Welcome back to the relaunched Daily Reckoning Australia. Of course, we’re not off to a standing start. The DR has been around for decades. And subversive pamphleteering for centuries before that.
Heck, receiving controversial ideas in your inbox sparked entire countries and religions in to being. The pen has proved mightier than the Facebook police many times.
But we’re a more modest bunch than Martin Luther or Thomas Jefferson…just trying to make you wealthier one idea at a time.
But how?
I spent last year warning readers about Trump’s trade war. Specifically China’s reaction to it. Which is, of course, the real reason the stock market crashed last month.
Most other countries jostled for space at the negotiating table as soon as Trump made good on his tariff threats. And trade deals have been worked on since.
But China responded badly to Trump’s threats. Just as I’d warned they would. And so financial markets began to price in a proper stoush between the two most important trading nations back in April.
It only took a month for stocks to bounced back though. As soon as it became clear China was secretly negotiating with Trump, the recovery was on.
If Trump’s bombastic tariffs are merely the opening gambit of a negotiating strategy, things can only get better. And it’s time to buy these eight stocks now.
Retail investors woke up to this possibility pretty quickly. They’ve been buying the dip like mad according to the stats.
And so far, it looks like they were right. The UK has already secured a trade deal. And even the Chinese are close according to news over the weekend.
Only one sector of the market remains noticeably beaten down. That gives investors who didn’t buy the dip yet another opportunity to buy what’s still cheap.
But institutional investors aren’t convinced we’ve seen the bottom. And neither is the oil price.
Why?
The real chaos is yet to come
Trump isn’t just resetting the global trading system. He has all sorts of wacky plans. Including serious tax cuts.
Debate on the tax cut legislation began Friday. No taxes on tips, tax-free overtime and tax-exempt Social Security benefits are on the menu. Trump described the policy in great technical detail, calling it a “big, beautiful bill.”
As you can imagine, the Democrats are not impressed. Whatever is in the bill is a disaster waiting to happen.
The dreaded debt ceiling looms.
And if April’s tariff tantrum gave us a taste for how Trump will negotiate with Congress, we’re in for a wild ride!
All this exposes something I’ve never understood about negotiations and politics…
The art of the deal dodger
If compromise is the name of the political game, then there’s a simple hack. All you need to do to get your way is start with an absurd opening position.
The person who starts off with the most absurd position gets the best “compromise” outcome once the parties meet in the middle.
And nobody, outside of the Middle East, has more absurd opening positions than Trump…
In fact, Trump is notorious for using this hack in business. He simply refuses to pay his bills to smaller businesses he contracts with. They can’t afford to take on the Trump organisation in court in a series of appeals. So the parties settle for a partial payment – the cost of doing business with Trump.
Trump is doing the same thing in geopolitics. Making big bombastic threats with the intention of working towards a compromise. A compromise that favours the US just a little more than the status quo did. That’s exactly what he achieved with the UK trade deal.
The flaw in the strategy is that someone may eventually call your bluff. Trump could encounter someone as belligerent as himself. Or someone who has clocked onto the same negotiating strategy.
China did, briefly. That’s what frightened the stock market. Investors made the mistake of taking both Trump and Xi literally.
A similar bust up over tax policy might be next. And there’s a particular reason to worry.
Bond markets don’t negotiate
Back in 2024, I was asked to contribute to a series of predictions about 2025. Mine was that the bond market would pull the rug out from President Trump.
That’s precisely what happened during the April tariff tantrum. The US government’s borrowing costs spiked during the panic. And so Trump was forced to calm the market by delaying most tariffs by 90 days.
The big worry is that we are going to see a repeat of this in coming months. But for tax cut and debt ceiling negotiations with Congress.
The bond market will wobble once again. And take stocks with it in much the same way.
In fact, the bond market hasn’t stopped wobbling. US borrowing costs recently jumped again. The tax cut crisis may have begun already.
But this time, there is no geopolitical opponent for Trump to bully or placate in negotiations. The bond market doesn’t negotiate. You comply with its demands or find yourself high and dry.
Regards,
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Nick Hubble,
Editor, Strategic Intelligence Australia
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