Tariffs up. Markets down
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Pushkin.

And unto them was given power, as the power of scorpions of the earth have.

That's Revelations 9. I read it to capture the mood of markets this morning, the day after Trump announced his reciprocal or so-called reciprocal tariffs. So-called is right. This is Unhedged, the markets and finance podcast of the Financial Times and Pushkin. I am Rob Armstrong.

Coming to you from unhedged headquarters in New York City, a city that is still standing as of 10.06 this morning, and I am joined by

by my colleague Aidan Reiter. Aidan, how are you enjoying your apocalypse? You know, I was just saying that I put on a tie today because if the ship is going down, you may as well look nice. Yes, that's what I'm talking about. It's like Admiral Nelson standing bravely on the poop deck as the bullets fly around him.

Or the people on the Titanic playing the violin as it sank slowly into the water. Yes. So let's just go through the numbers. These may be completely, almost certainly will look completely different by the time you listeners are listening to this podcast. But S&P down 30.

Well over 3%. The NASDAQ down well over 4%. Big tech is getting killed. Apple's down 9%. The banks are getting murdered. The dollar's down 2%. Treasury yields have fallen 18 basis points. For those of you who don't nerd out on treasuries, that's a big drop. Europe is down. Japan is down. China is only down a little bit.

Oil is down $5 to $67. So everything, it's a sea of red, to use a somewhat biblical piece of imagery for you.

Where do you want to begin, Aidan? There's so much to say and reflect upon here. Well, maybe let's go to the news conference that our president gave us yesterday. Okay, great. So he came out and there was a lot of fanfare. He brought in a retired union worker and then he laid on the tariffs. Yes. And these tariffs were much bigger than people expected. Much bigger. Right. We had gotten a couple of Wall Street

estimates saying, "Oh, well, the effective tariff rate after this might be between 10 to 20%." Yeah. Most people were even in the low end of that, like 10 to 15, kind of. Exactly.

Totally wrong. It seems like the US is now effective tariff rate is somewhere between 20 and 30. That makes us, ironically, one of the highest tariff nations in the world. Or at least in the developed world, I should say. We're back to almost 100 years ago, the last time we had tariffs this high. It was the era of the Smoot-Hawley tariffs. Smoot-Hawley is one of those phrases people use.

to scare economists' little children into eating their vegetables. And I thought what was most important and part of what the market is responding to here is that he said, President Trump said very clearly this reciprocal, reciprocal, reciprocal, what they do to us, we are going to do to them. And the reality of the tariffs, even under the most charitable interpretation, is not that. Starting with the fact that every country

whatever their tariff status gets 10%. So right there and across the board at 10% tariff is not a reciprocal tariff. That's point number one. Point number two is this absolutely-

I was going to say something else, but I'll say unusual calculation they used to arrive at the tariff number. Yeah. So maybe it's worth backing up a little on reciprocal tariffs, and that this was an idea that had been kicking around the Republican world for six to seven years. In 2019, it was brought up by a bunch of people in the House saying, "We're going to go line by line on other people's, on other countries' products." So you charge me 10% for coffee, I'll charge you 10% for coffee.

If you are somebody who knows how coffee works, that's a bad idea. The United States does not make a lot of coffee, whereas Colombia makes a ton of coffee. Matching their tariff would result in much more expensive coffee for all Americans.

Even barring the fact that reciprocal tariffs are difficult, this is not them. Exactly. This is not line by line reciprocal tariffs as they were originally put out. Yes. This is also not exactly matching the reciprocal rate, the average effective tariff rate of other countries. Yes. Instead, they used what seems like a very bizarre calculation.

Which is you take the US's bilateral trade deficit with every country, divide it by the imports to America. So America, the things that you get- Of each country. Yes. For each country and divide by two. Now I used to be a consultant, which meant I made up a lot of math. Yes. This is really dumb made up math. Yeah. Well, what it shows you is what fundamentally, like I don't understand and I don't know anyone who does understand why you would choose that particular calculation. Right.

But it does have one salient characteristic, which is that it bases –

size of the tariff on a given country fundamentally upon that country's trade deficit. Not its tariff levels, not what you do to us, we do to you. It's fundamentally if you have a high trade deficit with us, you're going to get a high tariff. Again, this is not a reciprocal tariff by any description and it implies that any trade deficit the

the United States may have with another country is because of unfair treatment by that country of the United States. It makes sense in that, you know, originally when Trump started hitting on tariffs in his first campaign, it was all about bilateral trade deficits. So in that regard, this sort of makes sense. But as you said, it's not reciprocal. But where it doesn't make sense is it's not really looking at the absolute value of goods coming from these countries either. Right?

This is just based on percentages. So if you have a country like Laos, for example, it has very high tariffs because they are a very closed, authoritarian nation. They don't do a lot of trade with US to begin with because they have such high tariffs, even though the reasons we're not trading with Laos have almost nothing to do with unfair treatment. We are now charging them 48% because they essentially have this 95% tariff rate that they calculated. So we have to kind of highlight that this calculation is so strange.

that it actually makes it more difficult

for the world to know what happens next. Yeah. I spoke with a former leader of the WTO and his point, and he used to be a trade negotiator for the United States. And his point was, well, one would think that originally, if you were going to have these negotiations, they'd want to understand what was going behind the numbers to say, oh, well, you're saying that's a VAT, but actually that doesn't apply to US products, et cetera, et cetera. But this has nothing, it's not based in reality, really. Right. So what do you negotiate? And also I'll just read this quote, which comes from

A Wall Street strategist was quoted by our colleague Robin Wigglesworth this morning. And I love the kind of administrative understatement of this quote. This analyst wrote, we worry this risks lowering the policy credibility of the administration on a forward looking basis. Now, I think what that means is if everybody thinks the administration is as crazy as a sack of ferrets,

That is going to change their risk appetites in a significant way. Absolutely. And I think that's being really reflected in the bond market. Yes. So yeah, treasuries are off 18 basis points. That's growth expectations coming down. Yeah. It's flight to safety because growth expectations are coming, is how I would describe it. The two-year, by the way, is also down. So it's all across the curve, major step down, on top of decreases in bond yields that we have seen recently.

in recent weeks and months. So this is a big move given where we started from. And we're clinging to above 4%. And I don't know, I should look up where we are right now. But I wouldn't be surprised if there's a three in front of the 10-year bond yield when we close the day.

Which would be a very significant moment. 0:02:00.0 S1: To some degree, it might also reflect people expecting the Federal Reserve to cut later this year more than they had priced in. 0:02:04.0 S1: Yes. 0:02:05.0 S1: Looking at trade implied futures last night, I haven't checked this morning, originally they were pricing in three 25 basis point cuts. 0:02:11.0 S1: Yeah. 0:02:12.0 S1: Seems like they're edging up towards more.

Yeah. Thinking that the growth is going to be much more impactful than the inflation. Yeah. Let's talk about ... That's an important point you bring up. Let's talk about how the Fed is going to respond to this, because it's a pretty tough position they've just been placed in. Yeah. As we've said a couple times on the podcast, the Fed has been staring down stagflationary pressures from tariffs, right? Yes. They slow growth and they kick up inflation. Yes. This is a supercharge of both those pressures.

Right. Right. So they're still caught between the same issue, but it's just going to be a question of which side of their mandate is going to take over. Yes. It's the moment of truth. Which one do you really care about, employment or the inflation rate? Exactly. So I spoke with some people who used to work at the Fed and they suggested that after a three-year struggle with the inflation numbers, they're going to be really dragging their feet on making a cut. Yes. So imagine the following scenario.

We do see these tariffs increase inflation, which it makes sense they would in the short term. We can have an argument about what adjustments come in six months, whether things normalize a little bit. Even if the importer absorbs some of it, the consumer is going to get some of it. So we'll get some inflation and suppose all of this causes a real growth slowdown. And the Fed comes out and says, we've got to focus on the inflationary bit. We're not budging. We're not cutting rates.

How is this administration going to respond to that from the Fed? Yeah. This administration will be very angry, right? Trump has wanted the Fed to cut even before this. Yes. Interestingly, some people on Wall Street have talked about, "Well, there might be a Fed put, right? If the economy gets really bad, the Fed is going to step in." But this is not COVID-19. This is not a moment where, "Oh, we know the entire economy is about to completely grind to a halt."

It's going to take a couple of months for numbers to really show up in the data. Inflation, labor data, they're all moving slowly. It's a very important question for the Fed and all policymakers around the world to think to themselves, am I going to react to the first move in markets or in the economic data?

Or am I going to sit on my hands for a while and watch how this develops? And I think based on recent comments from Fed Chair Jay Powell, they're going to sit and wait. Good guess. Yeah. I mean, we've spoken before about the Fed doesn't want to get into a little tango with the market where the market thinks they will start...

coming in to save them, and the Fed then feels like, "Oh, well, I have to come and step in because the market is falling." Japan has sort of made that mistake in the last two years. So we don't want to wade into that territory, and Chair Powell certainly does not want to. Trevor Burrus: Quite right. Now, I think we should talk about one really good thing, and I think it is being overlooked, but it's really important, which is the relatively soft treatment that the administration meted out to Canada and Mexico.

Right? That it will continue to be the case that the USMCA, am I getting that acronym right? Yes. Although in every country they call it different. In Canada they call it the CMUSA. Okay. But this is the trade deal that Trump struck in his last term with our immediate neighbors, Canada and Mexico. And it exempts a very important subset of goods trade from tariffs.

Basically, goods that were originated mostly somewhere in the Americas. One of the three countries gets off treatment and that stays in place. And Canada and Mexico will not face additional tariffs, which was on the table and thought about. And that, for me, this is a ray of sane sunshine.

on an otherwise cloudy day full of insanity because we know, we learned from Brexit, for example, that geographical proximity is extremely important to trade

And these are our immediate neighbors, and we know it would be bonkers to turn all those supply chains that cross and recross those borders. It would be bonkers to just throw those all away. Yeah. Canada and Mexico are our largest bilateral trade partners. Yes. That being said, some people might say this, oh, okay, USMCA is going to stay in place, or this could just be a reprieve for a little bit. Yeah. And speaking of reprieves, it was very interesting. I thought that

The items where we expected industry or sectoral tariffs were not included, are exempted from these national tariffs. So we're talking about pharmaceuticals, lumber, copper. And those are the big ones, I think. And those are precisely the areas...

that the administration has flagged as being national security interests and so forth. So we know that those didn't get away scot-free. There is some set of tariffs. Oh, semiconductors was the fourth one, right? Well, there is some more news coming on the tariffs in those very important industries.

That's a sword of Damocles that is still hanging over the head of the market. Canada, Mexico, industrials, not for now, but eventually. Interesting that the dollar is down. My little tariffs 101 handbook, which I read when all this stuff kicked off, told me the tariffs should be dollar positive.

Right. You increase the price of imports. The way the system adjusts is that the dollar goes up, which makes imports more affordable. It's the relief valve. But we're not seeing that this morning. No, we are not. What do we make of that?

It could be partially a reflection of the growth slowdown, right? So people think that the US will grow more slowly. It could be a reflection of a flight to safety to US treasuries in part. Yeah. But that would actually go the other way, right? Because that would create demand for dollars to buy those treasuries with. That suggests that the flight to treasuries we have seen is from within the US. Yeah. It's probably more from within the US.

There's always, of course, technical explanations, especially on the first day after something like this happened. It could be that a bunch of traders were wildly on the wrong side of the bet and everybody's scrambling to get on the right side of the bet. And the dollar can keep on rising tomorrow once the deck chairs on the Atlantic have been appropriately rearranged. The Titanic. The Titanic. Yes, that's what I meant. The Titanic was on the Atlantic, right? I mean, it could just be also that there's going to be a global growth slowdown. Yes. And that...

has not kicked into a dollar smile just yet, but eventually it will. It might, yeah. And for listeners who don't know the dollar smile, the idea is when the world economy is doing poorly, everybody floods back to the dollar. When the world economy is doing great, people go to the dollar. Yeah, but it's in the middle that it tends to fall. Interesting also, another thing that surprised me a little bit, gold is down this morning. It bounced a little bit, but gold, as our listeners will know, has been on a staggering run.

It's over $3,100. You know, when it was $2,100, everyone said, oh, this is as high as this can possibly go. Demand for gold gets destroyed in the 2000s. But nope. Interesting it's falling. What that suggests to me is people are selling everything that isn't nailed down. In other words, people want to get liquid as they do at moments like this. And it doesn't matter if it's gold or anything else. Just sell it or sell a little bit of it.

But it did go up right after his announcement. So there was an immediate run to fear, or run away from fear, I guess. 0:02:00.6 S1: Okay, here's a question for you, Aidan. We got this one note of sanity among the cacophonous irrationality, this moderation of the position towards Canada and Mexico. Do you think that signals, and I certainly hope it does, but I honestly don't know what to think.

that what we're seeing is the first round, the first hyper-aggressive round of a negotiation that the United States have initiated, and that we might see moderation in the weeks and months to come.

And we also don't know, frankly, how other countries are going to retaliate. But there's one signal in the market that suggests that they might retaliate strongly, which is that the big US tech companies in general, and Apple Computer in specific, are getting absolutely kicked in the teeth this morning. Apple was down like 10% at one point. And what that tells me

is those are the American companies par excellence. And they are going to have a huge target painted on their forehead. They're also the most expensive things that have run up the most. And maybe you just sell them because you have huge gains in those already. But I also wonder if people are seeing the European Union

who got a 20% tariff slapped on them yesterday is going to go after US tech and US services. That's possible, right? But I read that as these are companies that have incredibly integrated supply chains in Asia specifically. And there are extremely high tariffs on Asia, both because a lot of countries in Asia have relatively high effective tariff rates on the United States for a variety of reasons, industries they want to protect, et cetera.

Reading between the lines, it seems like they might have settled on this calculation approach because it both targets China and targets the countries around China that China has tried to use to get around US tariffs in the past. So again, the calculation could have incorporated that, couldn't have, who knows? But the point is tariffs on Asia are particularly high. I'm glad you mentioned this. And I have a question for you, smarty pants. Our rough guess is that tariffs on China, once you stack them all up,

Meaning you put the new tariff from yesterday. What was the new tariff we got yesterday? We got 34%. 34%. And you add that to the 20% is already in place and you get to over 50%. And it was confirmed by the White House yesterday.

We're talking about 50% tariffs. And it could be higher because, first of all, there were already tariffs in place both under the Trump and Biden administrations. So the effective tariff rate on China was already something like 6% to 7%, I believe. Yes. So that takes you up to almost 60%. Yeah. And then you have the Venezuelan oil tax.

tariff. China imports oil from Venezuela, as does the US, we should note. And Trump said he would put 25% tariffs on anybody that imports Venezuelan oil. So that brings our tariff rate on China, our largest bilateral deficit, and essentially the factory floor of the world to almost 100%.

Yeah. It's hard to imagine that that will really happen. But even if it's 50%, it's unbelievable. It's crazy. I mean, the dollar stores are down, but like all the stuff we import from China, right? You know, I mean, are you going to pay...

Like, for all that annoying plastic stuff you buy for your kids, are you going to pay 50% more for all that stuff? And then on top of that, going back to the tech companies, not only are they very well embedded in China, they've tried to diversify to other countries. Apple's trying to diversify to Indonesia, to Vietnam. Yeah, exactly. You've completely undercut their industrial strategy. Wait, here's the question I wanted to ask you, because you know so much about China and you're so clever.

Chinese stock market is down less than 1% this morning after a 50% tariff from the United States. Explain that to me. Well, we're assuming that Chinese...

stocks were always about, were all about fundamentals. Yeah, yeah, fundamentals. Yeah, that's fair. Yeah, that could be a made up number. And they might not have been, they're also probably undervalued. Also, the tech surge is definitely a big part of the story in China, and that hasn't been changed by this. Yes. And if anything, investors in China might be feeling that with US growth about to plummet, with United States' soft power now really, really hurt by this, China might be poised to take advantage of the situation. But that might be reading too much geopolitics into the stock movements.

I mean, you're the one with a PhD. You tell me. We haven't mentioned, Aidan, the most important topic of all in this whole discussion, though. What would that be? Which is penguins, as you know. The penguins have been taking advantage of America for a long time, which is why the White House announced yesterday a 10% tariff on the McDonald Islands. And where are the McDonald Islands? I don't know, but I have been told by reliable sources that the only people who

who live on the McDonald Islands are penguin people. So those penguins are about to learn a hard lesson in the costs of taking advantage of Americans. Do you think Trump was bought out by the SEAL lobby? We will hear more about the various lobbyists coming to the White House from the animal kingdom after a short break.

Bonds are back. And so is All the Credit, PGM Fixed Incomes monthly podcast series. From the latest trends to long-term perspectives, you'll get timely fixed income insights from leading economists, research analysts, and investment professionals. Whether you're new to bonds or a seasoned investor, tune in to All the Credit wherever you get your podcasts. This podcast is intended solely for professional investor use. Past performance is not a guarantee of future results.

Listeners, welcome back. This is Long and Short, that portion of the show where we go long things we like and short things we don't like. I'm going to go long tips, treasury inflation protected securities. As several bond traders told me yesterday, tips do really well when inflation is headed up and growth is headed down. And it sure feels like we're in one of those situations now.

So I like the tip here. Aidan, are you long or short on anything? I am. I am short the spending power of the average American. Not that I don't like it, but I don't think it's going to do well after these tariffs. I think we do a little bit of a disservice to the world when we call tariffs tariffs.

Really, they are taxes, and they are going to disproportionately hurt lower-income Americans who spend more and more of their weekly paycheck on the essentials or cheap goods that might come from China. This is going to really hurt their wallets, and they're also going to be facing a lot of the pressures of the slowdown, more so than other households. So I am concerned, and I think we all should be. Listeners, these are crazy times. So until we come back into your feed next week...

Stay sharp out there.

Unhedged is produced by Jake Harper and edited by Bryant Erstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forges. Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn, and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer.

I'm Rob Armstrong. Thanks for listening.