The Stroke of a Pen

What Is The Plan?

I’m going to run through some different scenarios. Then we can marry up reality with each over the next couple of weeks and that will give us a clue as to what is really going on.

1. The Mar-e-Lago Accord

The USA needs to reduce the cost of servicing the national debt. However you look at it, the only way to achieve that goal is to make US debt more attractive.

Fiscal reform is extremely difficult and inflation is still problematic. Creating a dilemma for the economy and investors, that drives a flight to quality, is an option that has never been tried before.

So far so good. The 10-year yield has contracted to test the 4% level. Treasury Secretary Scott Bessent has been quite vocal in his desire to have 3% yields, 3% growth and 3 million barrels of additional oil production.

The ambition is to get yields low enough to refinance into long-dated debt without that having a severe impact on the cost of borrowing for consumers. That requires bond yields to be in sight of 3% and ideally much lower.

The benefit of using tariffs for the purpose of manipulating the bond market is they can be turned off with the stroke of a pen. This is not the equivalent of Lehman Brothers going bankrupt because that event triggered credit events that could simply be undone.

This scenario implies that the tariffs are a means of achieving a set goal and once reached they will be loosened.

2. President Trump Is Serious About His Desire To Champion The Rights Of US Workers

The President has been talking about the ills of globalization for decades. It therefore makes sense that he truly believes that pursuing efficiencies at the expense of domestic workers is something that needs to be remedied.

He ran his Presidential campaign on the promise to resolve many of the issues that have reduced the living standards of regular workers. This suite of tariffs is delivering on that promise.

Introducing tariffs on that basis is seen as a way of increasing government revenue and simultaneously promoting the cause of creating manufacturing jobs at home. Since it takes years to build manufacturing capacity that would imply the tariffs are going to be in place for at least the duration of the President’s term.

That would be a significant realignment of priorities for the economy. More than anything else it would potentially spell the end of the financialisation of the economy.

Moving the manufacturing offshore takes practical expertise with it and leaves soft skills like management, marketing, sales and finance at home. The trend of MBA’s taking over CEO positions in major engineering companies is a symptom of that trend.

If tariffs are the long-term new reality, that clearly puts domestic companies at an advantage over imports. Meanwhile exports will have a weak currency as a tailwind and counter tariffs as a headwind.

3. The Art of the Deal

President Trump has made no secret of his negotiating tactic. Ask for more than you want to ensure you get what you want.

The large tariffs imposed on allies and the bombastic way in which it was delivered could be the first volley in ongoing negotiations on trade with most countries. The best way to get what you want is to demonstrate you are willing to walk away. That is effectively what the Trump is doing.

If this is a negotiating tactic, then it is enormously disruptive by design. The end point is to ensure attractive trade conditions for the USA and the renewal of the OECD as a group of liberal markets that oppose oligarchy.

If tariffs are simply a means to an end, then success would be promoting domestic production and cutting China out of the global economy.

So what next?

The bull market on Wall Street has been liquidity fuelled since 2009. Every time it looked like there was going to be a significant correction, either the Fed or the government intervened to support asset prices.

The reaction towards the 1000-day moving average on the major Wall Street indices has generally been enough to spur the monetary and fiscal authorities into action.

The market has a way of testing the resolve of politicians and Fed governors. The last time we had a similar example was in 2018 when Jerome Powell began his Fed Chairman role. The market wanted to know he would support it in a time of stress.

It quickly sold off by 10% before steadying and declined by 20% at the end of the year. That was enough to spur action by both the government and the Fed. Rumours that the Plunge Protection Team had convened spread on Christmas Eve, then the Fed said it would stop raising rates. The market bottomed and rallied for most of 2019. 

The Trump administration is exhibiting a confident demeanor at present. It’s entirely possible they will change their tune following a steep stock market correction. However, it remains likely that the market will go down before any corrective action is taken.

The challenge is the Trump administration may be pursing all of the above policies at the same time. That increases the potential for disruption and particularly for consumer uncertainty.

Meanwhile, other countries are preparing their responses. That will include relaxed regulation, domestic stimulus and counter tariffs.

https://substack.com/@eointreacy