Scott and Ed dig into the rubble of the record breaking $6.6 trillion sell-off following Trump’s tariffs announcements. They break down how Trump determined the tariff rates, what the tariffs will do to company earnings and the real economy, and offer advice on how to deal with turmoil in the markets as an investor. Vote for Prof G Markets at the Webby Awards Subscribe to the Prof G Markets newsletter Order "The Algebra of Wealth," out now Subscribe to No Mercy / No Malice Follow the podcast across socials @profgpod: Instagram Threads X Reddit Follow Scott on Instagram Follow Ed on Instagram and X Learn more about your ad choices. Visit podcastchoices.com/adchoices
Chapter 1: What triggered the $6.6 trillion market sell-off?
How are you, Ed? How are you? I'm doing okay, Scott. How are you? Are you reacting badly to these tariffs? What's going on with you? So I'm an emotional tideful right now, not for the reason you probably think.
I lost... I don't know, mid-single-digit millions, maybe $10 million on the 48 hours on Thursday and Friday. But that's the bad news. The good news is that means you have a lot of money to begin with. I'm blessed.
And I could kind of—I don't want to say I could kind of give a shit, but the reason I'm an emotional die-ball is I just finished up a college tour with my son, and it just is sort of this very—it's a marker in time, you know? It's just—we went to eight schools in five days, and— I decided I was going to be totally focused on parenting and not do any business calls.
And it's just sort of, you know, it's very emotional. He doesn't understand it, but he will when he has sons. But what happened on Thursday and Friday, for me, I was much more upset about the Trump coin. I was much more upset about... You know, Marines being kicked out of the service because they're transgender.
This, to me, is like so far fucking down the list of this ass clowns, un-American, bigoted, weird behavior. I find it just sort of disappointing. All of a sudden, the most powerful people in the nation have decided enough is enough when they lose, when their portfolio goes down. Yeah, I'm a bit of a mess today, but for the right reasons. We know this is stupid, so let's bust right into it.
You did a fantastic video I thought was really powerful talking about tariffs can play a role in restoring trade symmetry. Talk a little bit about the asymmetry as it relates to U.S. tariffs and our trading partners.
Well, I will get into that.
Never mind. Get into other stuff, Ed. You're clearly the fucking producer here.
I've got to stick to our structure that producer Claire— By the way, that's super sexy when you're not flexible and have to stick to a script. Yeah, that's going to get you laid, boss. Anyways, sorry. Go ahead.
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Chapter 2: How did Trump determine the tariff rates?
Trump asked his team to do the analysis and to go out and find out, okay, what actually is the effective tariff rate on each nation, which is a difficult thing to do because, you know, these tariffs, they're not universal. They're specific to each item, and then that rate can change depending on your relationship with a certain country.
In other words, determining a number, a tariff rate, is a difficult thing to do. But his team did it. They went out. They did the analysis. And they went to the president and they brought him a menu of options. They said, okay, we did what you asked. Here is what we could do. And he looked at the menu and he said, I don't like it. I want to do something else.
And that's when he decided on this new trade deficit formula, which again has nothing to do with actual tariffs. And this gets back to what I discussed last week. which is that if you actually look at the numbers and you look at our relationship with all of these countries, we're not the victim we like to think we are. Many countries charge less than we do.
Most of our largest trading partners charge around the same that we do. And in fact, if you look at the last 15 years, the US has implemented the most amount of hawkish trade interventions of any nation. And so what I think happened was the Trump team went out They found the data. They did the analysis. They showed him the data. They showed him the truth.
And then Trump looked at it and he said, I don't like the data. I don't like the truth because it doesn't fit with my narrative. So what we're going to do now is we're going to make up the data and we're going to make up the truth. And that's what that board was that he was holding in the Rose Garden. It was basically a fabricated list.
It was like an imaginary world of what if the tariff rates were this amount? And then we will just divide that what if number by two in order to make you believe that America is getting screwed. So...
that's it's a very interesting dynamic following what i talked about on the on the last episode which is you know look do the numbers do the math look at the actual tariff rates uh do the hard work of understanding what is going on in the economy and you will conclude as is usually the case america's not really getting screwed on much in fact we're the most powerful nation in the world for a reason we're actually uh
quite stringent on other nations on many things, including tariffs. But Trump, it didn't fit with his narrative. Trump needs to believe that America is getting screwed by foreigners. And so it was a miraculous thing to see him literally make up the numbers. And I think the most concerning and disturbing thing is seeing his team
just playing the sycophantry once again, clapping at his announcement and basically pretending that he's got it all right, having just told him these are what the real numbers are. And he said, no, I don't like those numbers. And they capitulated.
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Chapter 3: What impact do tariffs have on company earnings?
But just to use one company as an example, Apple, the tariffs that he has imposed are gonna cost Apple $40 billion. By the way, it's the importer that pays the tariff. So they're gonna have to pay $40 billion, right? That comes right off the bottom line. The P.E. of Apple was 38. Now I think it's 34. So you're talking about a trillion dollars in shareholder losses to Apple.
And I want to come back to shareholder losses. In addition, the idea is that if you kind of raise the cost, then it inspires domestic production. To produce an iPhone in the U.S. would cost $3,500 an iPhone. So we're not moving back manufacturing. All it's going to do is increase the price of an iPhone from $1,600 to $2,300 and reduce the market capitalization of Apple by a trillion dollars.
And that is fairly typical of what happens across the board. So these – it is difficult to think of a more elegant way to reduce prosperity than And what people aren't talking about that's even more damaging is the uncertainty. People don't know how to plan their businesses.
If he'd just come out and said, all right, 10% tariffs, businesses, both foreign and domestic, could plan their business, get on with it. They don't know who they're waking up next to. His sclerotic epileptic decision-making, he could cancel all tariffs on Monday. So no one knows what to do here. What they are doing—
is the largest companies, the largest economies in the world are reconfiguring their supply routes to excise American manufacturers and American services firms from their supply chain. This will take likely years, if not decades, to repair and reassemble.
The other thing we're not missing, and Josh Brown brought this up, and I just think it was a fascinating insight, is that if you look at the products we export, a lot of finished products, a lot of high value manufacturing. By the way, we need to rebuild our manufacturing base.
Now, we have purposely traded it off because the services jobs we've replaced the manufacturing base with are generally higher paying. And we are still the second largest manufacturer in the world behind China. But we, for example, we take an NVIDIA chip, very, very high value add, and we export those chips. Those products probably have a 50 or 60 point profit margin. We import Mercedes.
Mercedes maybe, maybe has a 10% profit margin. The products we generally import in have a much lower margin than the products we export because we're bigger in services and high value add products. So let's just look at NVIDIA versus Apple. NVIDIA has a price-to-sales ratio of about 24.
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Chapter 4: Why are tariffs creating market uncertainty?
Mercedes has a price-to-sales ratio of 0.23, meaning if you were to go pro-rata and assume we're going to reduce a billion dollars because of these reciprocal tariffs, which they didn't think were going to happen for some reason, but let's just assume for shits and giggles a billion less dollars of Mercedes coming in because of the tariffs and a billion less of NVIDIA chips going out.
That's a reduction in market cap of $23 or $24 billion to NVIDIA shareholders, and it's a reduction of $23 million to Mercedes shareholders. In other words, if we go pari passu and lose $1 for every dollar they lose… That's not the analogy. This is apples to aircraft carriers.
The hit to our stock market, the hit to our market capitalization, the hit to the compensation via options of domestic employees that work for these amazing firms will be much greater, much greater than the hit to foreign markets. We'll hurt both. All the markets were down, right? Our market was down. Europe stocks, 600, fell 8%. UK's FTSE fell 7%. The MSCI Asian index fell 5%.
This guy has figured out a way to elegantly take down the prosperity of the global economy. And I only have one of two scenarios here. And one sounds paranoid, but it doesn't mean I'm wrong. The first scenario is this guy's just a fucking idiot. And nobody around him has the stones to to say, this is just a really bad idea and it's going to cost you a lot of votes, a lot of support.
Farmers are going to get hit the hardest. Canada and Europe are already deciding to be more strategic with their tariffs and they're going after the heart and lungs. They're going after the red states. They're either all acolytes or he just doesn't listen to them. My second scenario, and I know this sounds ridiculous, but what I would ask our listeners to contemplate is the following.
If President Trump had received $10 billion or a commitment of $10 billion from both Putin and Xi into his Trump coin in exchange for dividing the Western alliance, for driving the biggest trading partners into the arms of China, for withdrawing from Ukraine... wouldn't that just make perfect fucking sense right now?
If she and Putin had called this guy and said, all right, I mean, he's either this fucking stupid or this fucking corrupt because none of this shit makes absolutely any sense whatsoever. There is no evidence. There is no support. There is no empirical argument for why or how this does anything but reduce prosperity, throw our
throw our trading partners into the arms of our adversaries, Japan, South Korea, and China are talking for the first time about closer economic ties. So this is the inconsistency, the market capitalization loss, the general sort of reduction in the value proposition of our products abroad while increasing our prices domestically. This is Nigel Farage on steroids.
But Trump is going to take down a bunch of Western economies in the short term. The big winner is China, because China is basically going to scoop up a lot of these trading relationships that we are throwing in the dustbin.
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Chapter 5: Is America truly a victim of trade asymmetry?
But what it does is it freaks everyone out. It shows all these other nations, we're serious, we'll actually do this stuff. And it will allow us to bring them to the table and make them do whatever they want, whatever we want. So, that would be their argument.
My issue is those two arguments are completely contradictory because it's either a real policy that has long-term benefits or it's like a pump fake and a negotiating tactic. It can't be both. So, I would like to get your response to their response. You know, what would be your reaction to their arguments?
Either one, that we have to do this because America is screwed on this long-term debt path, or two, this is 40 chess, it's a negotiating tactic.
Yeah, the trope or the weirdness here, whenever no one in the administration can justify, explain, or rationalize a decision he's making, they claim he's playing 4D chess, that this is so stupid or crazy that it's crazy genius and you just aren't privy to his genius yet. Enough already. That's just fucking stupid. There's a lot of smart people out there. Tell us what you're thinking and
You know, this notion that, oh, all will be revealed as genius will be revealed. That argument doesn't hold. I think the best argument from an optics standpoint is it is true that we've lost a lot of manufacturing jobs. And at least theoretically, if you raise the price of imports, our domestic manufacturers should be more competitive theoretically, and you should increase manufacturing jobs.
The problem is they impose reciprocal tariffs. I mean, just as an example, 88% of toys under the Christmas tree are from China. Tariffs on toys I think are going from 3% to like 33 or something. So a 20% increase in the cost of toys. 90 plus percent of Americans are on a fixed budget for Christmas gifts. They just can't spend whatever it takes.
So just to bring it home, this Christmas, 90 percent of households are going to have 20 percent fewer gifts under the tree for their kids instead of 10 gifts. They're going to have eight. So the notion it's going to bring back manufacturing doesn't really hold. I do believe you could say, all right, we're going to give massive subsidies to the chips industry because it's strategic.
It'll create good jobs. We're going to spend a lot of money on an infrastructure bill, which will create shovel-ready jobs for people here who don't have college degrees. I'm sympathetic to the argument that we need more on-ramps. But the notion that tariffs are going to somehow restore American manufacturing – It just, it doesn't pan out that way.
As a matter of fact, almost every example, this is essentially the policies of Latin America from the kind of the 50s to the 80s, and it didn't work. It was a disaster for them. And then a lot of people think that essentially China, you know, had all of this kind of cultural backlash. And basically they said Mao Zedong, his strategies didn't work. So they've totally embraced kind of
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Chapter 6: What are the arguments for and against Trump's tariff policy?
Well, I'll talk about them and then I'll, I don't like to give financial advice. I'll say what I'm doing. And I'm in a much more blessed position than a lot of people for a lot of reasons. I got lucky and I'm talented. So, and I've been very open about my wealth on this program. So first off, same advice, don't panic sell. The markets could rip back up.
Work with someone, talk to some people and say, am I too invested in the U.S. market? And how can I thoughtfully and rationally and in a mature manner start to diversify away from a geographic concentration? I think that same advice goes. And also, are there opportunities to perhaps diversify? maybe ramp up my investing through consuming less, right?
And you don't like to tell people to consume less if they're already living close to the bone, but other opportunities to make a few cuts here and there. It's basically the same advice, almost the same advice for young people. Diversification is even more important for old people because they don't have the time to make it back. So diversification is your Kevlar.
So this should be the impetus to try and figure out if you would benefit from diversifying. Now, what I am doing or what I've done, I'm doing nothing over the next few days because I think the market could go up two or three. This guy could announce all tariffs are off on Monday and we're off to the races. What I've been doing over the last three months is I have been doing –
I have been slowly but surely selling out of U.S.-based assets and buying European. I made my biggest private investment of the year was in a European defense company. My other one was I invested in a friend's company, Atlanta Partners, that manages specials in Latin America and Europe. I love that. It's mid-cap and small-cap and basic value.
I wanted to get away from tech, what I thought was just— Now, I also want to be clear. I've been planning to sell Apple and Amazon down, and I waited too long. So I don't get it right. I'm not a genius. I still—I lost a shit ton of money Thursday and Friday from Apple and Amazon because I know I've been thinking about it, but I always thought, well, maybe when Apple hits $250 again, right?
And it didn't. Now it's back at whatever—
By the way, my prediction was right. Not for all the right reasons, but I said Apple would hit, go below $200 in the next six months. It did. You did. So chalk it up as a win.
So what I have done, or what I did, was I went short. I thought this thing's just too expensive, specifically AI. I lost... I don't know. I haven't even really looked. I think I lost somewhere between five and seven million bucks on Thursday and Friday in just my U.S. equities. But I got 30 percent of it back because I'm short Palantir and Tempest AI. I think AI is overvalued.
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