by Ivan Martchev
May 6, 2025
We have wiped out all post Liberation Day tariff losses for the time being with the S&P rising nine straight days through last Friday and in the process registering a range of 11.76% over that period. This is how the S&P 500 acts after a major stock market bottom has been formed. The index can rally further, depending on trade deal news flows and the evolution of economic numbers. The longer the uncertainty lasts and the longer the tariffs stay on, the more likely it is that some economic numbers will deteriorate.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The volumes of goods from container ships coming from China are rapidly declining at the port of Los Angeles and they are likely to deteriorate further as tariffs with China have not been cut or postponed, although there are signs that both the Trump administration and China are looking for ways to deescalate the situation. News last Thursday that China is evaluating messages for the Trump administration to begin negotiations caused a 70-point surge in the S&P futures before midnight. Then, in the middle of Friday we saw another smaller surge on news that the Chinese minister of state security was considering coming to Washington to hammer out details of U.S. demands that China curb the supply of precursor chemicals to Mexican drug cartels. (The fentanyl tariff is 20% of the roughly145% total, with some exceptions).
Just this news of “thinking about” negotiating with the Chinese caused a major surge in U.S. stocks, which tells you that China is perceived to be the hardest nut to crack in this trade standoff. It is pretty clear that the Chinese are looking for a way to save face and not show they are bowing to U.S. pressure, so smart people in the Trump administration need to think hard about how to give them some face-saving options. Still, if both sides are looking for negotiating leverage, it stands to reason that China will want to create shortages on U.S. shelves in order to increase their negotiating power. The hardest deal to make will be the one with China and that would be a deal that the Chinese may not want to keep past the Trump administration, as whatever Mr. Trump is seeking goes directly against the long-term Chinese strategy.
Warren Buffett noted over the weekend at his annual Omaha gathering that trade should not be a weapon. I am sure he knows trade has been a weapon for millennia, and major wars have been fought over it.
Trade wars created the Roman Empire. The first big empire in the Mediterranean Sea was Carthage, built entirely on commerce and the control of all major sea routes. The roots of the Roman Empire came out of the First Punic War, which was fought for control of Sicily, which was then controlled by Carthage. Carthage lost Sicily in the war and also Corsica and Sardinia after the initial peace treaty was signed.
In the Second Punic War, the Carthaginian general Hannibal Barca won most of the important battles but ended up losing the final battle – and thus the war – in what has to be one of the bigger miscalculations in military history, resulting in loss of control of all Carthaginian colonies. In the Third Punic War, Rome destroyed Carthage and completely absorbed the Carthaginian Empire into the Roman Empire. There was no Roman Empire before the First Punic War, as there were no Roman territories outside of Italy then.
While America has no colonies today, we can exert soft power and commerce, which still controls wealth. The Chinese have been using trade as a weapon for decades by directing trade flows wherever they wish to increase their political influence. In China, government ministries and state-owned enterprises source goods and services globally with the clear goal of increasing Chinese political influence. They buy more from their friends and neighbors with long-term political considerations that don’t exist in the West. I have known for a long time that the large (and growing) Chinese trade deficit with the U.S. is in large part intentional and would be a lot smaller if it were not for these long-term Chinese secondary considerations.
The Trump administration is 100% right that de-industrialization and trade deficits need to be reversed and put on a more sustainable long-term trajectory. It cannot all be resolved by summer, but America has 18 major trading partners and last week the Trump administration was actively working on 17 trade deals among those 18, with the 18th being China. If all 18 trade deals can be hammered out without producing a recession at home or abroad, the stock market should be able to make a fresh all-time high this year.
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