Bloomberg Audio Studios, podcasts, radio news. What a day, Haunty, what a day?
Another day, another crazy day. I don't know. I'm I'm I'm getting a little tired. Is tired of the words?
I'm not, I'm exhilarated. I am not getting tired. I think this is why we get up in the morning. But as we are talking right now, which is April third, nas X down four point eight percent.
Yeah, obviously this is all because of Liberation Day and Donald Trump announcing his new reciprocal tariffs, which turned out to be a lot worse than a lot of professional analysts and economists had been expecting.
Yeah, I'm sure the market's just totally taken aback, Tom Orleck. How surprised were you by yesterday?
We took him seriously, but not seriously.
I did a dead lest.
I'm both the most popular trader, most successful trader at Citadel.
That is going viral.
Uh barges.
This isn't after school special, except.
I've decided I'm going to base my entire personality going forward on campaigning for a strategic pork reserve in the US.
Black goal.
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So on the campaign trail, Trump was talking about sixty percent tariffs on China, twenty percent tariffs on everybody else, and I think the reaction from wool Street and the reaction from most in the economics profession will this is red meat for the campaign trail. This is not a serious proposal. The US economy, the global economy, the global trade system wouldn't be able to survive tariffs at this level.
And now here we are on April third, one day after Liberation Day, and we've got tariffs at that level for China. If you add it up, tariffs may even be a bit higher than sixty percent. So it's a huge shock. And I think the question people are going to be asking is what's being liberated from what is the US being liberated from unfair trade practices from China and Europe? Or are US workers about to be liberated from their jobs and US investors liberated from their returns?
Yeah, kind of two different outcomes there, Tom, you were at our Washington, DC event.
You think, by the way, thank you.
You gave this great presentation showing some of your favorite charts at the moment, and you kind of made the point that when it comes to trade, the US has some legitimate grievances. Can you kind of walk us through that, especially in relation to China? And then also if you think these tariffs are actually going to start alleviating some of those grievances.
So I think it's interesting, Tracy, if we go back to the nineteen nineties, it was the kind of unipolar moment for the United States. Right the Soviet Union had collapsed, China was still an early stage of its development. Its GDP was a kind of tiny fraction of that of the United States, and so the argument for free markets really made a lot of sense. Let's have low tariff barriers. US firms are the most competitive firms in the world.
They're going to be the biggest winners from low trade barriers, and guess what additional bonus if we trade with China. That's going to be a force for market reform in China, and maybe the whisper it quietly a force for democratic reform in China. That's not how things played out. Over the years that followed. China developed really quickly up to the point where it became a rival to the United States for that biggest economy in the world, biggest geopolitical
power spot. And China didn't reform its economy, it didn't become more market based, and it certainly didn't reform its political system. And the US had a huge trade deficit, and a lot of that trade deficit was with China. So jobs were being lost, opportunities teas were being lost, and even worse, they were being lost to America's biggest geopolitical rival. And that just doesn't make a huge amount
of sense. And I think the Trump team and Trump himself deserve a bunch of credit for calling that out back in twenty sixteen and saying, this isn't the deal we signed up for in the nineteen nineties, This isn't the deal we signed up for when we invited China into the wto something has to change. Question is, well, now we've got these sweeping tariffs, is this going to deliver the realignment which Trump wants or could there be a sort of significant adverse consequence for the United States.
Could the United States end up just cutting itself off from the rest of the world and actually accelerating its own decline, its own fading as a global power, rather than restoring American greatness as President Trump intents.
Well, right now, if you look at the market, it's clearly the latter and the tariffs are not just on China. They're on countries that many people would say are friends or allies, or countries that have not risen an industrial might at the expense of the United States.
Narrow New Yeah Island in the South.
You know, you started your answer by saying, when this was thrown out on the campaign trail, it was perceived that the global trading system could never survive something like this. We don't know. Maybe there will be renegotiations. So the White House is not giving that indication as of the time we're talking about this. They're not indicating that they're going to back trackers of the market. They're not saying
this is the start of deal talks. Can the global trading system survive the level of tariffs that we see, assuming this is what's said.
So it's a difficult question to answer because we just haven't seen such big tariffs introduced in recent history, so we don't have much data we can use to estimate the impact. That said, we're making best efforts. What we've done is we've taken a computable general equilibrium model of the global economy. Is the same model which some of the economists that the World Trade Organization use, and we've used it to estimate the impact of this tariff shock.
And if we focus for a moment on the China piece of it, well, if you put sixty percent China tariffs into the model, it tells you that that pretty much wipes out US China trade. And that's pretty consequential, right, the world's two biggest economies, a Chinese economy, which is the home to major US supply chains for Apple and others. If those two economies just stop trading with each other,
that's a huge, huge shock to the system. Thinking about the rest of the world, well, most places haven't been hit by such high tariffs, but still a pretty significant shock. Europe, for example, now facing twenty percent tariffs when they sell to the United States. If you plug that into the big model, well that tells you europe exports to the United States dropped by around fifty percent. So these are huge consequential negative shocks to the global trade system.
When it comes to inflation, I mean, lots of economists right now are ratcheting up their inflation forecasts and ratcheting down their GDP forecast. To your point on inflation, how much of the ultimate results the increase in prices of imports into America. How much does that depend on companies absorbing the costs? And how do you go about trying to analyze that because it seems kind of, you know, a bit of a wild card.
Yeah, I think it's a huge uncertainty. So if we think about Trump one and the trade war with China, back then, a couple of things happened. So firstly, we had dollar appreciation and that offset some of the impact of the tariffs. Secondly, we had transshipment, so China carried on selling to the United States, but the goods went through Vietnam or they went through Mexico, and that meant
they dodged the tariffs. And thirdly, we had retailers absorbing some of the shock in lower margins rather than passing them on to consumers. So all of these things meant tariffs on China went up twenty five percent, but the US consumer didn't really feel the shock, and I think that maybe how the Trump administration are thinking about it this time around. This time around, though, I think there's
going to be some pretty significant differences. So the first difference is, well, the economic textbooks tell us when you apply tariffs, the dollar should appreciate, but guess what, this time round, it is depreciating. So that isn't gonna offset tariffs shock on inflation. It's going to amplify the tariff shock on inflation. Secondly, this time round is not just China, it's everybody. Everybody's being hit with the shock at the
same time. And that means that that transhipment strategy, sending goods via Mexico or Vietnam, that's not going to work. You're still going to get hit with tariffs. And then thirdly, well, if you're hitting everybody at the same time, can a Walmart or a target really absorb all of that in narrower margins or is it just going to have to start passing it on to the consumer. So the experience in the Trump term. Trump's first term was tariff shock,
no impact on consumer prices in the United States. This time round, well, it's difficult to say. There's a lot of variables at work, but I think this is going to be a stagflationary shock, pretty significant hit to US growth, pretty significant boost to US inflation. And that's why we're seeing this fierce stock market sell off today and the US coming out worse than pretty much anybody else.
So crazy, Yeah, especially when you look at US versus every other stock market and how much everyone how much more optimistic people are about the rest of the world. You know, there's this vision right that on the other side that there's pain now that we get to the other side, that there's this reindustrialization, and Trump talked about it yesterday. We're going to make great cars with us this state of the art manufacturer, We're going to build chips again, all this.
The sunlit uplands manufacturing.
What would have to happen for these tariffs to actually translate into or because like I'm fine with taking some short term pain to be like one of the most advanced, technologically prosperous countries on the I see all those propaganda videos out of China with the drones and the cars. I'm like, yeah, I want that here. I'm susceptible to that too. I want like all that stuff produced here. What would have to happen to go from today to that vision.
Well, it's a tough one, Joe. So I think Trump will point to the pledges from Apple and TSMC and Nvidia and Hyundai and others to make massive investments in the United States and say, look, it's working. I made the tariff threat. Everyone's bringing their jobs and their factories back to the United States. I think it's probably a bit more complicated than that. Wages in the US are much higher than wages in China or Vietnam or Mexico.
Infrastructure in the United States, well, there's not been a lot of investment in manufacturing infrastructure here over recent decades. Supply chains stretch across borders. If you're going to impose massive tariffs, actually makes it harder to manufacture in the United States because factories are going to have to pay that tariff to get crucial inputs and of course the uncertainty which Trump has introduced into the system, and which
he sees is crucial to get deals done well. That uncertainty makes it harder to plan, makes it harder to make long term investment decisions, and that makes it harder to reshore manufacturing as well. So it's striking to me if you look at all of those companies which said we're making massive investments in the United States, Apple five
hundred billion dollars, TSMC one hundred billion dollars. If you look at what happened to the share price of those companies on the day after the announcement, basically didn't move right, basically didn't move. And I think what that tells us
is that markets investors are pretty skeptical. They see those announcements, perhaps as good government relations by those companies currying favor with the White House, rather than the big change in corporate strategy that we'd have to see if manufacturing was really going to come back to the US.
Yeah, and on the topic of investment, there's no physical offset either. I mean, the administration is extending the tax cuts, that's basically the existing status quo. So it's not like the government is going to be funding a sudden roll out of investment to try to boost these industries. You mentioned stagflation earlier, Tom, what does the FED do in response to stagflation?
So it's a tough one.
Tracy keep saying that, how do we get it's going to be tough to keep going?
A lot of tough ones in our future. You know, this is the biggest tariff hike that we've seen in the United States going back over the course of one hundred years, and it takes tariff to their highest level in one hundred years. So this is an absolutely enormous shock to the system. So I feel like somewhat justified. Are you are? So it's a tough one. And so if you're the FED, you see growth coming down, you see unemployment going up, you want to cut interest rates.
But you see inflation rising because import prices are going up, and so you want to raise interest rates. So what's the impulse? What's the kind of the major impulse? Which one do you follow? Well, some of the messaging which we've been hearing from Chair Powell is that the tariff impact on inflation, well it could be transitory. If I was Chair Powell personally, I wouldn't be using the terb transitory anymore. I think you kind of use that one up in the post COVID shock. But there we are.
There's the idea that the tariff impact on inflation is going to be transitory, and so what you have to respond to is the impact on growth, and so that would suggest the impulse for the FED is going to be more rate cuts. That said, there's a bunch of uncertainty out there. We don't know how big the growth shock's going to be, we don't know how big the inflation shock's going to be, don't know if inflation expectations
are going to move. If we see inflation expectations staying high, well that will be a sign that the tariffshock and inflation isn't going to be transitory. And the FED is going to be tracking all of these things and weighing them in the balance.
So we've established that it's tough. At a minimum, what are you looking out for in terms of economic indicators or I don't know, even corporate anecdotes to see which way things are going to go?
So I think there's a few things we're going to be looking for in the days ahead. So the first one is going to be the retaliate or kaw tao choice for other countries. Right, do we see China and Europe and Japan saying, Okay, we don't want these tariffs. Tell us what you want and we'll give it to you and you can take the tariffs away. Or do we see them saying you give us tariffs, We're going to give you tariffs right back. And if it's that
retaliation path, that's going to amplify the impact. Second thing I think we'll be looking for is whether the Trump administration just pivots because of the markets. Right, we've got the Nasdaq down more than four percent today. If that slide continues into the end of the week into next week, if we see a very significant and sustained market fall, it's possible, then we'll see that Trump put come into play.
And then in terms of indicators we're going to be looking at well, of course, we're going to be tracking the important export numbers. Another important one to look at is going to be the import price data. That's going to tell us how much of this cost is being absorbed by foreign factories and how much of it is being passed through to US retailers. And potentially the US consumer. By the way, is also the US voter. And mid terms, well twenty twenty six not that far away, Tracy.
Can I just say two things that yesterday. One is they knew this was gonna slam the market.
Oh yeah, and they did it.
Anyway, this is a really big deal to me because this is not usual on his American politics. Some might even look at that say I'm impressed, right, because you're like, well, for once we have a president who is not so obsessed with the market. I don't know, I'm just saying.
In his speech he also talked about how much stock price is in his first term, which is you can't have it both ways.
I thought that too, and then I just think it's man, we had this multiple years of really high inflation, and the first thing that the new president does is push up the price of anything. It's really funny.
Tom. I have one more question for you. This is a very important one. It's a bit of a loaded question, but here goes. How much fun did you have at our Washington, DC event?
Just an absolutely enormous of fun, Tracy. And my message to od Loots listeners is, if Joe and Tracy come to your time, snap up a ticket immediately. We didn't plan that.
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