Carney Capitulates?

News today was that Prime Minister Mark Carney withdrew many Canadian retaliatory tariffs on American good, although some remain. (One report indicated that the withdrawal was for goods covered by CUSMA/USMCA.) This news angered many Canadians, as it is an apparent reversal of the “elbows up” message of the election campaign.

Chickening Out Over The Jobs Report

I was slow to the outrage about the floated idea of stopping the publication of the monthly Jobs report (in favour of just the quarterly numbers). It now appears that E.J. Antoni has walked away from that suggestion.

Backing down is hardly unexpected. From the point of view of politics, economics data just seems to be a nuisance when it goes the wrong way, and shutting it off does not matter. But for people who are paid to discuss the economy, in the absence of data, there is nothing useful to do. As a result widespread push back from economists in finance and financial media to data cuts are inevitable.

A Banana Republic Without Bananas

American institutions continue their slide into being a clown car with the firing of the director of the Bureau of Labor Statistics (BLS). Although the stock line appears to be that this is a dangerous step in a bad direction, that’s been true since before the inauguration. Nevertheless I would be more concerned by the continuous slide in data quality due to budget cuts and the secular decline in survey response rates. Data gathering is in a crisis even without this sacking.

Fed Independence And The Rates/Inflation Debate

The drumbeat from the White House to replace Powell as the head of the Fed is increasing, and we are seeing potential candidates for the replacement echoing President Trump’s line that the United States needs low interest rates now. (President Trump argued Monday that the policy rate should be 1% or lower - link to news article.) I have just written an article about the difficulties finding writing opportunities about economic theory debates, and I guess I needed to be more careful about what I wish for.

The TACO Principle And Inflation Risk

At the time of writing, President Trump is waffling about the possibility of joining Israel in its attacks on Iran. This adds yet another possible inflation risk story: crude oil prices could spike in response to snowballing conflicts in the Middle East.

To recap, there are four main inflation risks lurking over the U.S. economy.

1. A large tax cut could help fuel demand.

2. Tariff wars are only in a ceasefire, and high tariff rates (particularly for Chinese goods) might resume after the ceasefires expire.

3. A widening of the war might result in a crude oil spike.

4. Widespread deportations are cutting off some industries from labourers, particularly the agricultural industry.

Trump Folded, Uncertainty Remains

Uncertainty got the upper hand this weak. President Trump removed one certainty from the outlook — the U.S. economy would be wrecked by his de facto embargo of China — but we now are uncertain as to how bad a 30% Chinese tariff will be, and we also do not know what happens when the 90 day grace period is up. Meanwhile, the White House has indicated that he will start unilaterally imposing tariff rates within a week. Since Trump appears to get great satisfaction from changing tariff rates, and there is no sign that any country other than the U.K. is interested in his “deals,” he might as well go back to governing via posting tariff rate changes on social media.

Trump Trade "Deals"

Recent comments by Donald Trump seemed to confirm what he implied in his earlier remarks: the “90 trade deals in 90 days” he promised generally did not refer to formal trade treaties. Instead, they would be more informal negotiations about setting American tariff levels.

No Feedback

I have a primer in the pipeline, but I just want to comment on President’s Trump's statements/posts that hit yesterday. The problem with the current trajectory of the United States is that President Trump has effectively taken control of the economy, and it appears that he is getting no useful feedback on the consequences. We would need to go back to historically disastrous central planning episodes to find parallels.

Economic Phoney War

Although the advance estimate of U.S. real GDP shrank by 0.3% in the first quarter (link), I am unsure whether that contraction will stand up to revisions (as discussed below). I still feel that the U.S. economy is in the unenviable state of being an experiment in expectations: current economic activity is actually revved up courtesy of everyone trying to front-run tariffs, but activity is gone over the cliff Wile E. Coyote-style. Meanwhile expectations are caught in a bind — if the tariff policy were credible, everyone would expect gravity to kick in. However, the random nature of Trump’s policymaking still leaves people with the hope that the effective embargo on China will be quickly reversed since only an insane person would view the policy as a good idea.

Yes Virginia, There Is A Trade War

I continued my record of being an equity market contrary indicator by finishing my last piece with a deeply gloomy discussion of equities that was published hours before a top ten positive U.S. equity daily return close. The alleged logic that was pushed by some commentators was that the trade war was “paused.” (I lean towards the explanation that bear markets are violent — the top ten up days mainly occurred in major bear markets.) Since then, with tariffs between China and the U.S. on both sides over 100%, I think it is safe to say that the trade war is still on.

Sigh, Chaos Continues (11)

Rates markets are starting to act unmoored, with long end Treasury and gilt yields rising. I am not in any position to offer an insider’s view of what is happening now, but I will just offer my impressions based on historical experience.

At the time of writing, China retaliated to the 104% American tariffs with a 84% tariff, and the EU is heading for a vote on their retaliation. At the same time, the White House administration is digging in and showing no visible interest in finding an off ramp. The American-Chinese tariffs have moved into the range where we are in a de facto embargo situation instead of merely a trade war. Supply chains are going to break rapidly, and will unravel long before the results show up in lagging economic data. At the same time, it is unclear that Trump will allow negative economic data to be printed — the truth is the first casualty of war.

It's Not A Real Financial Crisis Until Credit Cracks

I was hoping to relax after my visit to Rome, but the equity markets are currently in free during the Sunday night futures sessions. At the time of writing, the main U.S. equity markets are down 15% or so over three trading days (including Sunday). Although this is certainly an eye-opener, this is not yet a financial crisis. (We are in an economic crisis thanks the White House brain trust, of course.) 

Sigh, Chaos Continues (9)

Trump is hyping up April 2nd as “(Tariff) Liberation Day,” and it seems foolish to discuss the state of economy until we find out how extensive those tariffs are. I will be travelling for the week around “Liberation Day” so I will not be able to pipe in with my predictions of doom until quite late.

The only interesting new angle is that the Prime Minister United Kingdom looks to be angling to align himself with Trump. Although that is certainly quite the choice for a centre-left politician, it is not clear how viable that is with the unravelling of NATO and a more assertive EU.

Comments On "The Mar-A-Lago Accord"

In an attempt to find an explanation for the erratic policy of the Trump administration, people are pointing to the so-called “Mar-a-Lago Accord.” (This short explainer by Torsten Sløk offers one summary.) Although one could imagine that this policy mix is what some members of the White House want, we run into the classic “you can’t get there from here” problem. To the extent the plan would work, it relies upon the world being one of simplified economic models, and the goodwill of other countries.

Sigh, Chaos Continues (8)

Meme "recycled" from Reddit

As I expected, Trump has turned his gaze towards the European Union, and a cycle of tariff/counter-tariff/counter-counter-tariff appears to be starting. (At the time of writing, Trump threatened to put a massive tariffs on booze from the EU in response to EU counter-tariffs.)

Revenge Of The Expectations Fairies

I used to mock the idea of the “expectations fairies” — at least in the context of neoclassical theory. However, Keynes’ “animal spirits” is back, we are running into a situation that does not have a lot of precedents in the post-World War II era. The brain trust in the White House has done a lot of things, but very few of them so far would have macroeconomic impact (outside of countries where US aid was significant). Instead, the issue is the effect of future actions.

Sigh, Chaos Continues (7)

Since my last article, President Deals partially caved in Canadian/Mexican tariffs, but has just announced new tariffs on Canadian products (dairy and lumber, from what I could tell). We also have had reports that Trump had earlier threatened to revise the Canada/U.S. border (i.e., annexation of Canada).

This constant chaos (and existential threats) means that the required re-negotiation of the Canada/U.S. free trade treaty is a non-starter, and the best that can be hoped for are some kinds of “trade cease fire” while Canada desperately re-orients its economy away from North-South trade. At the same time, Europe is dealing with the effective demise of NATO, and the call for nuclear weaponry is growing. Trump also appears increasingly frustrated that nobody cares about his Ukraine “peacemaking” efforts (since he gave the Russians everything he could give, he is no longer of use to them).

Sigh, Chaos Continues (6)

The tariff hammer finally fell on Canada/Mexico, and it is unclear how long the new policy will remain in place (and whether new tariffs will be stacked on top of them). Although the tariffs will have major negative economic effects, the Trump White House is detached from objective reality, and so the negative effects will not force anything.

Sigh, Chaos Continues (5)

The Tariff Week speculation continues, and at the time of writing, it is unclear whether the Tariff Hammer falls on Canada/Mexico (deadline tomorrow). I just want to comment on the Ukraine blow up, which was far stupider than I expected.

There are a few broad scenarios I see going forward, one of which will have hard to predict side effects.

Sigh, Chaos Continues (4)

The crisis continues, following existing trends. Musk is destroying state capacity (and looting) while simultaneously reducing spending very little, and Trump is doing his best to undermine previously allied international relationships while actually accomplishing very little.

On the domestic front, the administration is doing its utmost to destroy confidence and force a recession. Perhaps the plan is that the economy will emerge from the wreckage by around the midterms, so the business press can gush about growth prospects. Although the House managed to get a budget plan passed, it is still not clear that they will agree on anything once the scale of economic damage is clear.