In The Nothingness Black
Liberation Day: more questions than answers.
This has to be one of the biggest unforced economic policy errors in US history. – David Beckworth
Donald Trump's "Liberation Day" on April 2 was nothing but an astonishing mess. Before Trump's press conference that day, there was a lot of speculation around the potential height of the tariffs that Trump planned to announce.
My latest monthly opinion piece was released on April 2, just hours before Trump's press conference. In it, I argued that tariffs are unlikely to achieve what Trump has claimed about tariffs throughout his political career. I can only recommend reading that piece in addition to this one.
The press conference revealed that everyone underestimated Trump again. He announced a baseline tariff of 10% on all imports into the US and, additionally, "individual reciprocal tariffs" on the 60 "worst offenders," which are the ones with whom the US has the most significant trade deficit.
I've seen hardly anyone active within financial markets who wasn't baffled. To name a few, Trump announced reciprocal tariffs of 20% on the EU, 34% on China, 46% on Vietnam, 24% on Japan, 26% on India, 36% on Thailand, and 32% on Taiwan.
The first obvious question is what Trump and his team did to calculate the height of these tariffs. One would have guessed that there's some sort of model running in the background to calculate the height of these reciprocal tariffs. But the pro-tariff people didn't deliver anything of that sort on April 2.
It turns out that no model was involved at any point. As various sources, including the New York Times, have found out, these reciprocal tariffs were simply calculated by cutting the ratio of the country's trade deficit to nominal imports in half. According to the NYT, the reason the ratio was cut in half was that Trump "was kind."
Author James Surowiecki, one of the people who figured out the method as one of the first, commented as follows:
Even given that it's Trump, I cannot believe they said "We'll just divide the trade deficit by imports and tell people that's the tariff rate." And then they decided to set our tariffs by just cutting that totally made-up rate in half! This is so dumb and deceptive.
So, if one leaves the fact aside that tariffs are economically harmful and will do nothing but exploit the US consumer, it's still shocking that they came up with a totally made-up number that isn't backed by anything other than that. TS Lombard's Dario Perkins put it best:
They literally codified Trump's worst, most economically illiterate instincts on trade and turned it into a tariff schedule. Then they displayed it as a colorful table because they were so proud of their work.
What's certain is that April 2, 2025, will be a historic day that pushes the average tariff rate on US imports back to levels not seen since the 1910s. Yes, there has been no misspelling. At least, that's the situation right now. After all, there's no guarantee that this will be a permanent measure. And that's what makes it so difficult to read the situation when it comes to financial markets.
As one would expect, markets were shocked by the announcement. The announcements occurred after the market closed globally; stock market futures dropped 2% immediately, and US 10-year yields dropped 20bps to 4.06%.
Interestingly, despite the big tariff announcement that might kick off a global trade war, the dollar dropped significantly. EUR/USD has turned around and is moving towards the 1.10 mark. I'd have expected that with increasing economic uncertainty and anticipating a big blow to economic activity, one should have expected a flight to safety. And yet, here we are.
Former Goldman Sachs CEO Loyd Blankfein once said, "It's hard enough to predict the present." Predicting how this will play out will be even more difficult. Initially, the market seems to interpret it as bearish stocks and bullish bonds.
The broad consensus so far is that the tariffs should ramp up inflation and stifle US growth. Obviously, people expect stagflation in the US, but that is counterintuitive to the move, making me speculate that this scenario might not come to fruition.
Commodity prices dropped almost all after the announcement, the dollar slid, and bonds rallied. If one thinks that stagflation is coming, then the exact opposite should happen. This makes me speculate that the growth effect might outweigh the inflationary effect by a large margin. If that's the case, then the result will not be inflation but deflation.
One of the arguments I came across is that the market gets it wrong at the moment because "inflation expectations are not under control." Readers know I repeat myself here, but the argument lacks the simple fact that expectations cannot increase inflation for longer than a very short period of time because at one point, reality kicks in, and people find out there's simply not enough money circulating to pay these prices.
I could think of only one scenario that would lead to an increase in consumer prices. In case people by large exit financial markets and try to sell their assets, stocks and bonds, and use them to finance their real economic expenditures. Then, the question is how much of the money really ends up in the economy because the increased selling will lead to trillions of fictional wealth simply evaporating before it even ends up in the sellers' pockets.
Further, as I've already pointed out, bond prices would need to fall alongside stock prices, meaning interest rates would need to skyrocket. Nevertheless, that's pretty much an endgame scenario, which would require a dramatic increase in inflation expectations, which would make investors pull their money out of financial markets to spend it on whatever they can. So far, there's nothing that indicates that.
Yet, the falling dollar could suggest a different story—higher US inflation from pricier imports. However, falling commodity prices totally contradict that theory. My hunch is that the market struggles to interpret it coherently, so a wait-and-see approach is probably warranted when it comes to inflation and interest rates. As of writing, German bunds have already corrected lower, so one has to see how this plays out further.
Regarding stocks, the picture is clearer, in my opinion, because the tariffs likely will directly impact business costs and must lead to a correction of high earnings expectations. Are European stocks a place to hide? Relative to US stocks, maybe, but I lean to the conclusion that in a broad sell-off, stocks suffer everywhere.
[The equity market sell-off is] a Mag7 problem, not a MAGA problem - Scott Bessent
Finally, one has to see whether the introduced tariffs will remain permanent. It's not unwarranted to expect that countries will now try to negotiate with Trump to get lower tariffs by offering something to the US themselves. Various government leaders have already announced that they're willing to negotiate trade with Trump, so it might be that the situation is entirely different in a week from what it is today.
However, things get more complicated because very little indicates that Trump logically understands basic economics. In his speech on "Liberation Day," he claimed that the Great Depression wouldn't have happened had the US kept the tariffs, which is nothing more than outright nonsense.
If you have more questions than answers, then you're not alone. Everything about "Liberation Day" leaves me "in the nothingness black."
Awaken back in truth
In the nothingness
Awaken back in truth
In the nothingnessMnemic — In The Nothingness Black
Have a great weekend!
Fabian Wintersberger
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All my posts and opinions are purely personal and do not represent the views of any individuals, institutions, or organizations I may be or have been affiliated with, whether professionally or personally. They do not constitute investment advice, and my perspective may change over time in response to evolving facts. IT IS STRONGLY RECOMMENDED TO SEEK INDEPENDENT ADVICE AND CONDUCT YOUR OWN RESEARCH BEFORE MAKING INVESTMENT DECISIONS.