Guest Article: Container Orders Plummet. Trade Deals Now or Economic Depression Soon.

We are delighted to share, with permission, the following article from highly esteemed economist Daniel Lacalle, PhD.1 

Container Orders Plummet. Trade Deals Now or Economic Depression Soon.

April 20, 2025

Global container booking volumes fell by 49% between the last week of March and the first week of April 2025, according to Freight Waves. Imports from China to the United States collapsed by 64%, with imports of apparel and textiles declining by a whopping 59% and 57%, respectively. The figures coming from shipping companies are worse than those seen during the Covid-19 crisis.

These alarming figures suggest that importers are unwilling to accept higher prices in the middle of a tariff war, that exporters cannot simply choose to move their products elsewhere easily, and that the excess capacity in many sectors is much larger than initially expected.

No one wants to accept the cost of tariffs, and this means that the only option for the economies with elevated productive overcapacity is to negotiate a trade deal, and quickly, or face an economic depression.

The mainstream view about tariffs was that United States consumers would pay the entire negative impact. This news suggests otherwise. The purchasing power of importers is higher than expected. The number of order cancellations is so large that ports in China have had to take emergency measures to address the challenges created by piles of unsold containers.

The negative impact is enormous on ports, as fees plummet, but we cannot forget the dramatic effect on producers with excess capacity. Many global exporters are going to face bankruptcy if no trade deal is reached due to insufficient working capital.

In the European Union, leaders are concerned that the trade war between the United States and China will bring a flood of cheap products from China that could endanger local producers and create a significant economic problem.

Many exporters are facing a harsh reality: They cannot sell their products if they don’t export them to the United States, and the importers are not going to accept higher prices due to tariffs.

The reason why exporters cannot pass the cost of tariffs to United States consumers is because most of the products they delivered to America were only attractive because they were exceedingly cheap. When prices rise, demand decreases significantly. The tariff war has shown that demand is not inelastic.

The collapse in container orders proves Menger’s imputation theory. Output prices determine factor prices, not the other way around.

The unsustainable state of global shipping will compel countries to expedite trade agreements with the United States, failing which they risk a cascade of economic collapses within their business structures.

The slump in container orders proves that United States importers are not going to accept any price, that excess capacity in the main retail sectors is enormous, and that there is no straightforward alternative for American consumers.

If you believed that other countries would hesitate to negotiate trade agreements with the United States, you need to reconsider.   The American consumer loves cheap products but does not want the same goods at twice the price.

The United States economy may suffer a contraction due to this sudden slump in imports, but the consequences are much larger for the exporter nations.

The outcome is not positive for any country, so there is only one choice to make: negotiate or lose. If countries fail to establish significant trade agreements with the United States in the near future, their retailers are likely to face a severe working capital crisis.

1Daniel Lacalle (Madrid, 1967). PhD Economist and Fund Manager. Author of bestsellers "Life In The Financial Markets" and "The Energy World Is Flat" as well as "Escape From the Central Bank Trap". Daniel Lacalle (Madrid, 1967). PhD Economist and Fund Manager. Frequent collaborator with CNBC, Bloomberg, CNN, Hedgeye, Epoch Times, Mises Institute, BBN Times, Wall Street Journal, El Español, A3 Media and 13TV. Holds the CIIA (Certified International Investment Analyst) and masters in Economic Investigation and IESE.

The Bigger Picture on U.S. and China Tensions

Market Environment Indicator (MEI): Readings improved from last week and the indicator remains Positive, suggesting that the U.S. stock market will likely hold above the recent lows. However, a retest of the lows cannot be ruled out. The weight of the evidence still suggests that the current decline is not expected to extend into a significant downtrend. If the MEI reverses to Negative, it would be a signal of more substantial problems ahead.

Trade tensions between the United States and China have escalated in recent weeks, with both countries implementing unprecedented tariff increases. For the moment, the U.S. has raised tariffs on Chinese goods to 145%, while China has countered with 125% tariffs on American products. The situation is evolving quickly and continues to affect financial markets. While global tensions can create uncertainty, history shows that markets have weathered similar challenges in the past. Despite the headlines, understanding the economic relationship between these two countries can help long-term investors to maintain perspective.

U.S.-China trade tensions are now in focus 

Tariffs against all trading partners have dominated market news, and the 90-day pause now puts the focus on the U.S.-China relationship. The underlying issue runs much deeper than trade policy alone. Current tensions are a result of the “multipolar” world in which the U.S. and China are the two largest economies, both with significant global influence. This is a decades-long shift from the “unipolar” world in which the U.S. was the only major superpower after the Cold War. This naturally creates new challenges and opportunities for each country.

While there are no easy answers as to how the trade war might progress over the next few months, maintaining perspective has become even more important for long-term investors. The U.S. and China remain significantly linked through trade, finance, and global supply chains.

What makes this situation different from previous trade tensions is both the magnitude of the tariffs and the broader geopolitical context. As the accompanying chart shows, the U.S. maintains a significant trade deficit with China. Tariff levels above 100% effectively mean that goods crossing either border would more than double in price, all else being equal. This increases the price of goods for consumers, raises costs for businesses, and can slow economic activity. The fear of high inflation and worsening profit margins have caused market volatility in recent weeks, with a notable shift in consumer surveys and corporate earnings guidance.

Markets have also been worried about how far the White House would be willing to go in escalating a trade war with China. Since tariffs at these levels are unlikely to be sustainable in the long run, it’s still likely that they represent a negotiating position for the administration. The 90-day pause on tariffs above 10% (except for China), and the exemption for technology products, are evidence that the White House’s main objective is still to achieve deals.

The tariffs implemented in 2018 and 2019 provide some historical context for how markets and companies might respond as the situation evolves. Many companies demonstrated resilience by adjusting supply chains, finding alternative suppliers, or absorbing portions of the increased costs. While markets stumbled in 2018, they performed well in 2019 and again during the post-pandemic recovery. The broader scope of tariffs makes it more difficult for companies this time around, but the historic market rally after the 90-day pause was announced is evidence that markets can recover once conditions improve.

For investors with long-term time horizons, this challenging market environment can create opportunities. Valuations are much more attractive than they were even just a few months ago, both across the broad market and in sectors like Information Technology and Communication Services that drove the recent bull market. Rising interest rates have led to bond market volatility, but they also mean that investors have more opportunities to generate portfolio income.

China's economy faces many challenges

While much attention has focused on the U.S. response to trade tensions, China faces its own set of economic challenges. These include persistent concerns of a real estate bubble and financial system instability that could impact its ability to withstand trade tensions. China's post-pandemic recovery has been uneven, with GDP growth slowing to 5.4% year-over-year in late 2024, according to official Chinese government statistics. Many economists have already reduced their 2025 growth forecasts below the government's 5% target.

Chinese leaders are reportedly considering more stimulus measures. This would be on top of significant stimulus measures implemented last year, including a 5-year, 10 trillion-yuan stimulus package to support local government debt issues, a commitment to increase the budget deficit, cut interest rates, reduce bank reserve requirements, and measures to support the real estate market.

In recent days, the People's Bank of China has also allowed the yuan to weaken as a potential offset to tariff impacts, including setting its currency peg to the weakest level since September 2023. Currency devaluation can help boost exports by making goods cheaper for foreign buyers. However, it also carries risks including capital outflows, which is especially risky for China since it could destabilize its financial system further. It can also be seen by the White House as an attempt to circumvent tariffs.

The chart above, which shows major currencies indexed to a level of 100 two years ago, highlights how volatile global currencies have been in recent weeks. In addition to the yuan’s moves, the value of the U.S. dollar index has fallen to the low end of the range over the past three years. This is the opposite of what some expected since, in theory, tariffs tend to reduce imports, lowering the need for foreign currency, and thus boosting the value of the dollar.

Most U.S. debt is held domestically

Some investors also worry that China's holdings of U.S. Treasury securities give them undue influence over the U.S. economy. There have been concerns that recent moves in the bond market are the result of countries like China selling their U.S. Treasuries. While this is difficult to verify, what’s clear is that China's Treasury holdings represent about 2.1% of total U.S. government debt according to government data. Importantly, most Treasury securities are still held domestically by U.S. individuals, corporations, and other federal, state, and local government entities.

If China were to significantly reduce its Treasury holdings, it could potentially cause short-term market volatility and temporarily push up U.S. interest rates. However, China and other countries hold U.S. Treasuries, the dollar, and other foreign assets for an important reason: to maintain financial stability. The U.S. dollar and Treasury securities have consistently maintained their "safe haven" status even during periods of uncertainty. This has been true over the past few years despite inflation fears, budget crises, U.S. debt downgrades, and more.

The bottom line? While escalating U.S.-China trade tensions create uncertainty, history shows that financial markets are resilient in the long run. A flexible, diversified portfolio aligned with your long-term financial goals remains the best approach to navigating the changing global landscape.

Gratefully,

Sean Gross, CFP®, AIF® | Co-Founder & CEO

Staying Invested: Missing the Best Days (chart)

Click on above image to see full chart.

Key Takeaways:

• Staying invested is a key principle of long-term financial success.
• This chart shows the impact of missing the best market days over the past 25 years.
• Staying invested through ups and downs can make a significant difference in final investment outcomes.

Methodology:

• This chart shows the value of an initial investment of $1,000 using S&P 500 price returns before transaction costs under varying scenarios. Each scenario assumes that $1,000 was invested 25 years ago and remained fully invested or was moved to cash during the best market days.

Date Range: 25 years ago to present

Source: Clearnomics, Standard & Poor's

Guest Article: When Keynesians Predict a Disaster, Start Buying

We are delighted to share, with permission, the following article from highly esteemed economist Daniel Lacalle, PhD.1  

When Keynesians predict a disaster, start buying.

April 6, 2025

I always get excited about a market correction when I read the Keynesian consensus predict a disaster. The same people who claimed massive money printing and soaring government spending wouldn’t cause inflation are the ones who know exactly how tariffs will impact aggregate prices. Fascinating.

In June 2016, sixteen Nobel Prize winners expected higher inflation from tariffs, and it never happened. Furthermore, many of those economists recommended enormous government spending and Federal Reserve quantitative easing in 2020, stating there were no concerns about inflation. However, this led to the highest inflationary burst in thirty years. Reality showed that there was no inflation in 2016-2019 and that the insane printing and spending spree of 2021 led to the current inflationary burst. This happens because many economic experts will always justify all government imbalances and tax hikes but raise alarm at any tax cut or supply-side measure. We should never trust experts that work painfully close to social democrat governments.

According to fearmongers, tariffs will create an enormous inflation burst both in the U.S. and abroad. These estimates show that Trump’s tariffs will be paid by US consumers, China tariffs against the US will also be paid by US consumers, and EU countermeasures will be paid only by American consumers. Quite amusing. If we believe this narrative, tariffs would be the best news for businesses all over the world: Americans would swallow the cost entirely, margins will not decline, and the world would be happy. It is so ridiculous that it would be laughable if millions did not take their words seriously. Furthermore, according to the consensus narrative, tariffs will cause a global recession if imposed by the US. However, when tariffs are imposed by China or the EU, then it is all fine.

When Keynesians predict a disaster, it is unlikely to happen. When the Keynesian consensus tells you that there is no risk, as they did in 2008, run away.

We should consider some relevant factors. Markets already discount a recession and a risk of stagflation, but the latest jobs report shows the opposite. 228,000 jobs were created in March despite some federal jobs. The ISM Composite Index points to expansion, and the economically weighted figure is comfortably above the expansion level (50) according to Real Investment Advice. All the investment and production leading indicators are far from a recession signal. Furthermore, many market participants seem to discount a hawkish Federal Reserve and a recession, something that has not happened in two decades.

What I find intriguing is that, for the first time in many years, the S&P 500 is attractively priced. After being hugely expensive in a bull market with constant multiple expansion, we can finally say that the S&P 500 is starting to be attractive, even if you discount a significant downward revision in earnings. The Price-to-Earnings ratio of 15.2x for 2027 provides ample room for a revision and still shows an attractive entry point. Stocks are quite cheap at 10.3x EV to EBITDA 2027 (enterprise value to earnings before interest, taxes, depreciation, and amortisation). Furthermore, with the 10-year yield of Treasuries at 3.99%, it means that stocks look attractive compared to bonds for the first time in months. Margins are strong, guidance is positive, and entry points for long-term investors are starting to be evident, as inflationary pressures are likely to be limited and the so-called trade war will be negotiated, with more than 50 nations calling on the US government to make a deal on trade barriers.

Any long-term investor should look at opportunities in which fear is exaggerated, valuations are attractive, and consensus concerns are unrealistic. It may be a good idea to start building long positions, knowing that quantitative easing and rate cuts will likely follow periods of volatility.

Investors need to protect themselves against inflationism and central bank destruction of the purchasing power of currency and that has not gone away; it is coming back stronger as governments all over the world continue to build debt and fiscal imbalances. Protect yourself against inflation with a balanced strategy, building positions that protect your wealth and help you navigate volatility.

1Daniel Lacalle (Madrid, 1967). PhD Economist and Fund Manager. Author of bestsellers "Life In The Financial Markets" and "The Energy World Is Flat" as well as "Escape From the Central Bank Trap". Daniel Lacalle (Madrid, 1967). PhD Economist and Fund Manager. Frequent collaborator with CNBC, Bloomberg, CNN, Hedgeye, Epoch Times, Mises Institute, BBN Times, Wall Street Journal, El Español, A3 Media and 13TV. Holds the CIIA (Certified International Investment Analyst) and masters in Economic Investigation and IESE.

Market Corrections and Recoveries (chart)

Click on above thumbnail for to see full chart.

Key Takeaways:

• This chart shows the two dozen stock market corrections since World War II.
• The average correction sees the market fall -14.3% from peak to trough, taking 5 months.
• Recoveries can occur swiftly, taking only 4 months on average. 
• Staying invested helps investors to not miss market rebounds.

Methodology:

• This chart shows every S&P 500 correction since World War II. 
• Market corrections are defined as declines beyond 10% but less than 20% from the previous all time high. 
• Declines of 20% or more are considered bear markets. 
• The market bottom is reindexed to 100 and the x-axis measures days before and after the market bottom.

Date Range: January 1950 to present

Source: Clearnomics, Standard & Poor's