Liberation Day: Inflation Set to Soar as Tariffs Loom

As April 2, 2025, approaches, the market is bracing for what could be the biggest escalation of the trade war to date. President Donald Trump has dubbed this day "Liberation Day," when he plans to impose reciprocal tariffs on imports from all countries that tax U.S. exports. The tariffs, which could be as high as 25%, are expected to impact imports worth more than $1.5 trillion by the end of April, with the automobile, pharmaceutical, and semiconductor sectors being the most affected.

The Kobeissi Letter, a popular commentator on the global markets, has warned that these tariffs will likely shift price hikes to customers, leading to inflation in the second quarter of 2025. This prediction is backed by the recent surge in the U.S. Economy Policy Uncertainty Index, which has exceeded the previous high it reached during the COVID-19 lockdown and is nearly 80% higher than the uncertainty level witnessed during the Great Recession in 2008.



The market's reaction to this uncertainty has been swift and severe. U.S. stock indices extended losses on March 31 ahead of Liberation Day, with the S&P 500 down 0.8%, the Dow Jones Industrial Average (DJIA) down 0.3%, and the Nasdaq Composite down 1.7%. Consumer sentiment has also taken a hit, falling to 57—a level last seen during the 2008 recession. Meanwhile, gold is hitting record highs as investors flock to safe-haven assets, with gold exchange-traded funds (ETFs) seeing a net inflow of $12 billion over the last two months.

The tariff war has not spared the crypto markets either, which are down 1.3% over the last 24 hours. This volatility is expected to continue as markets navigate the uncertainty surrounding the tariffs and their potential impact on the economy.

However, there is a possibility that President Trump is playing with emotions to make Liberation Day look like a success. If that were the case, he might promise the worst regarding tariffs and underdeliver. In other words, the tariffs announced on Liberation Day may not be as high or far-reaching as expected. If that were the case, the markets would likely stage a relief rally, allowing Trump to take a victory lap, claiming that tariffs are beneficial, as evidenced by the market’s actions.

In conclusion, while it’s easy to be bearish given the uncertainty, there are other scenarios to consider. As investors, we must consider all possible outcomes, from the most obvious to the least suspected. The scenario above may be a big bear trap for those fearing the worst. Keep the old Wall Street adage, “buy the rumor, sell the fact” in mind these next few days. However, this time, it might be sell the rumor, buy the fact!