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It is a brand of how anxious are investors to put the idea of a commercial war behind them that the markets increased last week in the news of a “agreement” of tariffs between the United States and China.
It doesn’t matter if it was a 90 -day pause in higher rates that probably contribute only temporary relief. Investors bought the story that the Secretary of the Treasury of the Donald Trump market market, Scott Besent, was now firmly in the driver’s seat, the Falcon of China Peter Navarro had been pushed to a broom closet somewhere in the back of the White House and we could all return to the bull prior to the “day of release.”
I don’t buy it.
I think that much more volatility is still waiting for us, not only in the next three months as the new normality of 10 percent of American tariffs in general is shaken (and this is the best scenario), but in the coming years, in the long term, long -term structural trends towards a new global economic paradigm continue.
Let’s start with immediate problems. While it is too early to see inflation in the data (the producer’s price index, an indicator of wholesale prices, fell slightly in April), there are numerous anecdotal warning signals on the price increases related to the rate on the horizon.
The gain margins have been clenched and even the largest retailers seem not to be willing to receive a greater blow. Walmart announced last week that prices were increasing in goods such as electronics and toys due to Chinese tariff rates, and warned that there would be more price increases to come.
“Given the magnitude of the tariffs, even at reduced rates … we cannot absorb all the pressure,” said Doug McMillon, executive director of the retailer. If Walmart feels that prices have to increase, you can bet that others will also.
Jay Powell, president of the United States Federal Reserve, emphasized a speech last week that “higher real rates can … reflect the possibility that inflation can be more volatile in the future than in the inter-crisis period of the 2010. We can be entering a period of more frequent and potentially more persistent, supply clashes, a difficult challenge for the economy and for the central banks.”
Standing is, of course, the great risk here. As the managing director of TS Lombard, Steve Blitz, wrote in a note last week: “Even if a slight recession is strengthened, a higher inflation result seems insured given the addition of tariffs to the trajectory of the increasing budget deficits.
Indeed. The poor fiscal position of the United States is the elephant in the room. Even if it supposes that the United States can raise between $ 200 billion and $ 250 billion in tariff revenues, that did not significantly compensate a deficit of $ 1.8TN.
Add to this the new Budget Law before the House of Representatives, which would add $ 3.3TN to the debt for 10 years, and $ 5.2TN if it supposes that all trulying expirations are permanently extended, according to the committee of a responsible federal budget, a non -profit organization. Several Hard Line Republicans rejected the first draft late last week, but the negotiations are ongoing, and it is unlikely that the final result will help the fiscal image of the United States.
The United States debt problems are structural and long term, and can trigger others. What happens if there is a slowdown or recession that causes tax receipts to decrease precipitously, even when interest rates remain high?
While inflation can temporarily relieve debt load, you could also make business in the United States more expensive. As Blitz points out: “One can, in fact, imagine a scenario in which the Fed helps the strength of the dollar to maintain to control the real interest rates necessary to maintain the necessary tickets and all that, in turn, overwhelms the rates as a barrier to prevent companies from imposing foreign capital and work.”
Trump will undoubtedly try to pressure the companies that subcontract, witness their “Little problem with Tim Cook” Last week after Apple announced plans to obtain iphones from India. But the rest of the world is not still.
China and many other countries have accumulated huge gold reserves in recent years, with the expectation of decoupling and getting away from the dollar. And although gold prices fell a little after the market increase, I would not be surprised if there was another increase at some point. Costco, the discount retailer, set new limits on the sales of gold bars last week, allowing customers to buy only one, instead of two, at the same time, since it cannot be kept up to date with demand.
One of the particularly complicated things of the current moment is that you can imagine an supply and a demand shock that occurs at the same time. Tariffs can interrupt the supply at the moment when a deceleration negatively affects demand.
The last time a combined supply and demand shock occurred was during World War I, according to Princeton Harold James, who made a presentation on the subject recently at the Hoover institution. Offer shocks tend to increase globalization in its consequences (which could support capital markets), while demand clashes make the opposite. When they join, it is not known what can happen. Anyway, James told me, such clashes “put a cousin in the government’s competition.”
The United Kingdom, with its “moment of the Liz armor”, has already seen what can happen when that is missing. The United States can still.