Joseph Wang: Tariffs Are Coming & They Will Be Bad For Stocks (But Good for America)
51:20 Share

This episode of Monetary Matters is brought to you by the VanEck Uranium and Nuclear ETF. Explore how nuclear energy can play a role in your portfolio at VanEck.com/NLRJack. The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough. Thank you. Just close the door.

I'm joined by my friend Joseph Wang, author of Central Banking 101, former senior trader for the New York Federal Reserve and publisher at FedGuide.com. Joseph, it is great to see you. Welcome back to Monetary Matters. Hey, Jack. Great to see you. Thanks so much for inviting me. It's a pleasure to be here. As always, Joseph, the pleasure is mine. How are you thinking about Trump's endgame with tariffs? Particularly, you have a piece out called The Plan.

about Trump and Trump, the Trump administration's plan to reshape the global economic order. Lay out this plan for us and share your thoughts on it, please.

Wow. So I think the market is really misunderstanding Trump because his plan and I've been following Trump for a long time and I've been reading up on many of his advisor appointees. One of them is our friend Stephen Moran, who has a great piece basically detailing how they're thinking about this. Now, that doesn't necessarily mean that they're going to exactly do as what they've said.

But I think the trajectory is very clear. There's going to be higher tariffs and the goal is to try to reshape the global trade system so that the U.S. is producing more manufactured goods themselves. Now, this is just for employment, but also for national security reasons, because the U.S. doesn't want to be dependent on a lot of goods abroad.

Now, a lot of people are looking at this and I think the market is thinking that this is all bluster. This is just negotiation. Trump won't really do that because, you know, he loves the stock market and this is not good for the stock market. And that's all true. He does love the stock market and crypto coins, apparently. But if you look at President Trump, he's been saying the same thing about trade for decades. You can find videos of him in the 1980s just telling everyone that this trade thing is not working out. We're not doing a good job.

And during his first term as president, we also know that he did put on tariffs on China. And that was surprising to many people in the markets. Now, it's the same person. He hasn't changed. And he is in office again. And he's hired a team of people who share his beliefs.

Now, in addition, if you listen to Treasury Secretary Scott Besant, now he'll say that tariffs are indeed one of the reasons is for negotiation. We saw that just that last week when in order to get Colombia to accept their repatriation of their own citizens, Trump threatened tariffs and that was effective. But Secretary Besant also noted that tariffs are also, one, as a source to negotiations.

reshape the global trade order but also to collect revenue as well and it's those last two points i think that the market is not appreciating and it's also because of those two points that we necessarily have to have wide and higher tariffs rates than before

And so it's not just going to be something that people can promise. And I think this trade problem they're trying to address is completely legitimate as well. If you look at China, for example, most recently they had a trade surplus of about a trillion U.S. dollars. Now, that's just mind boggling, right? They're selling so much more stuff to the rest of the world than they're importing. And at the end of the day, they're left with a trillion dollars. And that's not really that's not really how trade should work.

Because in theory, if you're making so much money from abroad, you would take some of that money and buy some goods from abroad, right? And so that would have some mitigating impact on your trade surplus. Or if you're making so much money, that would cause your currency to strengthen, make your exports less competitive, and that would also mitigate some of that trade surplus. But none of these mechanisms are balancing that trade channel. And we see the Chinese trade surpluses go higher and higher and higher.

And that's because they have a state-sponsored policy to basically create jobs at home, make goods, and export them abroad. And it's been very effective, right? So a lot of ways you can see this is that they manage their currency to make sure that their goods are competitive. And of course, if you are a...

Some sectors in China get very cheap loans, depending on what their industrial policy is. Recently, we see that their electric vehicle manufacturing sector has basically surged. They produce excellent products, but they're able to develop in large extent because of all the state sponsorship, protectionism and a cheap currency. And now China is the largest exporter of cars in the world, surpassing even Japan.

So in a sense, in the West, people are talking about free trade, having a larger degree of free trade than China. But other people are not playing by these rules. And we end up in a situation where all the manufacturing jobs go to abroad and abroad.

And domestically, we've become more vulnerable, both from supply chain standpoint and a lot of people just don't have a future anymore. So that's a big problem that President Trump has been trying to address. I think it's something that is legitimate as well. We all see how manufacturing has left our country. We all see the rise in the drop in labor force participation for certain demographics. So I think that's a big solution they're trying to solve.

Now, that's one point in trying to rebalance the global trade order. The other has to do with revenues. So historically speaking, in the United States, the federal government was very small and it collected most of its revenue from tariffs. Actually having a federal income tax, which is how the federal government collects most of its revenues today, was illegal. It was only after a constitutional amendment that we could actually change the system such that we could actually have a federal income tax.

So right now, what Trump seems to be wanting to do, and he's been saying this over and over again, again, these are things that are consistent. So it's not things that he would easily forget. He says that tariffs are making us wealthy. And then he's like, you know, we're going to collect a lot of tariffs. Make sure that if you don't make in America, you are going to have to pay tariffs. Now, this is particularly acute because a lot of the people around him

like Elon, care a lot about the federal deficit. And Trump, of course, also wants to extend his tax cuts. Now, in order to do that, you have to collect more revenue, and that can be done through higher tariffs. And so that is very much part of the plan as well. And so if you're looking at a world that no matter what the negotiating outcome is, you're going to have higher tariffs on a broader range of goods.

That's not good for the stock market, right? Because a lot of people who benefit from this globalization are the mega caps and the mega caps live in the big indexes. Now, one thing I'll add is that annually the US imports about $3 trillion worth of goods.

The volume weighted tariff rate for that is about 2.2%. So tariffs are very low, and they definitely have room to go up. So you think Trump is going to raise tariffs regardless of negotiations? What level, what percentages are they going to go up to, do you think? And are they going to be inflationary? Are they going to reduce growth? Are they going to do both? Are they going to do neither? What do you think?

So tariff is kind of a blunt weapon, but from what I've seen, he uses it for a few purposes. One of them is for negotiation, like the Colombia example. Now, right now, what's on mind is that Trump has threatened 25% tariffs on Mexico and Canada to take place this Saturday, which

unless he gets some border security fentanyl stuff. Now, that part, I think, is definitely negotiation. So I was listening to Secretary of Commerce nominee Howard Ludnick yesterday, and he breaks it down. So these tariffs that we're talking about with Canada and with Mexico, these are negotiating tariffs to try to get them to have more border enforcement and also to stop the flow of fentanyl.

but the economic tariffs, the ones that we're going to have just for, you know, to reshape the trade order, to collect revenue, those things are going to come later.

but the reason is that these come through a different legal process it's called section 301 and in order to put those tariffs on you have to have some paperwork some some studies and so those are probably going to come in april whereas these sudden tariffs these are under the international economic emergency powers so all that all this has to happen is for the president to declare an emergency that then you know it's kind of it's a different set of legal powers so

Right now, what we expect, what he's talking about are these negotiating-based tariffs. The economic tariffs are going to come later on in the term. So whether or not this is going to be inflationary, well, first, I think we'll talk about this in a couple of ways, in practice and in theory. Now, in practice, we've already had a wave of tariffs. We saw that in 2018, 2019. And if you look at PCE inflation back then, inflation was below target.

Now, a lot of people have been studying this episode now, and they come to the conclusion that it actually wasn't inflationary. So a team of researchers and one of the people there was Gita Gopinath of the IMF. And so, you know, this is an alleged paper. They went online, they looked through prices of over 100,000 products, and they found that, you know, this tariff episode was not inflationary for the consumer.

But prices did go up, though, because of the tariff. So what happened? Well, what happened was that the companies ate that cost. So they had lower margins and did not pass it on to consumers. So right now, that episode that we had with Trump the first term was that there were tariffs and they were not inflationary full stop.

Now, in theory, though, there are there's a lot of layers that tariffs have to go to where they can be inflationary and don't necessarily have to be. One first layer, of course, is the currency layer. So let's say we put tariffs on China. Well, what's been happening is that the dollar has been strengthening a lot, right? So if we have higher import prices, the stronger currency,

mitigates part of that. So that's one layer. The other layer is, as we've been talking about, is that instead of the businesses passing on those higher prices, those tariffs to consumers, they can eat the cost. And that's totally reasonable and could be possible today because from what we're hearing right now from earnings calls is that a lot of the consumers, a lot of the companies can't pass on to the consumers because their consumers are tapped out. So they say,

So that could be a possibility. And the third, of course, is that, and we hear Secretary Besson talk about this, is that consumers seeing that imported goods are more expensive simply substitute to domestically produced ones. So all in all, it's totally possible that these tariffs can be inflationary.

Not necessarily so. So it's a complicated question. Now, more to the point for people who care about markets is how does that impact the Fed? Now, the Fed is in a kind of an interesting spot here because traditionally speaking, if you have tariffs, it's a one time increase in the price level. It's not

Now, it's transitory inflation, as has been commonly said. And so we know in a memo in 2018 that the Fed basically looked at this that way. You know, we have tariffs. Inflation is transitory. We should look through this and not react. Today, I suspect they'll do the same. The one wrinkle is that people have been saying that inflation expectations are a little bit higher than before. And we just came out of an inflationary episode. So maybe they shouldn't look through this.

But now listening to Powell yesterday, he believes that inflation expectations are well anchored. Maybe he has to say that. I don't know. But as long as that's true, the Fed would likely look through any one time increases in the price level. So, Joseph, you said that the Federal Reserve looked at it in 2018 and they said that a lot of the tariffs were not inflationary. Oh, no, no, no, no, no. OK. And they're a memo.

So there's two studies. One study is the one that I cited earlier. That's looking at the postmortem. There was 100,000 prices looked at. Tariffs were not inflationary. The 2018 memo that I'm talking about is the Fed thinking how they should react to tariffs. And the thinking was that as long as inflation expectations were anchored, they should look through this because it's a one-time upward adjustment in the price level. What percentage did it find if a tariff...

caused an increase, you know, $100 billion. How much of that went to actual price increases? How much was from the dollar strengthening and how much was from producers just eating the cost? So that's a really complicated question. Now, to be clear, looking back to 2019, 2018, there were specific products where prices did increase for consumers, specifically washing machines. And there's an entire paper devoted to that.

But again, if you look at the totality of the prices and if you look at price indexes like CPI, PCE, you'll see that it really wasn't inflationary because the producers, the businesses ate the cost. That won't necessarily be true in the future. And how future tariffs feed into inflation, that's going to depend upon the rates, how broad it is, what it's implemented on, what countries and so forth. So it's all up in the air.

There is a potential for it to increase the price level. I'm just telling you that it's not clear that it will.

This is a different environment than 2018 and 2019. As you said, inflation was below the Fed's target. Now it's above the Fed's target. And Joseph, as we know, there are a lot of no-landing ISTAs who were worried that inflation wouldn't go back to 2% before tariffs. The argument for the Fed to react to tariffs is that inflation is above target, as you know, Jack, and also inflation expectations are a little bit higher than they were before. And so in order to keep tariffs

to prevent people from overreacting in order to maintain inflation expectations, the Fed should react to this. That's possible.

It doesn't seem like that's how they're going to react to it as well. Again, like I mentioned before, the standard central banking playbook to these one-time increases in the price level is to look through them because it's not a change in inflation. It's not a change in the rate of change of prices, simply a change in the price level. So that's how I would say that.

One other thing that I would note, and to be clear, the way that I see the market is that the market seems to think of tariffs as inflationary. So when I see tariff headlines, it seems like interest rates go up. I saw the same thing in 2018, and that ended up to be 20%.

totally wrong. And as we've discussed for over the years, Jack, the bond market is often wrong and sometimes by a lot. One of the things that I would be careful of is to is to know that although tariffs could put upward pressure on prices, they could also put downward pressure on growth. And what we saw in 2018 and 2019 was that those growth concerns were actually much stronger than the inflation concerns. And that ultimately ended up with the Fed

cutting in 2019. Now in 2018, December, I remember that the Fed had a dot plot that was getting towards a couple of hikes in 2019. They ended up actually cutting in large part because of the growth concerns that were related to tariffs. So my instinct is actually to say that tariffs are very bullish bonds because their impact on growth is much, much bigger than their impact on

if any, on inflation. And I'll also note that the financial markets just don't like tariffs. I think, like we discussed earlier, if you have tariffs that impacts the big multinationals the most, those are the companies that have revenues all over the world. Those are the companies that benefit from globalism. And as we retreat from that, those companies are going to suffer, their stocks are going to suffer, and their stocks are in the big equity indexes. So

Market reacts much, much, much quicker to these tariff developments than the real economy. Once you put tariffs on, that has to go into the price changes to businesses. That's a slow real economy process. But the markets are lightning quick. So if we were to have huge tariffs tomorrow, the markets would tank. That would tighten financial conditions. And that would, at the end of the day, in my view, lead to rapid rate cuts. And that's my base case for this year.

So, Mark, financial markets react much quicker to tariffs or tariff headlines than the actual economy, which takes months, even years to adjust. So you think tariffs may not, you know, they're only slightly inflationary. They may not be inflationary at all, but you have much greater confidence in saying that tariffs actually reduce growth. Why do tariffs reduce growth? Because

If the United States puts a tariff on China, U.S. consumers consume more. They substitute Chinese goods for American goods, so they buy more American, so more production in America. And also, imports is a negative in GDP. It's exports minus imports. So doesn't that boost GDP? Why is tariffs bad for growth?

Yeah, that's a great point. I think it depends on your timeframe. In the short term, I think it's definitely bad for growth because let's say you're a US company, you're relying upon many of your parts come from other countries, there are supply chains all throughout the world. Once you have tariffs, that whole part is disrupted. You don't know how to invest, you don't know how to price your products, and you know the price is going to go maybe higher or you're going to have less profit. And so that all impacts business confidence.

However, longer term, if the prices of imported goods are structurally more expensive, that means that we're going to have to have more manufacturing in the U.S., and President Trump has made a big effort to try to make that as easy as possible. A big movement he has is cutting regulation, which I think of as cutting costs. The other, of course, is his hope that we could have lower corporate taxes, and later on, probably,

the ability to easier ability to import skilled labor so in the medium term because prices are higher abroad that encourages production within the us and of course the federal government is going out across the world trying to court investment we see

The Saudi Arabian government wanting to make investments in the U.S. We have Masa San in Japan investing in the U.S. So as we build out that industrial base in the U.S. in the medium term, that creates jobs. That means more goods and services are produced. So that's good for growth.

But that's a medium term thing. In the short term, I expect it to be very disruptive. As AI demand surges, nuclear energy is making headlines, driving tech's biggest companies to turn to nuclear power to meet growing energy needs. The VanEck Uranium and Nuclear ETF, ticker NLR, has provided investors with comprehensive exposure across the nuclear energy value chain for over 15 years, from downstream utilities to upstream uranium miners and innovative companies developing next generation react.

Positioned to capture the opportunities from the nuclear resurgence, NLR offers a unique way to benefit from this increasingly critical sector. Visit vanek.com slash NLRJack to learn more. That's vanek.com slash NLRJack. You can also search for the ticker NLR in your brokerage app today.

Thanks for listening. Let's get back to the interview.

Basically, you get deadweight loss, which is basically the gains from trade you no longer get. Economists think that trade is good. Do you believe in that model? So I have learned over time that the tools and theories of economics is not super useful in understanding the world. I mean, we've been looking through this for the past few years, right? All these economists came out with their models and told us, guys, there's no inflation. It's transitory. It'll go away.

But that was totally wrong, right? And then they all came up with their models and told us that when you hike rates to 5%, you're going to have a recession. 99%, right? No recession. In fact, the GDP numbers today were quite good. We have to be careful with anything that we get from the economist community. Now, I think that's true. So I studied economics both on the undergrad and in graduate school as well.

So you're right that the economic orthodoxy is that free trade is good, tariffs are bad.

But we can just do a real life experiment to see how these countries that did a lot of tariffs, a lot of protectionism are doing. China is the prime example, right? They have not just a lot of tariffs and protectionism, they even have a managed currency, right? U.S. companies want to sell into China. Not that easy. Chinese companies selling into U.S., much, much easier. And what they've done over the few decades is

is create a world-class manufacturing sector and it lifted literally hundreds of millions of people out of poverty. So that is kind of a huge, huge, easy example to let you know that, you know, this standard economics model about trade, maybe it's missing something. So I'm really hesitant to buy into that orthodoxy since so much of that stuff has proven, been shown to be not accurate.

And Trump believes in tariffs. He's a big fan of President McKinley, who had hiked tariffs to a huge rate. So your point, Joseph, is tariffs are coming, whether you like them or not. And would you say that the financial markets are complacent in terms of Apple, Microsoft, Tesla, maybe not Nvidia, but many other big companies that rely hugely on trade and they're near or at their all-time highs, that they're

the people that the stock market is complacent and that it's not appropriately assessing the risk that tariffs will come 100 that is the equity market i think is totally totally mispriced especially some companies that are highly reliant on international trade apple for example makes basically everything in in china now i think tariffs are going to be really disruptive for them so

But, you know, my sense is that the market actually, also Nvidia as well, has some policy risk. I think yesterday there was some headline where the Trump administration, seeing that DeepSeek is, the Chinese AI company DeepSeek is doing so well, seems to want to throttle China's progress by imposing more limits on who Nvidia can sell to. So there's a lot of political risk there. But yeah, I don't think all these concerns are in the market.

Now, to be totally clear, the market is often very slow. I remember in 2020, for example, we were seeing this pandemic in China. It was really bad. And the market continued to go up one day until it didn't. And deep seek, for example, people in the know have known about deep seek for weeks. And then just one day over the weekend, the market realizes that and reacts. So I think the market is just being slow again. And that happens a lot, as I've shown.

Yeah, and people, you know, analysts at hedge fund and investment firms who were telling their boss, you got to sell NVIDIA because DeepSeek is coming. If they've been saying that for four months, they've been wrong for four months. So they might have been chastised for their boss, even though they were right, but they were early, which is the same as being wrong. Exactly, exactly. The timing is really hard to get, but they were eventually right.

Joseph, what did you think of the January Federal Reserve meeting? We had what I thought was a hawkish statement in two terms. It lacked the phrase

we're making progress on inflation. It also said that the unemployment rate has stabilized. So you're not concerned about the job market and you're no longer saying progress on inflation. That sounds like not a lot of cuts to come. So what do you think about that? As well as did Jay Powell in the press conference 30 minutes after, did he seemingly contradict or downplay? Colby Smith of the New York Times asked about that hawkish language and he said, oh no, don't worry about that. We were just changing a few words around.

Yeah, Jack, I agree. I think the statement did sound hawkish and you saw the bond market yields rise in response to that.

And the statement did seem hawkish, right? There are two things, like we know, Fed cares about two things, full employment and price stability. Now, the statement basically upgraded the view of the labor market and seemed to downplay the recent progress in inflation we've had by deleting a phrase saying that we've been making progress towards our target. So taken together, unhappiness with inflation, strong labor market, that immediately suggests a hawkish tilt. But when asked about that,

Chair Powell was like, "Yeah, we just had too many words in that sentence, so I removed some." I don't know that that was persuasive. I don't know.

So some people are whispering that maybe that statement is the one that he could get everyone to agree on. And now in the press conference, he just kind of puts his own spin on it because my sense is that Powell is pretty dovish today. He's the last press conference in December was pretty surprising to me and that he described the sickiness inflation as this new category of non-tradable services. Right. So that's kind of what you do. So,

When the data is not what you want it to be, you kind of make caveats and you create new categories. And that seemed to be what he did. And that just tells me that he really thinks that inflation is over and he's downplaying the data. And so that is his bias. He's biased towards to be more dovish. And maybe that's what he's trying to do at the press conference. And I wasn't at the FOMC meeting, so I don't know. But that is possible as well. But overall, the other thing that was interesting was his remarks on QT.

So as we know, the Fed is shrinking its balance sheet. Now, the whole discussion at the FOMC conference was pretty conversational. We have Powell being himself, just kind of talking with people. But that one moment when he was active about QT, what he did was he kind of looked for some prepared statements. So when that happens...

That tells me that this is something he thought about, something that he doesn't want to get wrong. And it was kind of a somewhat of a formal statement. So that was kind of his policy there, telling everyone that QT is going to go on for some time.

So if in, let's say, 2022, early 2023, the FOMC was more dovish than Powell and Powell, in some instances, spoke against the statement and he talked in a way that was more hawkish than the statement. Now you're saying it's the reverse, whereas the statement is kind of hawkish. He's talking, he's really dubbing it up in front of the microphone. So Powell is more dovish than the FOMC.

That's my belief. I mean, we can see this in a couple another way as well. We've had dissents in the last meeting, right? Some people weren't happy with continuing to cut rates. So there are people on the committee that are more hawkish than Powell and who are not afraid to express it.

Now, Powell, I think, is really dovish now. But again, he wants to have consensus. And so in order to have consensus, sometimes you have to make some compromise in order to get the statement that you want. Again, I don't know if this is the case. What I do feel pretty confident about is that Powell's bias here is it's towards cuts.

Yeah. And that question about quantitative tightening, I believe it came from Courtney Brown of Axios. Powell's exact words, I don't have them here, but he said something to the effect of reserves are still roughly abundant and they reserves are where they were when we started quantitative tightening, I believe in 2022. That was the the.

predetermined statement. So the reserves are the liabilities of the Federal Reserve, the assets of commercial banks. Why have reserves, if the Federal Reserve has been reducing reserves by letting the balance sheet roll off, why are reserves where they were almost three years ago?

Oh, the RRP has been coming down. So as the RRP comes down, that money could go to the TGA or it could go to the banking sector, but the RRP is almost at zero, right? So that's been countering a bit of the quantitative tightening. But looking at the RRP, it looks like it's probably going to go towards zero sometime in the... Well, a lot of it depends on the debt ceiling, of course, but after the debt ceiling is resolved, it looks like it's going to go towards zero as we have more bill issuance.

And at that point in time, I think the Fed will probably more seriously think about when to stop QT since the RP is to them one of the indicators of having excess reserves in the system. Yes. The reverse repo facility is now at 121 billion. That's like two or three months of Federal Reserve QT roll off. So it's basically nothing. Joseph, looking back, with the benefit of hindsight,

when there was over $2 trillion in the reverse repo facility, wasn't it kind of ridiculous that people were saying that there's no money, that we're running out of money? It's like there was $2 trillion in the system. Yeah, we have a lot of money. I mean, look at where the socks are, right? So there's, I think...

I think there's a lot of money chasing assets right now, and some of it is not very sophisticated. So it's a dangerous time, I think, in a lot of the risk markets. I'm going to ask a simple question to which the answer is very complex. Where is the money coming from that's been going into the stock market, going into private equity, going into private credit, going into Fartcoin, Trumpcoin? Where is this money coming from?

So like we've talked about over the past few years, I think of one of the forms of money is just treasuries, right? Treasuries are just money that pays interest. And we still have a tremendous fiscal deficit, right? It's still 6%, 7%. And that was a key driver behind my call, but 6,000 S&P 500 last year.

Now that continues, but it seems like there's more and more of an effort to stop that. Now, I don't know if they will be successful in reining in fiscal spending, but it's possible. At the very least, they're making an effort to try. Both Elon is trying to slim the federal government down by offering buyouts to employees.

Trump is trying to raise tax collection through tariffs. And so that is something that could change going forward. But until then, I think this tremendous fiscal deficit is sustaining a lot of the asset price buoyancy we see. And of course, prices are to large psychological. And a lot of people have been making a lot of money in the market. And I think that kind of positive sentiment is also driving prices up a lot.

And so, people have been finding the money to buy stocks, buy risk assets. What about bonds? Where do you think the buyers of bonds are going to be as the US Treasury is going to continue to run a huge deficit regardless of even if it decreases or we do cuts, it still will be a sizable deficit? Who's going to buy the bonds?

Well, if we have big tariffs, everyone is going to be buying those bonds because that's going to have a very, very strong risk-off episode. And I think that is going to drive a huge bull market. Oh, not a huge bull market, a huge surge of buying in the bond market. So I'm not really worried about that. Now, to your broader point, the U.S. deficit is very large. We're going to find these buyers. I'm less worried about that now because my sense is that

Secretary Besant understands that you can create demand in many different ways. Now, I've heard him discuss, for example, just changes in regulation. One thing he mentioned was taking off the asset cap of Wells Fargo, which for bad behavior has been prohibited from growing over the past few years. You take that asset cap off, you know, Wells Fargo could grow and maybe they'll buy some bonds. And as we know that Trump will be able to appoint a vice chair of supervision at the Fed.

It's probably going to be Michelle Bowman. And she is someone who is, I think, very lenient on bank regulation. So you have changes in bank regulation. To be clear, the Trump administration can also have appointments on the FDIC and the Office of the Comptroller of the Currency. To change bank regulations, you need all three agencies. So he has the power to change that.

To make it so that banks are more inclined to buy treasuries. So I think that actually solves that problem, or at least it can be solved. So in the near term, I think the downturn in risk assets would drive a lot of flows in the bond market. In the medium to longer term, I think they can fix this through regulation, since they have the tools and the understanding. So I'm not worried about that.

And if the foreign sector is earning less dollars because their trade surplus is lower, are they going to be a smaller buyer of U.S. Treasury bonds? And how will the splits go? Talk about just the different preferences of foreigners like bonds and U.S. like equities and your work there.

So the foreigners have so we talked about foreigners. There's a foreign official sector, so the foreign central banks, and there's also the foreign private sectors like, say, a Japanese insurance company. Now, the foreign central banks really haven't been net buyers of treasuries for some time. Actually, the Marshall buyers and treasuries in the foreign sector have been the private sector. And I think it's understandable, right? US rates are a lot higher than they are in many other countries. Now, I would expect, actually, as the Fed cuts rates,

And the treasury curve steepens that we'd actually have more foreign private sector buyers because then the cost of hedge currencies becomes lower. And so it becomes more attractive for them to buy treasuries on a FX hedged basis.

Looking at the equity markets now, one thing that's been really standing out to me is that the foreign exposure to US equities is just tremendous. It's enormous. It's like mind boggling. In part, it's because we have AI. We've been in a huge bull market. In part, it's because the valuations of US stocks have gone up a lot. Now, that's kind of an anomaly, I think, that could potentially reverse if we have some changes in the AI narrative. But what this tells me, though,

linking this to policy, is that the Trump administration's potential policy of having a weaker dollar to boost manufacturing could potentially crash the U.S. asset market because we know that there's a lot of foreigners with exposure to dollars, both in the treasury market, fixed income, corporate bonds, agency MBS, and in a huge way to equities today. And if they were to

understand that you know trump wants to make the dollar cheaper the weaker to boost exports well what are you going to do right do you want to take currency losses maybe 10 no you want to get ahead of that right so you got to sell your equities take it take repatriate back to japan or wherever so you're going to have to you you want to have to get out of the market before they pose those currency losses on you so that's

That's a huge risk and I hope they don't. So I understand the need to have a weaker dollar to kind of boost US experts and maybe that is necessary. But I'd be very careful over there because if you were to do that, you could have a very large decline in dollar assets as all the foreigners try to avoid FX losses. And do you think the dollar will weaken?

Because isn't the dollar supposed to strengthen because of tariffs? Yeah, it has been, right? It has been. And it has been. And it's easy to see why. Like, for example, looking at the Eurozone, if Trump were to impose tariffs on the Eurozone, that's not good for their economy, right? They are an export-dependent economy. That means the ECB cuts rates more than the Fed. Interest rate differential widens. And so the weak euro weakens. Dollar strengthens.

So that has been the reaction. But currency policy is something that can be politically determined.

Now, in the U.S., currency policy follows under the purview of the U.S. Treasury. And we've seen this in action before, right? Nixon took the dollar off the gold standard. It's within his power to do that. And we also have the Plaza Accord in the 1980s, where the U.S. basically went to Japan and said, hey, your yen is too cheap. I want you to strengthen it. And if you don't do that, I'm going to put huge tariffs on you. And Japan complied. So the Trump administration has the tools now.

to weaken the dollar. That I don't doubt at all. So whether or not they actually use them, I don't know. It seems like they have to, though, simply because it's part of their grand plan of reshaping the global trade order. But this is another reason why I'm very cautious on equities right now. And I think the biggest trade partner is China.

Trump, President Trump hasn't been talking about tariffs on China. He's mainly threatening them on Mexico, Canada, and more recently, Colombia. Do you have any idea on that as well as what's going to be the impact of tariffs on our regional partners like Canada and Mexico? So the tariffs against Mexico and Canada are set to take place this Saturday. You know, these are tariffs like I like.

Like Howard Ludnick mentioned at his confirmation hearing, these are tariffs just to make sure, basically to bully them into not taking care of the fentanyl problem. My guess is that they'll comply. Mexico, certainly. Canada, I'm not too sure. It seems like some of the leadership in the Liberal Party there want to have retaliatory tariffs against Trump.

I don't know if that's in their interest to do that, but so we'll find out this weekend, I guess. Now about the tariffs on China, those are the economic tariffs that we discussed earlier. Those require a process. The process has been set in place by executive orders signed on day one. And so that looks like something that we're going to hear more about in, say, March, April. Now, one thing I note is that

In China, they have a very different social model than the U.S. The government industry is state-sponsored. The government's plan is to create lots of jobs, lots of manufacturing, and ship those goods abroad. So they kind of can't come and build factories in the U.S. like Japan did, since that's basically giving Chinese jobs away to America. So there's really, I don't see if there's any good

It's very difficult to have a good negotiated base outcome. So I think that tariffs will definitely have to be put on China simply because the Chinese can't offer the jobs that the Americans want.

And do you think China expects to retaliate like they did in 2018 and 2019 with tariffs on what America exports to China, which includes agricultural products? And I believe Trump had to give the farmers a subsidy because the farmers got hurt, right? The Trump administration is unhappy that the

Chinese did not honor the phase one deal. In the phase one deal, China was supposed to buy a lot of U.S. agriculture products. Like you said, Jack, they didn't do it. I think that makes the Trump people unhappy and it makes them less inclined to trust what the Chinese say right now. So

I am not an expert on Chinese politics. I've read articles saying that the Chinese are prepared to retaliate, prepared to weather the storm. So yeah, I guess they'll retaliate. Now, the tariffs did, some of that money did go to repay farmers, but that's kind of how this whole strategy works, right? You put tariffs on, you collect that money, and you use it to buffer some of the losers of this trade war as we move towards reindustrialization. So that's probably going to happen again. So...

Joseph, so are you bullish on bonds and bearish on stocks right now? Absolutely. Wow. So a year ago, you said stocks and bonds. Also very bullish on gold, right? Gold is part of that. Again, making new highs today as we speak. I think it's part of that geopolitical risk trade right now. If you have a trade war, there's a lot of vulnerability here, right? If you're China and you're earning, let's say, a trillion dollars a year, it's not entirely in dollars, but most of it probably is.

You got to put those dollars somewhere. Are you going to just turn around and buy U.S. government bonds, knowing that this country is not super friendly towards me, knowing that looking at your friend Russia, well, you kind of lost all their foreign reserves, right? What are you going to do? You're going to have to diversify. And one of the obvious avenues is gold. And if you're making a trillion dollars a year off trade, then you have a lot of money to buy gold. So I think that's looking pretty good as well.

Interesting. What if tariffs reduce the Chinese surplus and they have less money to buy gold? That's possible as well. But if things get that bad, then you can have a compositional change where you shift more of your dollars that you currently hold to gold. But in any case, I think it's not just China, right? I think there are many people who will be on the other side of the trade war and they will have to diversify a bit as well.

United States and China, that relationship is very important and highlighted in the press, but you also have trading relationships with the Middle East, India, South America, and so forth. So I think there's potential for a lot of, I guess, more of a fragmentation in the system. So you're bearish on stocks, you're bullish on bonds, you're bullish on gold. Are you bullish on short-term interest rates like the two-year or so for futures because you think the Fed will cut more than the market expects?

I think so for futures is the best way right now to hedge from my personal view is the best way to hedge all this. As you know, you buy so for futures, you know, you don't believe data. There's no cost of carry or anything like that. So if all this happens, the immediate reaction, of course, is for the Fed to cut rates to stimulate to ease financial conditions like they did in 2019.

Now, my own sense is that the market is too hawkish. And so I don't feel like there's a lot of risk that the Fed won't

turn to hiking rates and so forth. So I think that looks like it's really asymmetric to me. So I do like short-term, let's say two-year yield, two-year treasuries, near-dated SOFR futures and so forth. So yeah, that's something I like the most actually. What haven't we covered? Oh, we could talk about, I think something that's really interesting is that the stuff that we're doing of what Elon is doing with

you know, buying out federal government employees, how's that going to work, right? He thinks that we might be able to get 10, 5% of the people to take that buyout. I think that's a fascinating way to reduce the federal government. I think it's interesting in the sense that it's structured so that you will resign

like eight months from now, but don't have to do anything anymore. So it does seem like that will show up in the unemployment statistics for some time, even if you suddenly lose, say, 200,000 people from the government. And in addition to that, there's an effort to try to reduce the amount of funding that the U.S. government gives to all these NGOs, which is basically employment, which is basically employment centers for a lot of political activists. So I don't know if they'll do that. I don't

I don't know if they'll find a way to do that. I suspect that they will. But if they do that, though, I think that's going to have a negative impact on employment because a lot of these guys, if you're a professional activist, I'm not sure that you have a lot of marketable skills. Right. And so when you include non-governmental organizations, I know the government is a lot bigger. But Joseph, just looking at the federal government,

So not state and local government employees, but the federal government. The US currently employs 3 million people.

which is where it was in 1989. Actually, in three in 1989, it was 3.1 million. So this idea, you know, I understand there's this narrative that we have scores and scores of people, you know, at a desk job, drinking coffee, not really getting a lot of work done. You know, I'm not saying that the government is the most efficient thing. But I think that's actually absolutely what happens at the government. Trust me. Joseph, I mean, like in HR departments at many, at many private companies, that happens as well. You know, there's I think it's

I mean, I've never worked at the government, but I'm just looking at the statistic. In the 1950s, there were 2.4 million people working in the federal government, and now there's 3 million. So where is this huge amount of waste? And if there is waste now, haven't we been wasting it for literally close to 100 years? I mean, the growth in the huge government employment is in state and local governments. Yes, yes. So-

I think that's fine because the same local governments aren't like the federal government. They can't print money. So in a sense, they have a lever to discipline them. If they spend too much money, they'll run out. They'll have to do cuts, which they sometimes do. And so I think that's fine. Again, it's their money. They can spend it. The difference is that the federal government doesn't have that same constraint. So it's more liable to have waste because there's not that mechanism there.

I agree with you that maybe it's a couple hundred thousand people. It's not that much in the grand scheme of things, but I think that it's possible that that could have some impact on employment numbers going forward.

Not right away, of course, because it's structured to be a resignation in the future. But I think probably the funding of these NGOs and stuff like that probably has more of a direct impact on unemployment. And in terms of cutting the deficit, cutting spending, how effective do you think it's going to be? I know Elon and Doge were throwing out numbers of one to two trillion. Do you think that is realistic with you cutting 100,000 employees?

It's very, very difficult to cut the deficit. I mean, look at it. Look at it. It just goes higher and higher. But what I like is that they're trying. They're doing something. And that's the beginning of that could be the beginning of something more. Again, it's a start. I didn't really hear a lot of that in the last few years in the first Trump administration or nor the Biden administration. But now they're doing something. So that's a good direction. It's going to be hard, but they're making progress. And when I look, the huge, huge percentage of government spending is government.

as well as interest on the debt, then entitlements of Social Security, Medicare, Medicaid, the Trump administration said not going to touch entitlements at all. So that's off the table. When I think of huge amounts of government waste, I think of the military where there's stories of, you know, there's a door hinge on an airplane and it costs $30 to make, but the government buys it from some contractor for $10,000. That's where I seek a lot of the waste. Do you think Elon Musk, Doge, Hegseth, Trump, do you think they...

are committed to cutting the waste in the military sector, which is famous for its intimate connection with private contractors. Number one, do you agree that that is where the real waste is? And number two, do you think Doge will be effective in getting rid of that waste? Or are the political connections just too strong? So federal spending is basically mandatory. So that's Social Security, Medicare, that stuff can't be touched, as you mentioned.

there's the interest rate that can't be touched either and there's discretionary and that includes military that's the price that could be cut and i think that is very difficult and like you mentioned jack that's you know there's they have a lot of political power it's difficult to do they also famously seem to have trouble passing fail passing an audit right so

I think one thing that Elon seems to be bringing there that we didn't have before is an understanding of technology. For example, Elon has been going on talking about how the future of

warfare in the air is drones, right? Small and cheap. That's what everyone is using these days. Why are we spending these billions and billions of dollars, basically a bottomless amount of money into these F-35s, which take forever to develop, are very expensive, and are basically obsolete in a world where we can produce drones cheaply and quickly, right? So these things, I think, could, let's say we don't have these programs anymore, or at least slim them down.

that could have a big impact. So I think it's possible that Elon can make a difference, Doge can make a difference. Now, the political side is always difficult to say. One of the things that we've seen over the past few decades is that the United States always ends up fighting a war somewhere in the world. We have Iraq as kind of a disaster, Afghanistan and so forth. And we have wars in Eastern Europe as well. That's really good for these defense companies and they have a lot of political power.

Well, it seems like Trump doesn't like them and they don't like Trump and Trump did not start world wars his first term. So maybe that will continue. So I don't know about the power dynamics specifically, but it seems like at the moment, at least it seems like the power is with, you know, the more somewhat more isolationist Trump's Trump team.

And thank you, Joseph. How are you? What's your economic outlook? What's your view on the unemployment rate, on consumer spending, the risk of a recession? So I think we're going to have growth slow down, notably, I think much more than people expect, because these tariffs are really disruptive. Again, I think the biggest thing that's mispriced in the market is misunderstanding the

the president trump agenda and that is to have tariffs to reshape the global order and to collect revenue and if you put tariffs on a lot of countries a lot of things that's going to impact real growth that's going to impact business confidence and that's going to slow growth down and it's also going to be bad for the financial markets and as we know

A lot of the spending has been financed through the wealth effect. So I think we would have much lower growth this year than last year. And that is also a reason why I think that we're going to have much more cuts than the market is pricing in today.

Well, Joseph, you have been fading the recession narrative for over three years now. So when you say you're worried about growth and you are getting pretty bullish on yields, yields going down, I'm definitely paying attention. Joseph, thanks so much for coming on Monetary Matters. People can find you on Twitter at FedGuy12 and your work is at FedGuy.com. Your book, Essential Banking 101, it's a classic. People should check it out if they want to learn about essential banking. Thank you so much, Joseph. Thanks everyone for watching.

Thanks, Jack. Thanks for watching. Remember to check out vanEck.com/NLRJack to learn more about the VanEck Uranium and Nuclear ETF. Thank you. Just close this door.