Today’s headlines are mostly about tariffs, politics, and fantasy. In short, they are predominantly silly, but silly with a purpose.

As is now typical of the financial media (and its front-page consensus-affirmations), the critical issues of our rigged to fail markets are largely glossed over.

This is problematic because it means that most Americans are being bombarded with hot-button distractions (which divide us daily) rather tFan simple, yet critical market signals.

More importantly, such distractions – and reality avoidance – are just classic symptoms of a rigged financial system in which pundits babble about mice while ignoring the elephant(s) in the room.

Just last week, for example, the Fed once again (and without any surprise) reported that “inflation did not meet expectations.”

Folks, in a country drowning in debt ($72 trillion and rising), the Fed has no choice but to “report” low inflation (and hence low rates). They pretend to be disappointed, but that is 100% fiction. More to the point – it’s a lie.

After all, an honest measure of inflation (closer to 10% than 2%), would be a death knell to our credit markets, as rates would have to rise along with real inflation. But rising rates alongside a $72 trillion debt bubble is the simple equivalent to a match next to a barrel of gasoline.

The Fed, again, knows this, and thus knowingly misinforms YOU.

But lies and distractions are the modus operandi of rigged markets.

And as for distractions, the ongoing tariff war, albeit important, is an obvious example of a timely distraction…

The Tariff-able Truth

Tariffs. I’ve written about them before, mostly here. Sure, tariffs matter and everyone has an opinion on this, which is understandable.

Here at the Critical Signals Report, we endeavor to stick to the lessons of math and history to keep a clear head on the financial implications of free trade vs. trade barriers.

As for “sticking it” to China with tariffs, I can understand why many of you support this. After all, China has been “sticking it” to us for years; furthermore, most of us already know that China cheatsa lot. As such, a trade war kind of, well… feels good.

The danger, however, is when feelings get in the way of facts. And the fact is this: our markets lost their way long before the first tariff tweet.

The Games We Play – Free Trade Includes an Occasional “Yellow Card”

In every game of sport, as well as trade, nothing is perfectly fair. We call fouls all the time, because, frankly, someone is almost always cheating or fouling on something, from soccer to trade policies…

That is, in any game, even a down-and-dirty game, we quickly learn how to play with the ringers, the benchwarmers, and even the cheaters. Sometimes we do a little fouling ourselves. (I sat in more than one penalty box as a young athlete…)

Below, I’ll show how game theory, as well as common sense, both recognize and require such dynamics.

In short, free trade, like a gritty game of soccer, expects both rules and broken rules – i.e. the occasional “yellow card.” No game is ever clean, and free trade is no less so.

Furthermore, and however “shaky” it may be, free trade is a critical component of capitalism, an economic system that has sadly been in increasing decline, as I’ve factually shown here

That’s why economists from Adam Smith to Rothbard and von Mises have fervently advocated for free trade, however imperfect or even “dirty” it can sometimes get.

In Washington, both parties have understood this, and both parties have tried to improve and play this game for years, from NAFTA to the TPP.

Were any of these trade deals perfect? Nope. But then again, is any game?

And as for the matter of tariff wars, the data we are examining now suggests that a tariff war will not cause a recession.

Instead, and for the reasons enumerated below, it will merely exacerbate/accelerate its windspeed and wave height. More importantly, it will keep most investors focusing on the wrong signals.

Ignoring the Debt Elephant in the Room

The recession we are tracking on our Storm Tracker has been gathering force for years, and long before the current tariff war.

As our readers know by now, the looming recession has one primary driver – debt, which D.C. and the Fed has been adding to (and sidestepping) for well over a decade.

Frankly, shame on them all.

U.S. combined debt is now a powder keg of $72 trillion , and that doesn’t even include the $100+ trillion in unfunded liabilities, nor the complexity-theory-driven ticking time bomb that is our overly-complex $700+ trillion derivatives markets.

Imagine how these fragile debt bombs will explode if interest rates inch up even just a bit? The Fed, for example, has been saying for years that the economy is strong, but if that were true, why have they kept rates at emergency-level lows for over a decade?

In the meantime, as this debt storm approaches our economy and your portfolio, our nation slowly suffocates under the weight of a debt monster conceived within our own borders.

Our Congress has shown little interest in this. The epic problem is either ignored or delayed, as one debt ceiling after the next is merely raised rather than resolved.

Just this week, Jon Stewart reminded us how Congress couldn’t even drop their infighting and political egos to hear the testimony of our ignored heroes, the 9/11 first responders, who are dropping like flies from the toxic dust of the twin towers.

Folks, many have lost focus on the big picture.

Enter the Trade War

As for trade wars, no one wins in such economic nationalism – they just become the last to rot, as in most, high-casualty wars.

But the headlines are filled with tariff talk. Why? Primarily, because it distracts Americans from the ticking time bomb of debt beneath their feet.

Nevertheless, some fervently believe that in this game of tariff chicken with China, the U.S. is in a stronger position. This may be true. I’ve already shown how weak China is. And I’ve shown how relatively stronger the U.S. is here and here.

But both economies are in dire condition, so the term “weak” is purely one of relativity at this sad point in our economic and market history.

I suppose the U.S. could “win” a trade war if our economy was thriving, but it’s not. Sure, the totally doped (and rigged) market has been thriving since 2009, but not the economy. There’s a big difference. Just ask our dying middle class or the folks in D.C. trying to explain an equally shameful and flat-lining GDP

Trade wars (and the “Balkanizing” of global supply chain relationships) in the backdrop of a weakening economy have very bad endings…

At the Critical Signals Report, we know this because we have a vested interest in history and financial data, not K-Street lobbyists seeking to push financial agendas that benefit banks rather than citizens.

History Lessons and Mathematical Game Theory

I talked about this history in general, and the Smoot-Hawley Tariffs of the early 1930s in particular, here. The tariffs didn’t work at all then, and won’t work today either. Smoot-Hawley was passed in 1930, and by 1931 the U.S. was on its knees. Why?

Because the U.S. had already “stuck it” to itself long before it tried to blame its faults on global trade.

During the roaring 20s, for example, the U.S. did precisely what it has been doing for the last decade, namely: 1) binge on debt, 2) get drunk in the markets, and 3) delude themselves with a fantasy that the fun never ends.

Today, the Fed is acting like they can outlaw a recession. Does anyone really believe that?

Like today, the roaring 20s were based upon false market confidence in a time of debt weakness that collapsed under its own weight of IOUs. By the time the poorly-timed (but politically popular) tariffs kicked in, the U.S. was already broke and knee-deep in the Great Depression.

Sound hauntingly familiar?

John Mauldin recently commented on this by a reference to the infamous John Nash, later played by Russel Crowe in the film “A Beautiful Mind.”

Nash’s entire Princeton thesis was based on Game Theory, which basically argued that when there are multiple players in a game (such as “free trade”), the game eventually finds a natural equilibrium between the stronger and weaker players, the big cheaters and the little cheaters.

Such shaky but inevitable “equilibrium” occurs regardless of the variant levels of fair play, honesty or even economic ethics, of which neither China nor the U.S. (nor any other nation for that matter) has a monopoly.

As George Washington himself admitted, nations have neither permanent friends nor enemies – just permanent interests. This, folks, is simple reality – or as the academics call it Realpolitik. That is, no one is without stains or yellow cards…

Thus, after years of at least superficial “free trade” in the developing world, Trump’s disruptive actions, however heralded or hated, are causing a “game change.” And that – at least according to the Nobel Prize-winning John Nash – typically ends badly…

Whatever one thinks of Trump, there’s no doubt he’s a game-changer. He pulled out of the much-flawed Trans-Pacific Partnership (TPP), for example, without much resistance. But whatever one thinks of the TPP, it also worked in “game theory” to isolate China and keep the admittedly imperfect trade game in “balance.”

Critics of the prior game (and hence tariff supporters) will rightly argue that the game/trade with China was never in balance to begin with, as over $300 billion a year tilted in favor of China to the detriment of our trade deficit.

What those critics forget, however, is that U.S. companies voluntarily went to China (and onto the “free trade” playing field) to make executive salaries (and stock prices) rise on cheaper Chinese labor. That was the choice of American executives, not the otherwise cheating Chinese.

Over five million Americans lost jobs after Clinton opened “freer” trade with China. But those American executives knew the rules (and consequences) of this shaky game long ago, and had no trouble “sticking it” to their own U.S. labor class just to improve their personal fortunes.

Again, no one (or nation) is without its own stains… this was all part of the imperfect free trade “game.”

But today, instead of a nervous balance, the U.S. is now a bull in a China shop (no pun intended) seeking to undo this old game and make unilateral trade deals, country by country. Such economic nationalism is a Herculean task and full of unknowns in a time of known stress in the real U.S. economy.

But for normal, everyday Americans staring down the barrel over $1.5 trillion in student loan debt, or another $2+ trillion in auto loan and credit card debt, whatever is to come out of this “disrupted game” is not likely to offer much immediate help to them.

Sure, the tariff war will bring some of those greedy U.S. companies back to the U.S., and hopefully more jobs. But such changes don’t come without major costs.

In short, the U.S. is not in an economically solid position to weather much of a “game change” today, regardless of how angry we may legitimately be with China and others, from Mexico to Iran to North Korea (or even worse, the greedy C-suite at companies like Apple or Nike).

So get ready…

On Thursday, I’m going to show you what all of this means to investors and farmers (and to anyone who owns ag-related stocks like John Deere, Caterpillar, or Archer Daniels Midland). I’m also going to show you why you shouldn’t listen to the optimists in D.C. that tell you not to worry about tariffs, and what exactly you can expect from a trade war.

Stay tuned.

Matt Piepenburg


Comments

10 responses to “Distractions, Headlines, Tariffs – More Proof of Rigged to Fail Markets”

  1. It is refreshing to read the back side of the tariff issue. I appreciate a balanced view because too long we have been given only one perspective.
    Thanks for your expansive world view. It is much preferred over the myopic view that dominates the media.

  2. Hey Matt was just thinking that as long as the economy is progressing at a rapid pace, we should be able to come up with viable paths to take care of the deficit. What do you think?

  3. Please add me to your emailing list for the Critical Signals Report and confirm.
    Thanks,
    Curby

  4. We’ve got TWO major problems in the U.S.of A under the title of excess
    overeating and overspending.one a personal problem and one also a national problem.Overeating is an individual solution case and is solved if solved by the individual not so with national debt. So knowing what is sure to happen HOW does an individual plan after avoiding all personal debt We can’t even avoid it by moving seems to be a world wide affliction

    Andy vranich

  5. Hi, Curby – you can enter your email address on the homepage of the Critical Signals Report to receive emails. Please be sure to whitelist us so you don’t miss out on the next issue. Hope this helps!

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