Passive index investing is the new mortgage crisis?

[Sig]

I too like @Sig's idea but don't believe you'll see that drastic an impact. If Walmart and friends are getting their suppliers to take the brunt of it, the suppliers will likely tap financing while they restructure their sourcing. It's not going to take years to restructure, maybe a few months. So I don't see that happening unless all importers make the same stupid mistakes while rejigging their supplies. Walmart is not dumb. They know what their suppliers can handle to juuuuuust before the breaking point.

Remember, these tariffs aren't out of the blue. Trump has been signalling them for months. That was enough time for many companies to figure out alternatives in the meantime and I'm sure many already have.

I used to believe that about Walmart knowing exactly how much they could squeeze but this whole thing actually throws that myth out the window. Either their suppliers we're making 25% in unneeded profit before tariffs and Walmart didn't realize they could squeeze a significant amount more, or Walmart was squeezing all they could prior to tariffs and they're now squeezing 25% too much. There's no universe where both those can be true simultaneously.

The problem with tariffs and the way they're being imposed is that everything about the process is highly uncertain and very random. Trump might wake up tomorrow and decide to switch his bromance from the North Korea's dictator to China's, at which point any business that went to the expense to switch suppliers to Vietnam gets killed because they both instantly can't compete on price and they just tapped a bunch of funds for the switch. So the folks I know in the import world are basically all making the bet that the random number generator that is Trump's brain will revert to a mean as the most rational response. Uncertainty kills markets, and Trump provides that in spades everywhere but certainly when it comes to how, when, and for how long tariffs.

 

[nooby_mcnoob]

I used to believe that about Walmart knowing exactly how much they could squeeze but this whole thing actually throws that myth out the window. Either their suppliers we're making 25% in unneeded profit before tariffs and Walmart didn't realize they could squeeze a significant amount more, or Walmart was squeezing all they could prior to tariffs and they're now squeezing 25% too much. There's no universe where both those can be true simultaneously.

The problem with tariffs and the way they're being imposed is that everything about the process is highly uncertain and very random. Trump might wake up tomorrow and decide to switch his bromance from the North Korea's dictator to China's, at which point any business that went to the expense to switch suppliers to Vietnam gets killed because they both instantly can't compete on price and they just tapped a bunch of funds for the switch. So the folks I know in the import world are basically all making the bet that the random number generator that is Trump's brain will revert to a mean as the most rational response. Uncertainty kills markets, and Trump provides that in spades everywhere but certainly when it comes to how, when, and for how long tariffs.

It's less Walmart knowing that their suppliers had a 25% profit margin (they don't, no way in hell) and more like "OK, we know these suppliers have a 5% margin that they've built up with us over X amount of years, they should be able to weather the storm. We sure as hell aren't going to take the hit for their supply chain deficiencies." That simple. Now, if you start reading news stories about Walmart suppliers being squeezed due to tariffs, then we can talk because the suppliers might be organizing to boycott Walmart. What's that? Walmart has N more suppliers from non-tariffed countries for every boycotting supplier?

I don't think the Walmart Chinese importer squeeze is going to be felt in the broader economy for those reasons. Parts of the US economy are somewhat dependent on value-adding imports from China (value-adding = slapping an English box on the product) but hardly enough to cause a chain reaction.

I personally love the uncertainty supposedly caused by Trump, this week alone is a 60% gain in my YOLO account. I just wait around and stalk for these times. I don't think there is any uncertainty from my end because we know he wants to MAGA through bringing jobs and manufacturing back through various means. So tariffs are in the future, the end. I already priced that in and I think my custom indicator did too (the one that made me go short a few weeks back - check my threads).

 

[Sig]

It's less Walmart knowing that their suppliers had a 25% profit margin (they don't, no way in hell) and more like "OK, we know these suppliers have a 5% margin that they've built up with us over X amount of years, they should be able to weather the storm. We sure as hell aren't going to take the hit for their supply chain deficiencies." That simple. Now, if you start reading news stories about Walmart suppliers being squeezed due to tariffs, then we can talk because the suppliers might be organizing to boycott Walmart. What's that? Walmart has N more suppliers from non-tariffed countries for every boycotting supplier?

I don't think the Walmart Chinese importer squeeze is going to be felt in the broader economy for those reasons. Parts of the US economy are somewhat dependent on value-adding imports from China (value-adding = slapping an English box on the product) but hardly enough to cause a chain reaction.

I personally love the uncertainty supposedly caused by Trump, this week alone is a 60% gain in my YOLO account. I just wait around and stalk for these times. I don't think there is any uncertainty from my end because we know he wants to MAGA through bringing jobs and manufacturing back through various means. So tariffs are in the future, the end. I already priced that in and I think my custom indicator did too (the one that made me go short a few weeks back - check my threads).

As I indicated at the beginning (incorrectly as @tommcginnis pointed out) it all depends on the elasticity of demand. The sheer volume of stuff that comes from China means that you can't just turn on a dime and make and import it all from elsewhere. So there will be disruptions, the question is just how big. I think your argument would be much stronger if you argued that consumers can just afford to pay 15% more for their Walmart crap than arguing that the price of Walmart crap won't go up by 15%. But just for grins, what do you think the impact of a 15% hike on consumer goods would be?

You have to remember that running a business is very unlike trading. While you personally may like uncertainty, it's indisputably bad for businesses and especially complex businesses like manufacturing and imports. Heck, I personally do much better at trading when the market is unsettled, but my life for my business would be hell if I had to face the level of uncertainty that anyone in the tariff world does (luckily I don't).

 

[nooby_mcnoob]

As I indicated at the beginning (incorrectly as @tommcginnis pointed out) it all depends on the elasticity of demand. The sheer volume of stuff that comes from China means that you can't just turn on a dime and make and import it all from elsewhere. So there will be disruptions, the question is just how big. I think your argument would be much stronger if you argued that consumers can just afford to pay 15% more for their Walmart crap than arguing that the price of Walmart crap won't go up by 15%. But just for grins, what do you think the impact of a 15% hike on consumer goods would be?

You have to remember that running a business is very unlike trading. While you personally may like uncertainty, it's indisputably bad for businesses and especially complex businesses like manufacturing and imports. Heck, I personally do much better at trading when the market is unsettled, but my life for my business would be hell if I had to face the level of uncertainty that anyone in the tariff world does (luckily I don't).

OK so let's start at the Walmart side of things since most rich people won't be affected (I shop at Walmart, because my dividends pay all of my expenses in this case!)

What are the things that have inelasticity of demand:

1. Food
2. ~Shelter to a certain point

Very little food is imported from China, and a 25% spike on those will be irrelevant. Shelter is irrelevant insofar as tariffs won't affect them (but Chinese economy could cause a liquidity problem when they try to get rid of the real estate in Western countries.)

So then where is there elasticity of demand:

1. Electronics
2. Toys
3. Clothes
4. Medicine/healthcare
.... other stuff I'm sure you can list

Again, very little of that will affect the broad economy by a 25% hike at Walmart or similar places. Sure, some suppliers may go under... And? That happens for a variety of reasons everyday.

Where is my logic wrong?

 

[tommcginnis]

IMO, they were out of the blue. That is why the market has been reacting so negatively.

"SO negatively"?? No way -- China revaluing the yuan (2015) was out-of-the-blue. Brexit (2016) was out-of-the-blue. Between China and now Mexico -- while things might be deemed to expecting *compounding* of effects -- nope! We're 30 minutes from the open, and down by 1%. VIX? I'd be shocked if we cleared 20 in the VIX9D -- 18 is more like it -- and only for the day.

 

[Sig]

OK so let's start at the Walmart side of things since most rich people won't be affected (I shop at Walmart, because my dividends pay all of my expenses in this case!)

What are the things that have inelasticity of demand:

1. Food
2. ~Shelter to a certain point

Very little food is imported from China, and a 25% spike on those will be irrelevant. Shelter is irrelevant insofar as tariffs won't affect them (but Chinese economy could cause a liquidity problem when they try to get rid of the real estate in Western countries.)

So then where is there elasticity of demand:

1. Electronics
2. Toys
3. Clothes
4. Medicine/healthcare
.... other stuff I'm sure you can list

Again, very little of that will affect the broad economy by a 25% hike at Walmart or similar places. Sure, some suppliers may go under... And? That happens for a variety of reasons everyday.

Where is my logic wrong?

I don't think your elasticity logic is wrong at all. In fact I would tend to agree with you, 2/3 of the stuff at Walmat is fairly discretionary/elastic and folks who shop there will just stop buying it and make due with the old toaster and TV.
The real question is will that just result in some suppliers going under same as happens every day, or will the loss of $539.5B, or some appreciable percentage of those imports from China, in spending over a fairly short period of time have a bigger impact on the economy. By way of comparison, consumer spending went down by less than $150B in 2008/2009 (https://www.bls.gov/opub/mlr/2014/a...mployment-from-the-recession-through-2022.htm)

 

[nooby_mcnoob]

The real question is will that just result in some suppliers going under same as happens every day, or will the loss of $539.5B, or some appreciable percentage of those imports from China, in spending over a fairly short period of time have a bigger impact on the economy

Ah but that question is only AFTER we answer the question "Can supply chains adjust quickly enough" negatively.

My thesis is that in way we are globally interconnected today, we _can_ adjust quickly enough. So the loss will be (maybe) similar as 2008/2009 but unlikely to be worse. Which will be fantastic.

 

[Sig]

Ah but that question is only AFTER we answer the question "Can supply chains adjust quickly enough" negatively.

My thesis is that in way we are globally interconnected today, we _can_ adjust quickly enough. So the loss will be (maybe) similar as 2008/2009 but unlikely to be worse. Which will be fantastic.

Well the original question you asked was, I believe, "I'm trying to figure out where the next catalyst will be. I think the market sees some catalyst forthcoming. But in order for there to be a breakdown in the market, the normal people have to feel the brunt."

It looks like you agree, the impact of tariffs could be as great as 2008/2009 and "normal people" will primarily feel the brunt. So question answered! At least one of many possible right answers.

 

[nooby_mcnoob]

Well the original question you asked was, I believe, "I'm trying to figure out where the next catalyst will be. I think the market sees some catalyst forthcoming. But in order for there to be a breakdown in the market, the normal people have to feel the brunt."

It looks like you agree, the impact of tariffs could be as great as 2008/2009 and "normal people" will primarily feel the brunt. So question answered! At least one of many possible right answers.

Sorry, I wasn't clear. I DO NOT think that it will cause a decline in spending like 2008/2009. But that is the worst case I could possibly see. I see it as maybe a 25% decline in spending.

 

[Sig]

Sorry, I wasn't clear. I DO NOT think that it will cause a decline in spending like 2008/2009. But that is the worst case I could possibly see. I see it as maybe a 25% decline in spending.

There was a 2% decline in consumer spending in 2008/2009. A 25% decline would be a catastrophe! Or did you mean 25% of the imports we get from China? That would be a $134B decline. Which is, as it happens, about $10B more than the decline from 2008 to 2009 ($8,684.0B to $8,561.2B).

Not sure why you're pushing back on this so hard, I'm agreeing with you and using your logic, just applied to the actual numbers! Sometime you have to ask yourself if you've allowed yourself to be overcome by what you're tribe tells you you're "supposed" to think to the point that you find yourself disagreeing with your own logic!