Investors Are Missing the Real Impact of Tariffs

Editor's note: As tariff chaos continues, some investors have become complacent... But even in a best-case scenario, our colleague Mike DiBiase says these folks are missing the bigger picture. In today's essay, adapted from two recent issues of his Stansberry's Credit Opportunities newsletter, he explains why the latest "pause" on tariffs is no cause for celebration – and why the fallout could echo the stagflation era of the 1970s.

Folks no longer seem as worried about tariffs. But they should be...

President Donald Trump's Liberation Day announcements on April 2 put the markets in flux. The S&P 500 Index fell 19% from its February high following the announcements. And the Nasdaq Composite Index plunged 24%.

But then Trump reversed course and hit "pause." He cut tariffs on Chinese imports from 145% to 30%. And China dropped its tariffs on U.S. goods from 125% to 10%.

Investors cheered the news. The stock market has since recovered and is once again near a new all-time high.

But investors are forgetting a few important things. Trump's tariffs did nothing but stoke a flame that had already started.

We're already in the early stages of a recession. Tariffs will only make it worse... And "zombie companies" are already starting to fail, just as they did in the stagflation era of the 1970s.

Let me explain...

Earlier this week, the president announced he struck a deal with China. Tariffs on some Chinese goods will now be 55% with a minimum 30% rate.

That's a huge increase from around 20% before Trump retook office and 5% back in 2018. And that's not to mention the increase in tariffs on other countries we'll soon see.

Tariffs are a great source of revenue for the government. But they're nothing more than an added cost for businesses and consumers. And these groups were already hurting from years of high inflation.

Remember, the U.S. economy shrank in the first quarter. The tariffs – no matter what final form they end up taking – will only stoke inflation and cause the economy to shrink further.

High inflation and a slowing economy is the definition of stagflation... something we haven't seen since the 1970s.

Even before Trump's new tariffs, inflation was already poised to head higher...

What most folks don't realize is that inflation is caused by one thing and one thing only... a rapid increase in the money supply. It's why we saw inflation soar to more than 9% after the Federal Reserve printed more than $6 trillion following the pandemic.

Here's why you should be concerned today...

It takes anywhere from 12 to 24 months for increases in the money supply to show up in inflation figures. After declining throughout 2022 and 2023, the money supply is once again on the rise. In fact, it has increased every single month since November 2023. That's 18 straight months.

Even more troubling, the increases in the money supply are accelerating. The latest reading from April shows the M2 money supply increased 4.4% year over year and 0.7% from March. These are the largest increases since December 2021.

Expect these increases to show up soon in inflation numbers. We're already seeing signs inflation is set to head higher. The Institute for Supply Management's latest services organizations' price index is up nearly eight percentage points since March. It jumped to 68.7 in May – the highest level since November 2022.

This index tracks input costs – what businesses pay in raw materials and labor to create their products. And the rise we've seen tells us consumer prices are likely to rise in the months ahead.

Tariffs Are a Hidden Tax on the Economy

Thanks to our fast-growing money supply, inflation is set to spike again. The tariffs mean things are likely to get worse quicker.

In April, Yale University's Budget Lab forecasted tariffs will cost the average American household an additional $3,800 this year. That's the equivalent of a 2.3% rise in prices.

The University of Michigan's Consumer Sentiment Index, which dates back to 1952, fell to its second-lowest reading ever in April. (After four straight months of steep declines, the index leveled out in May, remaining near record lows.)

Zombie companies should worry, too. These are companies that can barely afford the interest on their debt. Most businesses won't be able to pass all of the increased tariff costs on to consumers... So their profits will be stretched even thinner.

In the first quarter, 188 U.S. companies went bankrupt. That's the highest number since 2010. Expect that number to pick up in the quarters ahead.

Large bankruptcies this year include electric-vehicle maker Nikola, fabrics retailer Joann, genetic-research company 23andMe, and restaurant chain Hooters.

We also saw diet company WeightWatchers and retail pharmacy Rite Aid declare bankruptcy. A lot more debt-laden companies are on the cusp of doing the same.

While the stock and bond markets are calm today, the underlying pressures haven't subsided. The fallout from Trump's Liberation Day announcements is just getting started.

Investors who are spinning the tariff game into good news are delusional. Don't be one of them.

Good investing,

Mike DiBiase

Editor's note: Mike says we may already be in a recession. But you don't need to panic. There's a straightforward way to receive legally protected income from investments that are much safer than stocks. Despite the looming trouble in the economy, this could be the moneymaking opportunity of a lifetime... That's why Mike is sharing our firm's No. 1 strategy for times of financial turmoil.