Urgent Update - We're In the Eye of The Storm! What Comes Next?

It's hard to believe that on April 8th, the S&P 500 was down more than negative 15% year to date. And today, we've bounced back and the markets are nearly flat. So that should mean that we're past all of that tariff turmoil. And we can focus on growth again, right? One would think that we have plenty of runway for the markets to gain over the rest of the year. And if that's what you're banking on, then I have a different opinion that you might want to hear. Reality sucks. The problem with the markets today is that we suffer from recency bias. And if you're not familiar with the term, it means that we have a tendency to give extra weight to the most recent information that we've seen, heard, or experienced. And to simply downplay what had come before. So in plain English, you remember yesterday's headlines way more clearly than last month's trends. And you act on that fresh memory as if it's the whole story. We're all guilty of assuming the latest data point is the new normal. So when prices fall, you expect them to keep falling. And when they rebound, you think the rally has a lot of legs. But markets move in cycles. And headlines can be misleading or incomplete. Me personally, I think that we happen to be in the eye of the storm. Where it's unusually nice and calm. But there's probably a second wave coming that we should want to prepare for. Look, I am not a doom and gloom kind of guy. But I do try to be realistic so that I can plan ahead. For that reason, I'm going to map out what I believe is happening right now. And how companies will react or have already reacted. And for background, when it comes to YouTube personalities, I am easily one of the leading experts when it comes to understanding imports. Because I've imported billions of dollars worth of product. Where I have literally worked in China. And I've been to several of these plants. My point is, I know my shiznit. I am not making this up or summarizing some news articles. This is truly my first-hand knowledge. So grab a drink, relax. And I'm going to map out how much damage has already been done. I think we know that tariffs were first announced in February. And then began to escalate and grow until we had a liberation day on April 2nd. Where we can see that the markets had been consistently going downhill during this time. And several days after that liberation day, there happened to be some pauses and exceptions placed on the tariffs. And markets began to respond positively. Like I said, we all lived it and we all know it pretty well. But why did the markets bounce back so much? There were no trade agreements of any importance being made. Where people don't want to be left out of a rally, so they jump back in. But if you're me, you never sold in the first place. In fact, I was trying to double down on the dip. And I tried to share that as much as possible. Let's go ahead and get into the nuts and bolts of how companies are operating during this time. And what you can expect over the next six to eight months. First off, leading up to when tariffs were announced, retailers and brands had been trying to bring in extra product before the tariffs kicked in. But these companies can only bring in an extra three to four weeks worth of inventory. They just don't have enough room for months worth of product. To simply generalize, I'm going to put products into two groups. You have everyday product like jeans, shirts, tools that we buy every day. Then you have seasonal product like swimsuits, summer toys, water guns, pool toys, back to school, winter clothing, Halloween, and of course there's Christmas product. Both of these groups of products are often imported. But with seasonal product, the process is a little bit different. Retailers give brands commitments on what they plan to buy roughly nine months out. And they often predate purchase orders for a more legally binding agreement. And at six months out, that's when these commitments have to be locked in or retailers won't get any product. So in order to get Christmas product into the US in September, all the purchase orders had to be locked in by March. Now I'm just sharing this to give you a reference point. Of course, when the tariffs did kick in in April, boats that were on the water are a done deal. They're going to happen. They will be received and the tariffs are going to be paid. But I guarantee you most companies told the ships to sail as slow as possible in case things changed on the tariffs, which they did. But here's where things get really bad. Remember all of those commitments and the early purchase orders on the seasonal product? Some or most retailers reduce them down completely or they cut them in half. Retailers have to be fiscally responsible. And every merchant desk has their own budget. And it's often referred to as an option to buy. So if the toy merchant at Target has a billion dollar budget to buy toys, and those same toys that they sold last year are now costing 145% more, well later changed to 30% after the change, then they're going to reduce their purchase orders by roughly that same amount as the tariffs will allow them. My point is that companies won't bring in as much product as they sold in the past because their budgeting power is now cut down by whatever that tariff rate is. And for a small business or a smaller retailer, they may completely kill all of their seasonal orders. They simply can't afford to buy them at a 30% premium of what they paid last year. So when the Chinese tariffs hit 145%, US companies pulled back or canceled half or maybe even the majority of their orders to China. In turn, China closes down a ton of their production plants. And this is much worse than you can possibly think. Because the Chinese workers don't simply go unemployed and go home to their apartment to play video games. No, they often move back to the rural towns where their families live. And the reason that's a problem is that if we do resolve all of these tariffs tomorrow, well, guess what? The plants in China, they won't be able to flip a switch and make product right away. It would easily take them a month, maybe more, to get all the workers to come back into work. And anyone that has managed around the Chinese New Year knows exactly what I'm talking about. Hypothetically, let's just say that the tariffs with China drop down to 10% tomorrow and we call it a long-term deal. My guess is that the stock market would rejoice with new highs due to recency bias. In turn, I will probably sell some of my stock and gain a little margin. Because in my opinion, this is all still part of the eye of the storm. Keep in mind, the first half of the storm hit hard and strong when the tariffs were first announced. Since then, we've bounced back with positive news. But there's another storm coming as a result of all of these tariffs and the steps that retailers and manufacturers were forced to take. All of that news that's surfacing from retailers saying, hey, our shelves might be empty later in the year. Well, they already know that to be true because they already know that they've cut back on a lot of their purchase orders. So they're telling you what they've already bought. I had mapped this out in a prior video where I stated how much safety stock companies are holding. Because all the prices on import product are slowly starting to flow into the stores and you're going to start seeing those prices the latter part of May and beginning of June. I guarantee you it's going to happen because all of those imports in the past four to five weeks, well, they've already been received at 145 to 30% tariffs. And there has been a lot of swirl around the president telling Walmart to simply eat the cost increases. And I'm sorry, but that is utterly ridiculous. Walmart's operating margin in 2024 was at 4.2%. There is no way that the suppliers or Walmart can eat all of these cost increase with margins that are this tight. I guarantee you it will absolutely be passed on to us consumers. At the end of the day, Walmart can't lose money with every sale because that's exactly what they would have to do with even 30% tariffs. So let's be honest with ourselves. Yes, the cost of products are going to be going up and it's going to be shown in the CPI data. It's going to be coming up in July and definitely in August. There's simply no way around it. And there's no reason this should surprise any of you. Given what I know on the flow of seasonal product, if there's any seasonal item that you want or you need this year, my recommendation, get it now. Buy any leftovers from last year that are available because when the season hits, there's going to be a lot less inventory and the inventory that is there is going to be much more expensive. And if retailers are bringing in less product, then they won't be hiring all of those seasonal workers. That means the jobs reports will probably take a major dip in the latter half of the year. If this tariff situation isn't wrapped up in the next couple of weeks, the fourth quarter will be brutal for consumers, for retailers, and of course for brands. Because there will probably be a major shortage on product, not that you could afford it. Which means that many of the company sales and the margins will be lower for the brands and also those retailers, which often results in layoffs. And you bring it all together, that means that earnings calls for the potential next three quarters could be very bumpy. Once again, there has been a lot of damage done from these tariffs and we won't be hearing about the details until we begin to hit the seasons where we realize we don't have enough product. My overall point is to just be prepared for the back half of this storm to hit because it is inevitable. And given how our society reacts to recency bias, the markets will probably take another hit before the storm has fully passed. Of course, some of the only companies mildly insulated from this are companies offering services and software, which is why I invest in those the most. And I'm going to continue to highlight those in my future videos. As always, thank you again for watching.