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Who’s Afraid Of Tariff Man?
The tariffs! My God, what of the tariffs?! ("Think of the children!")
Most intelligent people (and
No long run sustained inflation. Just foolish policy, and lower real incomes worldwide.
“It’s a papamine, Michael. How much could it cost? $10?”
I am surprised that the markets assume Trump’s policies will be de facto inflationary. As you point out, tariffs are a one-time price shock and may be offset by their recessionary effect.
I’m also guessing any tax cuts will be more limited than people expect given the slim margins in the house and will largely benefit the people who are already rich. You might have some wealth effect, but it seems equities have already priced those effects in. Add in the impact of deportations and likely government layoffs and you’ve got a recessionary stew going.
My bet is Trump will extend his existing tax cuts with some slight modifications that further tilt the benefits to the wealthy, cut some of Biden’s IRA funding, and declare victory.
excellent point re.: deportations. If those should ever be enacted on a larger scale, the inflationary effects will be much worse than any tariffs could ever be. The only hope is that after back-to-back media coverage of some initial raids Trump will declare a “win” and lose interest. Cf. “wall” from his last administration.
Mr. Hatzius is normally pretty balanced and measured. But I wonder what inspired this piece?
One quibble is that Tariff hikes will not be a quick one off and done. They will be a time lag between when they are announced and actually start being collected, something I doubt he is unaware of since he cites the experience from the last round of hikes. But there can be no doubt that patriotic American companies in the affected industries and users of those products will immediately start raising prices using the tariffs as cover. (A $20 Cracker Barrel gift card to anyone who can convince me that Pepsico will not immediately raise prices 15% per quarter once again.) It would be safer to say that there will be a two year lag before the full impact on price levels starts to become fully evident.
And then there is the follow-on impact IF US companies use some of the pricing windall to actually expand production rather than funneling most of it into stepped up share buy backs. They’d have to pay for more equipment that will likely be more scarce and costly to acquire.
But there is always a Polyanna narrative out there that we investors can cling to.
No doubt his prediction is based on a model that has not been updated to account for how concentrated many sectors have become and do not account how extreme the impact of share-based compensation has come to drive corporate behavior. Update your models, Hatzie!
The Roger Wheeler Killing?
Your “stylized” Trump quote, unfortunately, is not far from his usual blather. Contrast that with this quote from David McCullough’s bio on John Adams, (p-106). Adams responding to James Warren:
“We may please ourselves with the prospect of free and popular governments. But there is great danger that those governments will not make us happy. God grant they may. But I fear that in every assembly, members will obtain an influence by noise not sense. By meanness, not greatness. By ignorance, not learning. By contracted hearts, not large souls…
There is one thing, my dear sir, that must be attempted and most sacredly observed or we are all undone. There must be decency and respect, and veneration introduced for persons of authority of every rank, or we are undone. In a popular government, this is our only way. ”
Decency and respect, that’s Donald to a T.
As we’re often reminded, inflation is not the same as prices, in that high inflation followed by low inflation leaves prices high. Voters get madder about inflation when prices are already high, especially when their incomes do not similarly inflate.
Even if tariffs are only a “one-off” price increase in goods prices, they will then trigger a rise in services prices or, if wages fail to rise, a decline in real income. As this will come when prices are already high, voters will get mad more quickly.
There will be no distracting global pandemic, less fiscal headroom, and a less accommodative Fed.
JL – well put, as always.
But I’m slightly surprised by yorr statement that “There will be no distracting global pandemic” since you have have been one of the few market people to call attention to the rising number of bird flu cases in the US.
Not that being early is always rewarded – especially in our “forward thinking” stock markets where news to actually start to hit shre prices in a way which will wake up the algos. .
You’re right, I should have said “base case” is no pandemic. If avian influenza picks up one remaining mutation and turns into a human pandemic, then all bets are off but we can start a pool on how long RFK lasts.
I may have said this before, but in 2025 watch for Republicans using tariff revenues as increased tax revenues to fund tax cuts. That will change tariffs from transactional bargaining chips to semi-permanent barriers to trade, which can’t be dismantled without blowing up the deficit and/or large tax increases/spending cuts.
Trump’s tariffs are so damned regressive and that’s the part that bugs me the most. It will be fascinating, however, to observe how he blames the resulting inflation on his predecessor.