Trump Just Nuked the Economy, or, America is a Submerging Market Now

Happy Liberation Day! OK, sorry, that was a bad joke. Don’t kill me. Gather ‘round, gang. We’ve got a lot to talk about.

I’m going to try to teach you what “Liberation Day” means. The takeaway for me is very simple: America is now a "submerging market."

I’ve been relieved and overjoyed to see that, having met so many of you in sessions, you’ve been wise. You took measures to protect yourselves, your assets, your futures, changed your lives in many regards. You understood clearly what I meant when I said be the Adult in the Room, and Don’t Sink With the Ship.

Submerging. Sinking With the Ship. I wasn’t kidding around, was I?

Trump just nuked the economy.

“Liberation Day” will indeed go down in history. But how will it be remembered? And what will it do to the rest of your life?

Submerging Markets, and How America Just Became One

You’ve heard the term “emerging markets.” That was coined way back in the 1980s, to describe a range of countries that were growing wealthier. Not to Western levels, perhaps, but at least “emerging,” in this context, from absolute poverty. They were in Asia, Latin America, and so forth. 

In the 1990s, go ahead and chuckle, even Russia was considered an “emerging market.” It collapsed, into autocracy. Perhaps you’re seeing some foreshadowing of my point here.

“Submerging markets” is a term that some clever guys coined later. Around the 2000s. Then, the idea was that richer countries might “submerge,” or grow poorer. We didn’t really that happen much. Until now.

There aren’t many submerging markets in the world. Perhaps the prime example is Britain, which chose Brexit, and tanked its economy, destroyed its vaunted public institutions, and experienced the sharpest, hardest decline in living standards in recorded history. All of that’s what America’s doing right now, too—only to even more staggering effect.

So. Submerging markets. What does that really mean? Right now, you’re worried about your life savings, stock portfolio, etcetera. And a lot of you have told me that you share what I write with your portfolio managers, and they’re like, “no way! He’’s wrong! It can’t happen here!”

Let me introduce you again to our new reality. Wall St today rose. It didn’t expect what was obviously going to happen to happen. Which is that…

Trump just nuked the economy.

Capital Flight, or What’s the Opposite of a Haven?

So what happens in submerging markets? We discussed capital flight a little bit in recent essays. But now it’s for real, even though it’s already begun—now it will intensify. 

I want you to really understand this. Capital flight means just what it sounds like. Capital flees. For safer shores. Not just money, financial capital, but also human capital, aka people, and ultimately, organizational capital. How long do you think smart corporations are going to stick around in Trump’s America when they can be headquartered anywhere in the world? But I’ll come back to that point.

Every country in the world, and you might not know this, or you might, has a credit rating. Just like you do. And that credit rating assigns every country, and it’s currency and bonds, a level of risk, which is a level of safe investment.

You probably didn’t know this, but America’s credit rating got downgraded already. That was last year. From the highest one, to the second highest one—countries get letters, not numbers, like you and I do, but that’s besides the point.

America sort of got away with it that time. We saw relatively muted effects. That was because sane people were still in charge of the economy, and so there was hope. 

But this time, America’s credit rating is almost certainly going to be downgraded again, and again, and again. And this time, it won’t get away with it. What does a lower credit rating do? If your credit rating goes down, you’re going to be able to tap way less credit. It means less investment. 

That is what capital flight is, in the simplest way I can explain it to you. This is a mechanical process. That’s important to understand. It’s literally just like gears in a machine. Computers do it, not people. Algorithms. This is an automated system. And while America yesterday could slow that machine down, today, it can do that a lot less.

Capital flight means that America is becoming less investible by the day. Capital is already fleeing for safer shores. Trust and faith in America just imploded. That is why the dollar is falling. And at the end of the day, it also tells us that the stock market has to fall, too, and so does the bond market, probably. Should you be worried about grandma’s life savings? She's probably smarter than you, because she’s been around the block. You should be worried about yours.

What’s the opposite of a Haven? That’s what America’s becoming. Would you invest your money, life, future in…Russia…if I asked you do? Perhaps you see why I ask the question. But now ask yourself: why do countries have to make wars? Because they can’t attract capital to begin with.

How Trump Just Nuked the Economy

Now. Let me explain to you what “nuking the economy” means, more fully. And I’ll do that by explaining just.whyAmerica’s credit rating is going to fall. 

Your credit rating is based on something like your debt to income ratio. So it is for countries. Their debt to income ratio, along with a good history of past repayments, etcetera, determines their credit rating. What is a 20% across the board tariff going to do?

It’s going to shrink the economy.

It has to. Again, this is mechanical. It’s not up for debate, it’s just physics. Prices will spike, suddenly, fast and hard. People are already stretched to the limit. They can’t afford to spend more. They will have to spend more the same stuff, which means cutting back on other stuff. That will, in turn, cause all kinds of negative effects: layoffs, unemployment, bankruptcies, a wave of businesses closing. 

That’s a shrinking economy.

There is no way around this fundamental fact of economics. None. There is no possible means by which raising prices in an economy dramatically, for the same stuff, can do anything other than shrink it, because of course, people are now effectively poorer, and that’s what a smaller economy really is. 

Unless you think there’s a way that people suddenly paying way, way more for the same stuff is going to make them richer, the economy is going to shrink now. How much? The best paper on the subject, which was published today, speaks of a Smoot Hawley level effect. I’m pretty sure you can understand what that means, and I’ll discuss that more tomorrow.

Now let’s go back to the dull subject of credit ratings for countries. What happens when an economy suddenly shrinks? It’s debt to income ratio explodes. Again, that’s mechanical. No way around it. Bang. There’s your lower credit rating.

And as that happens, again, purely mechanically, automatically, capital has to flee America.

And that is how you make a submerging market.

What a Submerging Market Means, or, Not Sinking With the Ship

Now you are beginning to understand that when I said, Don’t Sink With the Ship, for the last year, I wasn’t kidding. That I meant it almost literally. And I’m glad if I helped many of you take protective measures ahead of the curve.

Let me now make it crystal clear what happens next.

As capital leaves America for safer climes and shores, what are the real-world effects? Capital is what makes markets. Less capital in markets means they fall. Now we are going to see, almost inevitably, stock markets fall, the dollar depreciate, and eventually, the world lose faith in US bonds, too—remember that dull subject of the credit rating?

And along this path, a whole lot of people are going to lose a whole lot of their life savings. That’s not a threat, it’s not even a warning, nor is it a prediction. It’s just an observation, because what I’ve been trying to teach you is that the above is as inevitable as tipping over dominos.

America’s retirement system is about to turn into a Weapon of Mass Destruction. That is what Trump nuking the economy means in practical terms. It works in a terrible way, at least in a moment like this. You deposit your money in an opaque set of systems over which you have very little control. Some guy called a portfolio manager has almost total control, faces no consequences, and at this very instant, is completely out of his or her depth. 

They have never faced a situation like this before. And worse, even if they want to do the correct thing, they can’t, because they’re just cogs in the machine, too, and the Big Decisions are made at the top. All The Portfolios Must Be Structured Like This.

So millions upon millions of Americans now face the following situation. Their life savings are in a system a) over which they have no control b) doesn’t understand or grasp the magnitude of the catastrophe facing it c) isn’t equipped to deal with it and c) is going to be far, far too slow to act to protect them, and d) the point, can’t protect all of them. 

Can’t, because it can’t really act until it’s too late. When Major Events happen, like the example of the credit rating downgrade, then, maybe, all those opaque portfolios over which Americans have little to no control will finally be changed up. But at that point, it will be too late. See my point? You are either ahead of this curve, or behind it, and the system as it’s designed is made to react.

But reacting after you’ve been nuked is a pretty bad way to avoid being burned.

So what happens as millions upon millions of Americans see their life savings go up in flames? Nothing good, and everything bad. That is why the paper I referred to above described a Smoot Hawley level event. Precisely because this is how depressions happen.

If we really face this scenario, then of course, the economy will contract, to begin with, and then as people begin to lose what they have, it will contract even more. Because they will spend, invest, consume, less. This is the “contractionary spiral” that is at the heart of classical theories of depression.

This is how you nuke an economy.

How to Start a Depression

Americans, I fear, don’t fully grasp the road that lies ahead of them. You dear reader, I hope, are in a different place, but in general, I don’t think that Americans fully grasp how devastating the above series of consequences will be. They understand, perhaps, that tariffs will “raise prices,” and that much if we’re lucky.

But this larger chain of consequences? I’m skeptical.

And that is a very bad thing. Because people will lose a very, very great deal now.

Now. Depression’s a loaded word. I’ll discuss it more tomorrow, like I said, but you don’t need to imagine the 1930s, because this isn’t the 1930s. Or is it? That’s a joke. Or is it? Kidding aside, just understand the point, which goes like this.

America is now a submerging market. A contractionary spiral is what makes markets submerge, or go from rich to much, much poorer. Along the way, institutions cease to function, as they’re doing in America now, because par for the course here is oligarchy, which is the political system that accompanies the collapse into lower levels of wealth and prosperity. The social order which accompanies oligarchy is called neofeudalism, if you want to think about it that way.

In a submerging market, markets will do precisely what that word suggests, which is sink. Maybe there’s even a fantasy world in which Wall St loves tariffs. Even that doesn’t matter, because if there is, it’ll just be counterbalanced by even swifter falls in the value of the dollar, because are you kidding me, nobody else in the world is foolish enough to follow along with that delusion. 

So in general, in submerging markets, we should see markets sink. Yet it’s true that America’s markets are fairly psychotic, and I mean that almost technically for those of you who are psychologists, as in, broken from reality (who else could have believed in the “Trump Bump”?), and they might even go along with all this for a while. They might even say to each other, because “the markets” are just people, hey, you buy this from me at a high price, and I’ll buy that from youat a high price.

But in the end, reality must prevail, as it always does. “Liberation Day” will go down in history, but for all the wrong reasons. America now is not a society that the world can place much trust in. American stocks, bonds, and dollars are losing the faith of the world by the day. That is what capital flight is made of. And it proceeds through the dull example I gave you, things like credit downgrades, which are really just reflections of these larger psychosocial realities: the loss of trust, the shattering of faith, the breaking of bonds.

Americans, I fear, a whole lot of them, will learn these lessons too late. That is why I am teaching them to you now. 

It’s been a pleasure to meet so many of you (genuinely.) You guys are so smart, warm, funny, and cool. I know these are rough times. As always, just reach out if you need advice.

Lots of love,

Umair (and Snowy!)

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