Kyle Johnson
The financial media has transfixed millions. Trump keeps lobbing bombs at the Fed. Who said the summer would be boring?
Following the 24/7 news cycle can lead investors astray… especially if one were to believe that everything outside of the news cycle is unimportant or resolved.
Trump’s “Liberation Day” was April 2. For today’s news cycle, that’s nearly prehistoric.
Naturally, many Trump supporters have already claimed victory on the tariff front. Unsurprising. But many of his biggest critics have offered concessions, including talk show host Bill Maher.
I wouldn’t look to Maher for guidance on the economy. Despite discussing politics for a living since the early 1990s, I’m convinced Maher has never read a single book on economics. But for better or worse, he plays an important role in US politics. Maher seems to set the pace for people with certain political beliefs, indicating when certain ideas are permissible.
Maher recently claimed he was wrong to think Trump’s tariffs would tank the economy, crediting Trump with a win. I’m sure millions now agree with Maher that the tariff issue is settled.
Not so fast. I never thought that tariffs would tank the economy, triggering a 2008-style collapse. But they could unsettle the economy and markets to a degree that would have many glued to charts and tickers, clammy hands hovering over the sell button.
That’s not a prediction. But it’s premature to believe that the dust has settled.
The Trump administration has yet to sign new tariff agreements with about 20 of the top 50 countries by GDP (using 2024 data). I avoid offering a specific figure because it depends on how one might choose to count tariffs involving pauses and emergency measures taken by Trump.
This isn’t a slight against Trump. Hammering out the details of trade agreements is extremely challenging and time consuming. My point is that countless transactions involving trillions of dollars are not yet governed by new trade agreements.
Trump has yet to finalize agreements with key trade partners like Canada and Mexico. India has not yet signed a new tariff deal—and just got smacked with 50% tariffs as punishment for buying oil from Russia. Of course, the deal with China will be the most impactful for the US and the global economy. And it seems destined to be one of the last inked.
In 2024, the US imported about $462 billion worth of goods from China. How can anyone draw strong conclusions about the impact of tariffs while such a huge variable is still pending?
Talking heads are free to believe whatever they want about tariffs. But that’s a luxury investors can ill afford.
Don’t be caught off guard by turbulence ahead.
Who actually pays tariffs?
Consumers? Manufacturers? Exporters? Importers and retailers?
An MSNBC reporter asked this of Treasury Secretary Bessent and to my surprise, elicited a straightforward answer.
Bessent acknowledged that the tariff is paid by the person or entity who receives items at the dock. Of course, he added that the foreign exporter could decide to reduce prices in an effort to maintain market share, implicitly admitting that there’s no knowing how many will. He finished by admitting that importers can pass on tariff costs to their customers.
Refreshingly blunt from a government bureaucrat, even if with some padding. But what’s happening in the real world?
A recent study by Goldman Sachs found that US consumers have paid 22% of tariff costs through June. Their analysts estimate this figure will rise to nearly 70% in the near future.
There are widespread reports of Americans altering their purchase habits to front-run tariffs. This is understandable and smart. But from manufacturers to retail consumers, eventually Americans will need to replenish supplies, replace broken items, buy items for the first time, etc. So, in the not-too-distant future, there will be new waves of spending fully subject to Trump’s tariff regime.
What then?
Remember, consumer spending accounts for 68% of US GDP. And there are signs that the American consumer has lost steam.
How much can consumption habits change without upsetting the financial markets?
I don’t know. Perhaps someone should ask Bill Maher.
There have been many headlines about companies “investing in America.” New factories were promised as part of several tariff deals. But how many have broken ground? Has a single new factory been completed?
Doubtful. Large construction projects take years, not months.
Not knowing how much of Trump’s agenda the next president might reverse, I suspect numerous entrepreneurs and investors are holding off on making important capital allocation decisions.
And don’t forget about the legal challenges to Trump’s tariffs currently working their way through the courts. Some or all of Trump’s new tariffs could be undone with the bang of a gavel.
There are many variables yet to be resolved. Despite mainstream complacency, uncertainty reigns supreme.
Trump has not been shy in calling for lower interest rates, regularly insulting Jerome Powell in the press and on social media.
Thus far, Trump hasn’t gotten his way. But he might have found a new weapon in his battle against the Fed.
The core Personal Consumption Expenditures (PCE) price index is the Fed’s preferred inflation metric, a figure published by the Bureau of Economic Analysis (BEA).
But the Fed also tracks the embarrassingly wrong jobs data and various inflation statistics published by the Bureau of Labor Statistics (BLS).
Trump recently fired BLS Commissioner Erika McEntarfer, replacing her with economist EJ Antoni (an outspoken critic of the BLS). Interestingly, Antoni has since floated the idea of shifting many key data releases from monthly to quarterly publication.
Recall that Jerome Powell once claimed he was “navigating by the stars under cloudy skies.” Reducing the amount of data from the BLS effectively removes some stars from Powell’s view, so to speak. By doing so, Trump might get Powell to reduce rates earlier than he might have otherwise.
And now Trump is trying to directly sack a voting Federal Open Market Committee (FOMC) member “for cause.”
The next FOMC meeting is scheduled for mid-September. Many analysts have had the dates circled, believing there is a higher than normal chance that Powell will reduce rates.
They might be right. But I imagine that lowering rates is now less palatable than before. Lobo has long called Trump an agent of change (if not chaos). In this regard, Trump never disappoints.
On August 25, Trump announced on Truth Social that he was firing Federal Reserve Governor Lisa Cook, citing “sufficient cause” due to mortgage fraud allegations. Cook and her legal team have responded, claiming that Trump lacks the legal authority to fire her under the circumstances.
I can’t imagine Powell approves of Trump’s actions. Might this episode alter Powell’s decision-making?
I’m not sure. But the matter is now in in federal court. Regardless of the outcome, it shows the strength of Trump’s desire to battle the Fed. This might be the best test of the Fed’s alleged independence yet. It would be a major change if Trump can remove and install key people at the Fed.
The Consumer Price Index (CPI) has been above 2% since February 2021. PCE is up nearly 19% since then.
Powell has stated that he wouldn’t wait for inflation to reach 2% before lowering rates. A rate reduction could send inflation higher.
Never forget that Powell’s plan for stagflation is to “not have it.”
If it were only so simple.
As Trump’s tariff regime expands, American consumers will face higher prices. Government statistics be damned: many polls list inflation as Americans’ top financial concern (some polls even list inflation as Americans’ number-one concern overall). Just over half of Americans say their income is not keeping up with inflation.
While several mainstream economists have claimed victory over inflation, the fat lady has yet to sing. Consumers could struggle in ways that go overlooked or ignored by government statistics.
I can’t tell you what Powell will do. But I’d like to remind you that we’re all being treated like guinea pigs, subject to the whims of unaccountable financial engineers. You might want to prepare a strategy for the possibility of Powell lowering rates and losing control of inflation.
KJ
P.S. Markets will move regardless of Powell’s decision. Get prepared for next month’s FOMC meeting by subscribing to our free, no-hype, no-spam newsletter: the Speculator’s Digest. It’s the only place to get Lobo’s latest thoughts on monetary metals, markets, and more.
