The past 30 days have been a whirlwind of economic and geopolitical developments, offering no shortage of topics to dissect. Below, I’ve woven together key themes from the month, presenting both bullish and bearish perspectives. As an optimist, I believe that where there’s uncertainty, there’s always opportunity.
Tariff Update
In my previous post, Mutiny in the Global Economy, I highlighted how President Trump’s tariffs on China and other global partners risked pushing the U.S. toward stagflation. Shortly after, Trump paused these tariffs to allow negotiations, a move driven less by my analysis and more by surging bond yields, a declining dollar, and a falling stock market. As I noted in March (Trump’s Economic Goals), one of Trump’s priorities is keeping interest rates low—a goal complicated by the global reaction to tariffs.
Tariff uncertainty is shifting U.S. businesses from “just-in-time” to “just-in-case” inventory strategies. During globalization, companies stocked shelves based on predictable consumer trends. Now, executives must account for potential tariff changes over 30-60-90 days while balancing consumer demand. This shift could lead to volatile inflation—deflationary if excess inventory piles up, or inflationary if companies scramble to meet demand.
Complicating matters, a U.S. federal court unanimously struck down most of Trump’s new tariffs, ruling that the International Emergency Economic Powers Act (IEEPA) does not grant the president broad tariff authority. This decision, from the U.S. Court of International Trade and backed by a diverse judicial panel, nullifies tariffs like the 10% baseline, 25% on Canada and Mexico, and 20% on China tied to border and fentanyl issues. While the ruling may survive appeals, it doesn’t end the trade war. Other statutes, like Sections 122 and 301 of the Trade Act of 1974, provide Trump alternative pathways to impose tariffs.
This ruling may delay high tariffs, giving markets and businesses time to adjust, but Trump could pivot to Section 122 tariffs (up to 15% for 150 days without Congressional approval) or Section 301 tariffs (requiring investigations but potentially long-lasting) to pressure countries like China. Congress could extend Section 122 or incorporate tariffs into the Big Beautiful Bill to address fiscal deficits. Despite the court’s decision, trade policy uncertainty persists, and the tariff war is far from over.
U.S.-EU trade negotiations, already slow, face further delays due to the court rulings. Unlike China’s aggressive stance, the EU is practicing “strategic patience,” using domestic policies to mitigate tariff impacts. The EU may respond with targeted tariffs on €21 billion of U.S. exports (e.g., Harley-Davidson), potentially expanding to €95 billion, or even target U.S. services, which would hit U.S. GDP hard. However, EU retaliation requires consensus among member states, slowing escalation. The EU will likely be waiting for a final U.S. court ruling, prolonging uncertainty.
The Big Beautiful Bill
Investor attention shifted slightly this past month from tariffs to budget negotiations, which will shape U.S. budget deficits. Assuming 2% GDP growth, minimal spending cuts from the Department of Government Efficiency, and permanent policy changes, two scenarios emerge: tariffs reducing deficits more than tax cuts increase them, or tax cuts expanding deficits beyond tariff offsets. The latter, where deficits grow due to tax cuts outpacing tariff revenues, seems more likely, potentially boosting U.S. equities and the dollar but pressuring treasury bonds due to higher yields.
In the first scenario, higher tariffs could shrink deficits but burden U.S. firms, slowing growth and weakening equities and the dollar. In the more probable second scenario, tax cuts could add $5.2 trillion to deficits over a decade, per the Committee for a Responsible Federal Budget, far outstripping the $2.3–2.5 trillion in tariff revenue projected by the Yale Budget Lab. This could fuel growth and equities but risks higher treasury yields or bond market panic if foreign investors sell off, reminiscent of the UK’s 2022 crisis. Congressional Budget Office estimates suggest deficits around 6% of GDP, with outcomes hinging on tax policies and tariff negotiations.
The budget could further strain bond markets, already cautious due to weak foreign demand for U.S. assets. The House-passed draft, now in Senate review, includes Section 899, granting the Trump administration authority to impose “revenge taxes” on foreign holders of U.S. assets. These targets countries deemed to unfairly tax U.S. businesses, like those with digital services or global minimum corporate taxes (e.g., the EU). However, its broad discretionary power risks unsettling bond markets, as investors in countries like the UK, Canada, and Europe may divest to avoid tax hikes, complicating U.S. debt financing. While this benefits U.S. multinationals by pressuring foreign governments, it may deter investment in U.S. bonds, raising yields—a scenario Trump seeks to avoid. The budget’s passage could heighten fiscal and market instability, echoing past policy missteps like those of Liz Truss.
Maritime Trade & Security
Historically, alignment with the U.S. meant security under its military umbrella and safe maritime trade. However, as discussed in Mutiny in the Global Economy, the U.S. appears to be retreating to the Western Hemisphere, jeopardized by trade uncertainty, imbalanced military spending with allies, and evolving warfare dynamics, as noted by Vice President Vance in Munich and Erik Prince at Hillsdale.
The Russia-Ukraine war and Houthi attacks in the Red Sea highlight the effectiveness of cheap drones against stronger opponents. Houthi drones, costing under $100,000, have disrupted Red Sea shipping for 20 months, despite U.S. deployment of two carrier strike groups. U.S. naval operations have scaled back due to cost inefficiencies—shooting down drones with $1-4 million missiles is unsustainable. Erik Prince emphasized that in an era of drone warfare, million-dollar missiles protecting billion-dollar ships are no longer viable against thousand-dollar drones.
This strategic reassessment suggests the U.S. is focusing on military and economic ties from Greenland to Argentina. This is bullish for Latin America, AI, and drone companies, but bearish for Asian export manufacturers reliant on Western consumers. China and its neighbors will need stimulus to boost local consumption to offset export declines.
If the U.S. is indeed pulling back, logic suggests the EU and Japan would increase defense spending, as reflected in rising defense stocks. However, if billion-dollar ships and tanks are vulnerable to thousand-dollar drones, why would Europe or Japan pursue traditional defense buildup? Instead, investing in AI, drones, and counter-drone technology, alongside energy and manufacturing infrastructure to meet AI’s power demands, may be more strategic. This challenges the assumption of doubled defense budgets in these regions.
Outlook
In short, May had some impactful events with trade policy, trade security and fiscal policy all beginning to converge. Through my lens, it paints a bigger picture of new opportunities that are beginning to emerge as the global economy fragments into three distinct economic zones. While I still have concerns with rising interest rates, budget deficits and tariffs, those might be eclipsed by AI technologies, military drone buildup and opportunities in Latin America, Europe and Asia.
