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Ever since President Trump trotted out that giant poster board on Liberation Day, there have been two competing narratives over how this would turn out. Economists have warned that the tariffs, which ranged from 15% to 50%, would ultimately be paid by consumers. The White House, on the other hand, has insisted that tariffs are basically free money for the government and that they would lower prices by bringing foreign investment back into the US.
Serious investors never believed that overly rosy view of the trade war, but they’ve been mystified by an American stock market that seemed to defy gravity. Tariffs have made imports a lot costlier. Yet headline inflation as measured by the CPI has only risen modestly to about 2.9%.
Well, now some of the serious impacts are starting to be felt, specifically for new cars.
The average price customers paid for a new vehicle in the US was $50,080 in September, a reflection in part of the steadily rising prices in the wake of automotive tariffs.
Auto tariffs have an especially big impact on sticker prices, since car supply chains were designed to cross the borders between the US, Canada, and Mexico multiple times before the final product gets assembled, and now with auto tariffs hitting every time a part changes countries, those duties quickly add up. An entry level car used to cost about $20,000, and now, auto analysts are calling the $20,000 car “extinct.”
But the worrying news doesn’t stop there. Buyers have reacted to this new reality by going into debt, and those with shittier credit have turned to sub-prime lenders to finance their purchases.
Yuh-oh.
If the term “sub-prime” sends a shiver up your spine, you’re not alone. It wasn’t that long ago that sub-prime mortgages brought the US economy, and with it the global financial system, to the brink of collapse. Shifty lenders giving money to people with no jobs to buy houses they couldn’t afford went bankrupt, and the impact of these bad loans was so widespread that pension funds, retirement accounts, and even other countries’ governments were affected.
And now it’s starting to happen again.
Tricolor Holdings, a Dallas-based auto lender specializing in loans to borrowers with weak credit scores, went bankrupt in September.
The bankruptcy shines a spotlight on how millions of Americans are hurting from the high cost of living and sluggish job market. Cars are more expensive than ever, and more and more people are falling behind on their car loans.
Even JPMorgan, which prides itself on what Dimon has dubbed a “fortress balance sheet,” suffered $170 million in losses linked to the Tricolor bankruptcy, according to the company’s earnings call on Tuesday.
Why Jamie Dimon is warning of ‘cockroaches’ in the US economy, CNN
I must admit, sub-prime auto loans weren’t exactly on my 2025 Bingo card, but it all sounds eerily similar to what happened in 2008.
Nobody cares when some over-leveraged borrower loses their life savings, but when a whole bunch of them do it at once, the losses overwhelm the lender’s balance sheet and cause the company to go bankrupt. And because all these lenders are interconnected, losses in one lender spread to another lender, and so on and so on until the whole system collapses.
While it’s still too early to tell whether sub-prime auto loans can be contained or whether this will turn into the next financial contagion, the CEO of JP Morgan, Jamie Dimon, recently revealed how worried he was in an earnings call.
“My antenna goes up when things like that happen,” Dimon told analysts during a call on Tuesday. “And I probably shouldn’t say this, but when you see one cockroach, there are probably more… Everyone should be forewarned on this.”
Why Jamie Dimon is warning of ‘cockroaches’ in the US economy, CNN
So while I continue to hope that everything will turn out to be OK, we all have to prepare for the possibility that the economists were right, and that tariffs really are the bad idea they predicted in April.
So what can we do now to prepare?
Avoid Auto Loans Like the Plague
I hope that none of our readers would ever consider this, but auto loans are never a good idea. Cars are a depreciating asset. They lose about 10% of their value the minute they drive off the lot, and lose roughly 60% of their value within the first 5 years. So going into debt to own a car is like taking out a cash advance from a credit card to go to the casino. It might work out for you, but the vast majority of the time you’re just going to end up with empty pockets and a debt that’s steadily getting bigger over time.
Here’s a radical idea: If you can’t afford a new car, DON’T BUY A NEW CAR.
It’s a pretty simple principle that has served the FIRE community exceptionally well, and for some reason the general public has trouble grasping. Don’t get into debt for any reason.
Walk. Use public transit. Do the Mr. Money Mustache thing and try biking around town. Or if you absolutely need a car, buy one on the used market where tariffs don’t apply.
But don’t go out there and buy a new car using debt.
Stay Invested
In the face of scary headlines like this, it can be tempting to sell everything and move to cash until the dust settles, but that would be a huge mistake for two reasons.
One, even if I was 100% certain that a stock market collapse were coming, I have no idea exactly when that will happen. Hell, I thought the US would have entered a recession soon after the trade war started in April, and yet here we are. And remember, if you dance in and out of the market, you have to get both your exit and re-entry point right. That’s a pretty tall order. On the other hand, if you stay invested in the index long-term, all you have to do is wait and it will eventually recover from whatever downturn we’re heading into.
The second reason that it would be a bad idea to go to cash is that this particular financial meltdown that we’re heading into is likely to be caused by tariffs, which means inflation is going to play a starring role. And when inflation is high, cash is not a great place to be. Equities will be a much safer asset class when it comes to weathering inflation, because equities represent businesses, and businesses have the ability to counteract inflation by raising the prices they charge to their customers. In a rising inflationary environment, equities is the place to be.
And I know, I know, I recently took on a position in gold (which, incidentally, has risen 6% in the week or so since I made my buy), but as a speculative investment, I’m limiting my overall exposure to gold to just 5% of my portfolio. The vast majority of my investments will remain in equities.
Diversify Away from the USA
This year has been full of twists and turns, and somehow the USA has gone from the economic engine of the world to its biggest liability. At the time of this writing, the US index is up an impressive 13% YTD, mostly pulled up by tech companies profiting off expectations of the coming AI revolution, but it has been held back by politics.
During the same time period, the EAFE index, which comprises Europe, Australia and the Far East, is up a whopping 25%, despite a big scary war threatening Europe’s eastern flank. And Canada. CANADA, a country with the population of California, drenched in maple syrup and socialism, is up 21% YTD. Ironically, the inflation fears in the US that are pushing up gold prices are pushing up the Canadian stock market as well, since Canada mines a lot of gold.
If you’re American, consider investing outside your borders. I know that American investors are used to patriotically betting on their own country, but this might be a time in which that might not be the best idea. And that’s not just me saying that. Here’s JP Morgan’s chief global strategist in his own words:
There is a danger that political choices lead to a faster deterioration in the federal finances, leading to a backup in long-term interest rates and a lower dollar. Based on current allocations and valuations alone, many investors should likely consider diversifying their portfolios by adding alternative assets and international stocks. The risk that we move from going broke slowly to going broke quickly adds an important reason to make this move today.
Conclusion
What do you think? Is the world economy sliding into a new financial crisis, or do you think everything will turn out just fine? Let’s hear it in the comments below!
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Even better, find out when new tariff announcements are going to be made on China, and then short 1 billion in Bitcoin, then cash out and make 200 million in one day. Only catch is you have to be in Trump’s family to get that insider info, so marry a Trump.
I was under the impression the motivating factor with tariffs was to incentivize companies moving their manufacturing footprint to the U.S. and hence, NO tariffs. Also, you can buy a car if you have no choice, but why does it have to be foreign? And as far as inflation, no one was complaining when it was pushing 7-9% in the last administration because they were printing money. Time will tell what tariffs yield for the country but if other countries do it so well, why can’t the U.S. Vietnam might serve as a good example.
USA-made cars still import items to put in them, which have tariffs – the auto supply chain has multiple cross-border steps.
Maybe in years to come then the all-USA car will be made. That is THEN – what if you need a car NOW?
Thanks for the chuckle in reading the first few sentences.
The opposite of what Trump says is the truth.
That’s the case in everything he says. Works every time. Try it out.
The Tariff Tax is one of the biggest taxes ever imposed on the American consumer.
In the end, every long enough call becomes true.
It has been 6 months since the tariffs started and inflation is still under control.
Maybe inflation will be high next month, maybe next year, maybe 5 years from now.
I don’t know, nor does you, and frankly, it doesn’t seem any of those economists know either. They all said inflation would be raging by now, but then with every passing month they come up with new explanations of why it is not high YET, but it will be soon.
(inventory stocking prior to the tariffs kicking in, lower energy prices, Trump chickening out, etc etc).
Eventually people saying that inflation will be back will be right. In the meantime while we wait, we can be doom and gloom about it or we can look at this and hope for better days for Americans:
https://www.scdigest.com/firstthoughts/2510-10_Sharpie_Reshores.php?cid=22946
In the end – is the goal of having more jobs available for Americans (and Canadians) not a good goal?
Is the goal of self-reliability in critical industries not a smart goal?
(everyone on this blog believes in self-reliance, which is the only reason why we invest and pursue financial *independence!* – not to be dependent. Just extend this mentality to the national interest form the individual interest.)
I think at least trying to pursue it is a worthy goal. We may debate the way to achieve it, but so far I did not hear any leader talk about self-reliance until Trump came to power.
Now all of a sudden Carney is talking about “buy Canadian” and Europe is investing again in it’s own industries.
Put a compelling alternative and I’ll listen. The globalization era worked for the rich, the connected, and the educated and mobile. It completely left everyone else behind. Finally we have a politician who is saying it out loud and at least trying to do something. You may not like it, but at least you need to understand why people find him compelling.
(btw, many readers of this blog, including the writers who are both well educated engineers, are what I would consider the winners – educated and mobile. Not born rich or connected, by made good choices and positioned themselves well for a globalized world).
Many of the tariffs are on-hold, scaled back, or cancelled — because of inflation threats.
That’s why inflation is “under control” (though still elevated).
Sure, add this to the “reasons” inflation is under control. From what I hear there are quite a few tariffs affecting Canadian companies right now.
In the end, whether the economists were simply wrong (and Trump team right), or Trump was just bluffing and no tariffs are actually in effect, inflation is under control. That’s the bottom line for now.
Also, the tariffs were partly used as a political stick for use in negotiations. Some were never meant to actually be implemented. For example, the additional tariff threat on Russia in attempt to bring the Ukraine was to an end.
Didn’t work yet, but it is an example of it. Obviously even MORE tariffs on Russia at this point won’t make a dent, but it was still talked about.
Today they announced inflation rose from %1.9 to %2.4 here in Canada month over month. How does this fit into your analysis?
It doesn’t fit because we were talking about the relationship between US tariffs on imports and inflation in the US.
We were not talking about Canada at all.
But speaking of Canada, 2.4% is still within the BOC acceptable range.
And we have a host of issues of our own making that we need to deal with.
When you print money galore during covid and find it hard to wind it down you get inflation. It is not “in the rearview”, it takes years to resolve with the amount of QE we engaged in.
There are loads more issues in Canada, but I don’t think our inflation issues are related to the USA imposing tariffs on their own imports…
Thanks for clarifying. My miss understanding
Well said !!!!
I spent 30+ years working in manufacturing, mostly in areas around supply chain. There is no world in which tariffs “bring back US manufacturing”. Supply chains are global and will remain so. Increasing the cost of a component doesn’t cause someone to invest huge money to start making something that’s not in their wheelhouse. Not only that, but suppose it did bring some manufacturing to the US. They don’t mention that would mean the prices on those goods would be higher, since they are procured overseas for just that reason. Result: the price of the finished product goes up! I experienced this firsthand with his first round of tariffs pre pandemic. The company I was with did exactly what is happening now on a larger scale- we bought up stock pre tariffs where possible, absorbed the increase for awhile, then raised our prices to keep margins intact.
From “supply chain digest”:
https://www.scdigest.com/firstthoughts/2510-10_Sharpie_Reshores.php?cid=22946
Uhhh, a marker is vastly different from most products. One, it has few parts. Two, nothing in it is proprietary. Three nothing in it is regionally limited or monopolized.
The company I was at made medical devices, consisting of thousands of parts in each one. Parts were across many types of categories. Plenty of our parts or assemblies were single or sole sourced. Lastly, you can’t change parts in a med device without extensive testing, documentation, and approvals. A simple change can take easily more than a year.
The article posted is similar to a point made by the idiot administration (none of whom worked in supply chain as far as I’m aware) regarding how companies could just make that toy in the US now instead of China. Maybe that works for cheap and basic items. It doesn’t for complicated ones. I’m not the only one with this view btw.
Ok, lets start with cheap and basic stuff. It still creates local jobs, and bootstraps the providers. For example, by automating a marker factory you need automation specialists, robotics, chemicals and more. This will start creating those providers locally. Similar to Germany’s numerous small and mid size companies who provide the auto industry. You need to want the auto industry there which then both needs and supports the small and medium providers.
This is how China became the manufacturing powerhouse. It doesn’t happen in a day or a year, or even a decade. But you start small, and slowly more and more is possible. First they made cheap cloths, then cheap toys, then cheap simple electronics, then high tech and now they can make everything.
Did you read the very last sentence in the article? I’ll paste it here, and I think it is really the differentiating factor between the “yes we can” crowd vs. a “it will never happen” detractors:
“But my main takeaway from the Sharpie reshoring success is this: that kind of result may be less a matter of economics than of corporate will.”
Starting with cheap stuff isn’t going to create jobs that pay US living wages without the price of goods going up. China could do that because they pay minuscule amounts.
We tried in many cases to add local suppliers and it never resulted in competitive prices. Sometimes we did it anyway for better control of quality for example, but the cost was always more.
In multiple cases, we used assemblies from overseas that were proprietary (and this isn’t a unique case at all) so making those here would’ve required years of reverse engineering efforts to just make a part that cost more. We actually did that on one particular assembly just to have a backup source in case of emergencies.
Thanks for input.
Like I said, there I suggested, there is no magic bullet. In a globalized world we are flattening the distinctions between places. Unfortunately, it means that instead of only exporting wealth, we are importing poverty.
If we want to freely complete with China, we either let them manufacture with lower wages, lower working conditions and lower environmental strictness, or we import those conditions here so we can make it cheap here.
Globalization was not the win-win it was supposed to be. It WAS for the wealthy, but not for all those people who were on the losing side.
Now, the questions are:
– Should we care about those amongst our nation-people who were on the losing end?
– What can be done about those who lose?
– Should we reduce our own standards (wages, working hours/conditions, environmental regulations) only to give a chance to compete?
– Should we just say “tough luck, you are unemployable”?
We can try and solve the subsistence aspect of unemployment with redistribution, government programs, UBI etc.
But we need to find a solution for idleness and meaning and purpose in life. A person who only lives on UBI because they are unemployable is a person who is not likely to find a wife, support a family, or find meaning and purpose. Some will, for sure, but many won’t.
Wondering if you read the article?
If your premise is that businesses will be onshoring and bringing back jobs the article clearly disproves this:
“Today, Sharpie makes more than half a billion markers at its Tennessee factory every year… -without a change in head count.”
So no new jobs, they just didn’t lay anyone off (yet?).
Also, the article states this reshoring is likely unattainable for most businesses due to massive investments:
“to get to this situation took close to $2 billion in investment… Filippo Falorni, an analyst at Citi, told the Journal few companies have the resources to replicate Newell’s move. “I really don’t think there’s anyone that can be as competitive as them,” said Falorni.”
Further, the company started this process back in 2018 according to your article. Thus proving point that you can’t just wave a magic wand and start producing things in the US. It takes years of building, retooling, training, etc…
Interestingly you never asked the question that I thought was most pertinent in this article. That question is—how was the company able to produce products in the US without increasing prices and without increasing hiring? According to the article:
“With additional investments in robots… the factory has been able to make pens at three to four times its previous speed”.
No new jobs, just more robots and automation while companies move their business pieces around on the chess board to avoid paying taxes/tariffs and avoid paying live-able wages to employees.
You ask further down in the posts what the solution is. I don’t have one, because there are many different ways of building an economy. I would recommend: “The Alternative: How to Build a Just Economy” by Nick Romeo. Different ideas in there. Enjoy!
Thanks for the recommendation, I will definitely take a look!
Quite a while ago, when you published the Investment Workshop, it was right when Trump was elected for the first time.
The main lesson of the workshop is “ignore the news, invest regularly in your global diversified portfolio, and when one area implodes, another picks up the slack”.
It you read back the workshop (which I did recently) all the “big events” look so minor. Exactly the same time 8 years ago there was a US government shutdown showdown. No one even remembers it anymore.
We should heed to the same advice as you gave back then:
It doesn’t matter if the tariffs are inflationary or not – a global diversified portfolio protects you from that.
It doesn’t matter if the economists are right or wrong – a global diversified portfolio protects you from that.
It doesn’t matter if everything Trump says is wrong – a global diversified portfolio protects you from that.
It doesn’t matter if Biden has dementia – a global diversified portfolio protects you from that.
Unfortunately, parts of this beautiful blog are being infected by TDS and became all about Trump bashing and politics.
Let’s forget about it here on this little piece of the internet which is about freedom by self determination, financial literacy and making good individual choices.
We will never be in Trump or Biden insider circle. We won’t be making money by knowing when the next tariffs comes or by investing in Burisma.
So far, per this specific post, the US market is up 13% YTD and is the *worst* performer of your global diversified portfolio. How can we not be super happy about that?!?
My wage as a healthcare public worker went up barely 2%. I am very happy with what is happening in the markets, tariffs or not.
Market predictions are rarely correct of course, but it’s fun to play:
I’m more worried about the mass herding into AI. Corpos are pushing it into everyone’s eyeballs (not a surprise after the Broligarchs bought front-row seats to Dear Leader’s inauguration).
Most of it is botshit and widely hated by customers and employees. It barely adds value, especially after accounting for the insane energy usage and environmental/health/municipal financial damage the data centres cause.
RSP (equal-weight S&P 500) has been nearly stagnant since the US election last year, showing that most SPX gains are being produced by massive future bets on AI seeping into everything.
Hank Green made a recent video on how Nvidia and other corps seem to be engaging in some kind of magical recursive valuation scheme, leaving me wondering if all the recent US market gains are built on hot air.
What’s wrong with leveraging debt?
I locked in a cheap 2.7% rate on a new car in 2017 and had a loan for 6 years instead of buying the car in cash.
The original money stayed invested in the market growing at much higher rate and is more than 2x the initial value since then.
The interest in contrast was around 1.3% annualized over that time.
As long as you have safe margins and aren’t going in the hole over it.
Did someone say “car”? I haven’t owned one in decades, and I don’t miss it one bit. While I still lived in the US and had a salaried job, I put $ into the tax-advantaged investment program offered by my employer. Now, I’m glad that I did that instead of having a monthly car payment for a “sweet ride.”
America: The RepubliCON Hell Hole
Hi Wanderer,
Thanks so much for this interesting article and your take on the economy – as always thoroughly explained.
I’m a bit of a FI newbie (only got into it ca. 2 years ago), so perhaps this is a silly question (apologies if it is) – I am currently investing whatever I can in the Vanguard VT Total World Stock ETF, so from what I understand that’s the right thing to do as the share of the US economy in that ETF will change depending on how well they are doing – or not. But, being based in the US, I have everything invested in US$ with Vanguard US. Now my question is: Does it make a difference what currency your investments are in (whether USD, GBP, EUR,etc.)? If we think the US economy is going to shrink over the next few years (decades?) relative to other economies, does it make a difference whether I’m invested in the VT ETF in US$ or some other currency? I’m sorry if the answer is super obvious.
Thanks so much for all the amazing work you two are doing and for continuing to post interesting and thought-provoking articles! 🙂 I of course have read your book too!
Hope you both and Little Matchstick (<3) are well!
Long-time reader, first-time commenter FI-nomenal Journey
Hi there FI-Nominal,
Welcome to the comments!
My opinion is that while it can technically make a difference which currency you choose to hold, it doesn’t make a difference for me personally in how I invest.
Here’s why (and I am very open to suggestions, I might have a simplistic view here):
If I understand you correctly, you are concerned with two things:
1) The USD weakening (compared to other currencies) and losing its purchasing power. That means that if you grew your portfolio to 1M, it won’t buy you enough stuff as you expect/need. This is definitely a concern many people share (me included).
2) The US economy shrinking and losing market dominance, meaning US companies losing their stock market value. This can happen in a non-correlated way to the currency.
Lets stary with issue #2, because it is the easier and you already have the answer: global diversified portfolio. If the US loses dominance and companies lose value, you are holding European, Asian etc in your VT total world ETF (and this is what is advocated in the investment workshop here as well, just broken into the individual ETFs).
Now to issue #1 – the USD losing purchasing power.
The question is what do you do about it? (Assuming you live and work in the USA)
Your solution (if I understand correctly) is to find a currency you trust more and have your portfolio held in that currency.
But think about what is in your portfolio: It is companies’ stocks.
So, imagine the following hypothetical:
The EUR is worth today twice as the USD (1EUR = 2USD).
A 1M worth US company is worth 500K EUR.
This company issued 1M shares (each share is 1$ or 0.5EUR).
Lets say that today you chose to buy those stocks in EUR (if you even have access to a broker that does that – companies are not always cross-listed on multiple exchanges in multiple currencies) – and you bought 100 shares. You converted 100USD to EUR and bought the stock and hold it in a European brokerage.
10 years later you were right, the USD collapsed and now 1 EUR is worth 10USD (the dollar is a fraction of the EUR).
The company grew over time by 100%, doubled its share price.
So, the company today is worth 2M USD, which, because of the collapse of the USD is only 200K EUR.
Since there are 1M shares still, each share is now worth 2USD or 0.2EUR
Your 100 shares (held in EUR) are now worth 20EUR.
Since you live in the US and you buy food and gas and pay rent in USD, you convert it to USD to be used and end up with the 200USD – doubling of your holding since when you bought it.
You doubled your money but everything you want to buy will be way more expensive due to the collapse of your currency (which is what you tried to avoid).
When investing, Buying the SAME ASSET, just in a different currency is not protecting you from that.
What you are looking for is something that if the USD value collapses, maintains its real world, global value. You are looking for a *different asset* that is not a US company stock.
Some people turn to gold, some to crypto.
And, your global diversified portfolio turns to non-US companies.
If you hold Samsung, Siemens, Sanofi, Rio-Tinto etc – you hold non-USA companies that may not suffer as much from a USD collapse.
Now, realistically, if the USD collapsed by 90% everyone will be affected to some extent. But this is one way to diversify away.
If you are thinking about currency other than USD for keeping its value, then you want to hold either the currency itself, or companies making their living in that currency. Holding a US company in a different currency won’t help.
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wow, Max, that comment above is quite unhelpful and not pertinent to the very fine articles published here. Maybe we could try not to make everything online a political argument?
If you were American, just how much would you tilt towards international in your equities holdings? More than a third? Would love to hear your rough idea on a percentage.
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Subprime auto lending really does feel like an early warning signal for broader credit stress in the economy. For anyone tracking local ownership and valuation trends, useful public data can be explored through Avery Property Records which helps add context to market behavior. What’s interesting is how consumer debt cycles often mirror shifts we later see in real estate and asset pricing. It will be worth watching how lenders adjust risk models if default rates continue rising.