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What happens when a president’s bold vision to re-industrialize America collides with the mathematical realities of global capital flows? In a recent Financial Sense interview, Julian Brigden, president and co-founder of MI2 Partners, explained the crucial interplay between tariffs, trade, and capital, cautioning that Trump’s policies are both necessary but highly painful for capital-driven markets.

The Macro Mechanics: Why Markets Can’t Ignore Tariffs

At the heart of Brigden’s analysis is a fundamental economic truth: the U.S.’s current account deficit, driven by heavy imports, is funded by a capital account surplus—foreign investment pouring into U.S. assets. Trump’s goal to slash the deficit through tariffs disrupts this balance. “If the intention is to lower the current account deficit, mathematically, that means that we will lower the capital account surplus,” Brigden explained. This reduction could trigger significant outflows, as foreign investors, who hold $17 trillion more in U.S. assets than Americans hold abroad, take profits after years of stellar returns.

Brigden highlights the risk of a weaker dollar, a policy the administration appears to favor, potentially through a new “Mar-a-Lago Accord.” A declining dollar could further erode foreign investor confidence. “If you get the dollar right, you get almost everything else right,” he emphasized, underscoring its role as the denominator of global assets. For U.S. investors, this spells trouble, as domestic “buy-the-dip” enthusiasm—evident in steady ETF inflows—may collide with hundreds of billions in foreign selling.

Recession Risks and Market Capitulation

Brigden sees a growing risk of recession, driven by tariff-induced economic slowdowns and potential job losses. “We need to be braced for a couple of ugly non-farm payroll numbers,” he warned, citing delays in unemployment data as laid-off workers exhaust severance packages. Historically, recessionary market declines average 30%. If recessionary headwinds begin to materialize, Brigden estimates a potential downside target of 4,000 on the S&P 500. “Until we get that capitulation trademark coming from U.S. domestic [investors], I’m not convinced that the real pain is over,” he said, pointing to persistent buying by retail investors despite losses.

This lack of capitulation, coupled with overvaluations rivaling historical peaks, fuels Brigden’s caution. He dismisses bullish hopes that tariff rollbacks could spark a sustainable rally, arguing that even successful negotiations won’t alter the mathematical reality of reduced deficits and capital flows. For Brigden, the market’s fate hinges on whether Trump’s policies tip the economy into recession or merely a “speed bump.”

Trump’s Vision: Laudable but Costly

Despite his bearish outlook, Brigden finds Trump’s goals compelling. “What the President is trying to achieve, I think, makes an inordinate amount of sense,” he said, praising efforts to re-industrialize the U.S., bolster the middle class, and preserve the dollar’s reserve status. However, he questions the execution, particularly the tariff-heavy approach, which risks alienating allies and escalating tensions with China. “A 100% tariff-plus on China is unquestionably an economic war,” Brigden noted, highlighting China’s retaliatory moves, like restricting rare earth exports and canceling Boeing orders.

Re-industrialization, while a long-term necessity, won’t yield quick results. “You’re talking about years and decades,” Brigden said, noting that automation may limit job creation. Meanwhile, immediate tariff impacts—higher costs and disrupted supply chains—could exacerbate economic strain, especially if allies like the EU retaliate with tariffs on U.S. services like Netflix or Google.

Investment Strategies for a New Era

For investors, Brigden advocates a defensive stance. “It’s time to raise some cash,” he advised, urging retail clients to prioritize safety. His favored assets include gold, silver, and precious metal miners, which benefit from a weaker dollar and economic uncertainty. For equities, he is looking abroad in a selective basket of foreign and emerging markets. “Broad emerging markets are dangerous because they’ve got a heavy Chinese component,” he cautioned, expressing skepticism about China’s economic resilience amid escalating trade conflicts.

Looking ahead, Brigden sees opportunities in industrial commodities like copper and aluminum, but only if the Federal Reserve cuts rates and the economy stabilizes. For now, he emphasizes relative trades, where assets like materials and energy may outperform tech-heavy U.S. indices. “The trades that worked in the past are not going to work moving forward,” he stressed, signaling a shift away from the Mag 7 stocks that dominated recent years.

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