Double Black Swan: The One That I Did Not Want to Write

A bit of pain for long-term gain?

Through tax season, I was planning to hold off on writing the Strategy 4 Saturday blog. At 40 Accounting, we are working with clients to prepare their taxes, close their books, and to strategically look ahead into 2025. However, we have been seeing more than a bit of pain. That is why I have been compelled to share what we are seeing, and to start taking action now.?

The Swan Song Setup

Heading into 2025, small businesses had a sense of optimism. The University of Michigan's Consumer Sentiment Index (UMCSENT) reached 74, which was the highest reading since April 2024. This was a 3.1% increase from November and a 6.2% increase from December 2023.?

Factors for Optimism:?

There were two key factors that were creating optimism among business.

1. The predictions at the end of last year of at least three interest rate cuts in 2025. The belief that lower interest rates would help rejuvenate the housing market and reduce the cost for borrowers of all things, from cars to houses to credit cards. The interest rates also had an impact on private company valuations, venture capital, and the private equity world.?
2. The second key factor heading into 2025 was a pro-business environment expecting taxes to stay low and with less regulation.

Current State

However, Jan. 29th, the Fed President indicated to investors that they would not cut interest rates for the foreseeable future, until they see inflation reduced below the goal of 2%. The Michigan survey dropped from 71.1 to 64.7 in February and the Atlanta GDP now has a negative 2.4% correction.?

This created the initial damning factor for the mindset of consumers businesses.?

But that is not a black swan.?

According to the Corporate Finance Institute, a black swan event, is a phrase commonly used in the world of finance, is “an extremely negative event or occurrence that is impossibly difficult to predict. In other words, black swan events are events that are unexpected and unknowable.”?

A black swan is defined by having a significant impact on business confidence and orders, impacting supply chains.?

The Black Swan?

The first Black Swan are the tariffs that have been enacted on March 4th (and potentially retracted), 25% on Mexico and Canada breaking NAFTA from the 1990s. In response, Canada hit tariffs back on the US. On March 12th, the next significant tariff will happen, a 25% tariff on steel. On April 2nd there will be another reciprocal tariff.?

In a Wall Street Journal article by Esther Fung, Michael Goldblatt, who runs TireChain.com, said the company now faces a 45% tariff on its chains, 25% imposed during the first Trump administration and the two 10% tariffs implemented this week and at the start of February, he said. He issued the 10% price increase in early February. "It's irritating that they say China is paying for it. No. It's coming out of my pocket," said Goldblatt.?

In the short run, manufacturers who outsourced components globally from steel are facing a significant risk of squeezed margins that they will not be able to fully pass on to the customer.?

The second big challenge will ultimately happen with the expectation of higher prices that we passed on to the consumer to cover the cost of the tariff.?

A Significant Strain

Current estimates are that 70% of the tariffs will be passed on to the customer, while the remaining 30% will reduce supplier margins. Although we don’t know the full extent of how much prices will be increased, what we do know is it’s creating a significant strain on the economy and decision-making. According to David Kotok, Co-founder of Cumberland Advisors, "The entire Trump trade has been reversed. The president barreling ahead on what is escalating to an all-out trade war has left some clients bewildered."

The Atlanta Fed previously had disclosed expectations just 30 days ago on February 3 of a potential 4% increase in GDP for the first quarter but as real time data from their systems have come to them they’ve actually gone from to negative 2% GDP.

Black Swan Deux

The second Black Swan is on cutting government spending, including government layoffs, and the canceling of government contracts. In 2023, government spending (federal and state) was recorded at a whopping 34.4% of GDP. Normally, this is a safe area of investment because the primary risk over the past couple of decades has been brief shutdowns due to the Federal Debt Ceiling. We are not used to seeing the Federal government cut jobs and other expenses, and this will have a significant impact on the economy.

This is creating more fear and uncertainty in the market. Therefore, consumers are holding off on their decisions to spend cash.

Whether or not these decisions are best for the long-term, history will decide. The US national debt was $36.2 trillion on March 4th, 2025, compared to just $5.8 trillion in 2001.?

I’m not saying the decisions are right or wrong…it’s just there will be a bit of pain. Perhaps, a lot.

The two Black Swans are having a real impact on small business and consumers in the US.

And just wait till we see what happens to education in K-12 and universities with the potential dismantling of the Department of Education and significant changes to student loan policies. That may very well be our 3rd Black Swan.

So what are we recommending to clients?

1. Always try to have a reserve of cash for good times and bad. A small business should have at least two months of operating expenses to help manage short term challenges with declining revenues. You will outlast ? of your competition if you do.
2. Cash reserves give you the time to make the right decisions to decrease your operating expenses if the downturn is prolonged. Larger cash reserves provide buying opportunities.
3. Keep your focus on sales, ROI marketing, and retaining your core producers.

Although the consumer may be stalling, as a business owner, you don’t have the time to stall on your key decisions, whether we thought this downturn was going to happen or not.

40 Accounting Strategy and Tips

On a positive note, there are positive signs that proposed legislation will keep the current tax rates down; but also provide more tax reductions. This may include not taxing Social Security wages and the return of the 100% bonus depreciation, which is currently at 40% for 2025. We will keep you up to date with the major tax policy changes. Stay tuned.

Links to Podcasts:?

• Measure Success Podcast
• $4M Strategies Podcast?

Order your copy of Lost at CEO Here.?