The US will not be fine

Sort of?

As I predicted, Trump was not bluffing with his tariffs. But I thought he would go about it in a much more surgical and intelligent way. I only semi prepared for this by moving to Euro stocks and companies that would not likely be all that exposed to tariffs. Just did not anticipate he would go full retard like this.

What he is doing now makes zero sense from a game theoretical view. And the guy running this (Lutnick) seems to have brain damage judging by this interview where he argues that every crash was preceded by a period of stability. So by upending this stability preemptively and nuking the economy they are preventing a crash. If I put together a team of researchers to come up with brain dead statements, I could not come up with something this stupid. The US is truly run by morons now. The best cure for populism is populism I suppose.

This tweet by Davey sums up the current situation quite nicely. And this article by Citrini sums up the economic consequences if Trump keeps this up (which won’t be pretty). I think it is a mistake for value investors to completely ignore the macro effects here, but at the same time it would also be a mistake to panic sell everything.

A summary if you can’t be bothered to read those links:

• Trump doesn’t seem that intent on removing those tariffs quickly (he would look weak and stupid). Plus he has been talking about tariffs for 30 years, he seems to be a true believer. Like Putin and his conquest to restore the Russian empire.

• They likely don’t work as costs will go up for domestic producers bringing home production (which is why he should have gone with targeted tariffs instead of blanket tariffs).

• Hard to win a trade war vs the rest of the world. US imports are only 15% of global imports. This will just incentivize countries to team up on you.

• Damage will likely be greater than tariff % implies due to cascading supply chain inefficiencies and held off orders reducing economies of scale.

• It makes more financial sense for suppliers and consumers alike to just wait out these tariffs than to actually bring home production which will take multiple years and be expensive.

• Central banks have no effective tools to combat stagflation

• Due to higher complexity, tariff induced stagflation will be much worse than oil induced stagflation in the 70’s (which was much more local as oil was the main cause).

Question now is, how to make money from this (or minimize losses). So far the vast majority of my active ideas have no direct exposure, only indirect exposure from the tariffs. So I have outperformed the S&P 500 quite a bit so far this year.

I think selling stuff that is cratering now (that is part of my active ideas) will not make you much money in the long term. I have been selling some stuff that did not crash though or only fell a little bit, and will probably rebalance my portfolio towards what sells off most.

First way to make money

In a weird way if the market expects these tariffs to be temporary it will create a sort of hyperdeflation effect. Meaning, companies and consumers that can hold off on buying something will do so expecting to get a much better price say, 5 months from now.

I have been following Harmonic (HLIT), they are basically a monopoly in cable and fiber distributed access devices (and its operating software). Basically they sell equipment that allows cable and fiber companies to provide internet in a more decentralized way at a much lower cost with greater reliability. They have been developing this for the past decade and have completely locked up the market and secured major commitments from several of the largest cable providers.

HLIT is at the start of a large sales cycle and looked quite cheap to me, but tariffs seem to have put this upgrade cycle on pause (from a comment on this VIC write-up in February):

So that is the first way, wait for these types of very dominant but cyclical companies to crater and then buy them cheap and wait out Trump's tariffs (which he will likely at least water down within the next 6 to 12 months).

Other stocks to keep an eye on are Silicon Motion SIMO (which is rapidly taking share and on its way to become a duopoly because memory controller insourcing costs have skyrocketed (not related to tariffs), and are simultaneously moving up the value chain with their new SSD controller). Good write-ups summarizing the situation here and here.

Ciena (CIEN) and Fabrinet (FN) , which are very dominant in opticals, needed to build AI data centers. Semi monopolistic picks and shovels plays exposed to the AI boom. Not cheap enough yet, but will be researching them further and watching them like a hawk.

A more commoditized but still above average European fiber infrastructure company is Hexatronic (HTRO) trading on the Swedish Stock exchange. Long term prospects for this company are very bright, but short term it might get ugly. Expected 2028 earnings for Hexatronic are over 1 billion SEK, vs a currently 4 billion market cap.

Basically these are high quality, very dominant companies that sell equipment that will have to be bought sooner or later into a long term growth market. But might post some very ugly results in the short term.

Second way to make money

So get this, you are the average US consumer. PCs, phones, cars all have gotten 30-40% more expensive. But your income is also down, say 5% on average. You will not buy a new phone or a new car, or a new kitchen, instead you will spend it on goods and services that are not affected by tariffs much. A major one is travel. In a weird way this trade war could cause a sort of inverse Covid effect. During Covid spending moved to manufactured goods, now they might move to travel. This is kind of counter intuitive since travel is something you expect to be discretionary. But those $$ (especially in the US) will have to be spent somewhere right? If your income goes from $40k to $38k, but you are now not buying a new car and a new phone that still means several $1000 that might be spent elsewhere instead.

Main US airline I like is Alaska Airlines (ALK), they just swallowed up Hawaiian Holdings, a very dominant Hawaiian/West Coast airline. Oil prices are coming down which will be a further benefit. US airlines are basically an oligopoly that will also be benefitting from a plane shortage in the medium term due to issues at Boeing (which are now likely further compounded by the trade war). So you might see increased demand, lower costs while supply will be constrained, removing an incentive for value destructive price wars, giving airlines pricing power.

A similar concept happened during Covid in the automotive industry, where a chip shortage meant that taking market share was not possible while demand was greater than supply. This increased scarcity and pricing power at the same time.

I think the effect will be less pronounced in Europe, but not selling my European travel stock, even though it has fallen.

This article sums up my thoughts on the current situation that I thought might be useful to some people. Will post an update on my active ideas this weekend.

Disclaimer: Readers of this blog should do their own due diligence before buying or selling any of the mentioned stocks, since I have been wrong before and cannot guarantee all information in this write-up is 100% factual. I may buy or sell the above mentioned stocks at any time. Past success is no guarantee for future success. Some of the stocks mentioned might have poor liquidity, so make sure to check average daily trading volume before buying or selling anything. I am not your financial advisor.