Ever since President Trump unveiled the giant poster sign on Liberation Day, there have been two competing theories about how it turned out. Economists warn that tariffs of 15% to 50% will ultimately be paid by consumers. The White House, on the other hand, insists the tariffs are essentially free money for the government and that they will lower prices by bringing foreign investment back to the United States.
Serious investors have never believed in overly optimistic views on trade wars, but they are baffled by a U.S. stock market that seems to defy gravity. Tariffs make imported products significantly more expensive. However, overall inflation, measured by CPI, rose only slightly to around 2.9%.
Well, some serious effects are starting to be felt now, especially on new cars.
The average price paid by U.S. consumers for a new car in September was $50,080, partly reflecting steady price increases following auto tariffs.
In the market for a new car? Get ready for sticker shock, CNN
Auto tariffs have a particularly large impact on sticker prices because auto supply chains are designed to cross the border between the U.S., Canada and Mexico multiple times before the final product is assembled, and now auto tariffs are incurred every time a part switches countries, and those tariffs can quickly add up. An entry-level car used to cost around $20,000; now, auto analysts say $20,000 cars are “extinct.”
But the worrying news doesn’t stop there. Buyers responded to this new reality by taking on debt, while those with poor credit turned to subprime lenders to finance their purchases.
Uh-oh.
If the word “subprime” makes you shudder, you’re not alone. Not long ago, subprime mortgages brought the U.S. economy and the global financial system to the brink of collapse. Dodgy lenders provided money to people without jobs to buy homes they couldn’t afford, only to go bankrupt, and the impact of these bad loans was so widespread that pension funds, retirement accounts and even other governments were affected.
Now it’s starting to happen again.
Tricolor Holdings, a Dallas-based auto loan company that specialized in lending to borrowers with low credit scores, went bankrupt in September.
The bankruptcy case shines a spotlight on how millions of Americans are hurt by high living costs and a depressed job market. Cars are more expensive than ever, and more and more people are defaulting on their car loans.
Even JPMorgan, which prides itself on what Dimon calls a “fortress balance sheet,” took a $170 million hit from the Tricolor bankruptcy, Tuesday’s earnings call showed.
CNN: Why Jamie Dimon warns of ‘cockroaches’ in US economy
I have to admit, subprime car loans aren’t exactly on my 2025 Bingo card, but it all sounds eerily similar to what happened in 2008.
When a few overleveraged borrowers lose their life savings, no one cares, but when a large group of people do it simultaneously, the losses can crush lenders’ balance sheets and drive companies into bankruptcy. Because all these lenders are interconnected, losses from one lender spread to another, and so on, until the entire system collapses.
While it’s too early to tell whether subprime auto loans can be contained or turn into the next financial crisis, JPMorgan CEO Jamie Dimon recently revealed his concerns during an earnings call.
“When something like this happens, my antenna goes up,” Dimon told analysts on a conference call Tuesday. “I probably shouldn’t say this, but when you see one cockroach, there are probably more…everyone should be forewarned about this.”
CNN: Why Jamie Dimon warns of ‘cockroaches’ in US economy
So while I still hope everything will be fine, we all have to be prepared that the economists may be right and that tariffs are indeed the bad idea they predicted in April.
So what can we do now to prepare?
Avoid car loans like the plague
I hope none of our readers are thinking about this, but a car loan is never a good idea. A car is an asset that will depreciate in value. They lose about 10% of their value the moment they leave the lot, and about 60% of their value within the first 5 years. So going into debt to own a car is like withdrawing cash from your credit card to go to the casino. This might work for you, but the vast majority of the time you’ll end up with an empty pocket and mounting debt over time.
Here’s a radical idea: If you can’t afford a new car, don’t buy a new car.
This is a very simple principle that works great for the FIRE community, but for some reason is difficult for the general public to understand. Don’t get into debt for any reason.
Walk. Use public transportation. Do the Mr. Money Mustache thing and try a bike ride around the city. Or, if you absolutely need a car, buy one on the second-hand market where tariffs don’t apply.
But don’t go out there with debt to buy a new car.
stay invested
Faced with dire headlines like this, it might be tempting to sell everything and move to cash until the dust settles, but that would be a huge mistake for two reasons.
First, even if I was 100% certain that a stock market crash was coming, I wouldn’t know exactly when it would happen. Gosh, I thought the U.S. was going to go into recession shortly after the trade war started in April, but that’s what happened. Remember, if you are entering or exiting the market, you must choose the correct exit and re-entry points. This is quite a difficult task. On the other hand, if you’re invested in the index for the long term, all you have to do is wait and it will eventually recover from the downturn we’re about to find ourselves in.
The second reason why using cash is a bad idea is that this particular financial crisis we are experiencing was most likely caused by tariffs, which means that inflation will play a major role. Cash is not a good place to be when inflation is high. In terms of protecting against inflation, stocks will be a safer asset class because stocks represent businesses, and businesses have the ability to respond to inflation by raising the prices they charge customers. In an environment of rising inflation, stocks are the way to go.
I know, I know, I have a recent position in gold (which, by the way, is up 6% in the week or so since I bought it), but as a speculative investment, I limit my overall exposure to gold to 5% of my portfolio. The vast majority of my investments will still be in stocks.
Diversify away from America
This year has been full of twists and turns, and the United States has somehow gone from being the world’s economic engine to being its biggest burden. As of this writing, the U.S. index is up 13% year-to-date, mainly as technology companies profit from expectations of the coming artificial intelligence revolution, but the index is hampered by political factors.
During the same period, the EAFE index covering Europe, Australia and the Far East rose sharply by 25% despite the fact that the eastern part of Europe was facing a terrible war. And Canada. Canada’s population, as steeped in maple syrup and socialism as California’s, is up 21% so far this year. Ironically, concerns about inflation in the U.S. have pushed up gold prices and also pushed up Canadian stocks because Canada mines so much gold.
If you are an American, consider investing abroad. I know American investors are used to patriotic bets on their country, but right now might not be the best idea. It’s not just me saying that. Here are the words of J.P. Morgan’s chief global strategist himself:
Political choices have the potential to cause federal finances to deteriorate more quickly, causing long-term interest rates to rise and the dollar to weaken. Based solely on current allocations and valuations, many investors should probably consider diversifying their portfolios by adding alternative assets and international stocks. The risk that we move from slow to fast bankruptcy is a big reason why we are taking this action today.
JPMorgan says the U.S. is “slowly going bankrupt” as national debt swells and tariff revenue looks shaky, Fortune
in conclusion
What do you think? Is the world economy heading into a new financial crisis, or do you think everything will be fine? Let’s hear it in the comments below!
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