“Supply Shock Greater Than Great Depression-Era Smoot-Hawley Tariff” | David Kotok on Trump’s Sweeping Tariffs And Market Crash
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The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough. Thank you. Let's close this f***ing door.

I am joined by David Kotak, co-founder and strategic advisor at Cumberland Advisors. David, it is so, so good to welcome you to Monetary Matters. Great to see you. Thank you, Jack. It's nice to be with you. I missed you. I haven't seen you since we were fishing together and I missed you. I'm happy for you and I wish you well and it's nice to be with you.

I missed you too. I'm really glad we're talking, David. And I'm really glad we're talking today. The market, I've taken an absolute nosedive. The market down 4.8% yesterday. Today, we're recording in the middle of the day, was down as much as 5.1%. These are ugly numbers, David. And I think they are reacting almost exclusively to President Trump's tariff agenda, which extremely, extremely high numbers announced on Liberation Day.

David, you've got a perspective over your entire career. You've seen the transformation of the American economy, the shipping of manufacturing jobs overseas, to which the Trump tariffs are a strong reaction to, a perceived antidote to. So I want to get into that in just a minute. But

What do you think is the impact of these tariffs? And if they are actually implemented, how much do you think they will change the global economy, global trade, GDP, employment, and markets? Oh my gosh, Jack, we need 11 hours to cover all of that. Look, I'm an old guy, but I was not alive when we had Smoot-Hawley tariffs in the 1930s.

That's the closest reference to anything of this magnitude. And if you take what was announced and assume for a minute, I'm not so sure that's a valid assumption yet, but if we assume implementation off of that fancy chart that was held up from the Rose Garden, the tariff level worldwide is higher than

than the peak in the 1930s in Smoot-Hawley. Higher. So policy, in my opinion, an absolute disaster. The method of computation of the tariff. Madness. Any economist or person who understands trade

and I've been an observer of it for half a century. What did they do? They could not, I believe that when they looked at what they would have to do to the custom lines, item by item, they don't have the resources, they didn't know how to do it, and they didn't know how to implement it, so they came up with this cockamamie scheme.

We'll take a trade deficit. We'll take a number, and we'll estimate it. We'll cut it in half to give them a bargain. And we'll assume the entire world is crooked currency manipulators and all of the other stuff. Well, what if they're not? What if there's a smaller, poor country, and it has a lower labor rate, and it exports or imports coconuts?

Why do you want to put a tariff on the coconuts? And what do you expect that country to do? It doesn't import bourbon from Kentucky. So this is madness. Now, markets expected much less. The theme was, oh, okay, tariff levels will go up to about 10%. Nobody will like it, but we can handle it. It's not a shock. Instead, we got the equivalent.

of a major supply shock, like when the oil prices half a century ago went from $3 to $12 and war broke out in the Middle East in the 1970s. That's a shock. This is another shock, and it's massive. And

I might add, there's a huge difference between previous shocks and now, because we're introducing the shock after years of economic growth and well-being and low inflation rates and full employment.

We're not introducing the shock when we have all the resilience of recovery from the shock. And therefore, the risk to the United States is high. And we see it. Now, we don't see it in the Treasury 10-year yield today, because if we look at the 10-year Treasury yield and we see it's now below 4%,

It's sending one message, but look at what's happening to the credit spreads. Corporate spreads widening. Borrowing costs widening. Treasury yields viewed as the safest one.

down. But what about all the other businesses that have to finance themselves? And that's going the other way. So this is a shock. It's major. The stock market is reacting to a shock for good reason. And in the Nasdaq, we now have a bear market down 20% from the peak.

At least it was intraday. I don't know where it is right this minute because we're talking to each other. But you look at that mechanism and you say, gee, the markets are adjusting. Why are the markets adjusting? The earnings estimates were somewhere around 260 to 270 for the year on the S&P 500. We could quibble 262, 265. What difference does it make?

Every one of those estimates is wrong. The damage that has already been done will lower those numbers. Where will they lower the numbers? Worst case, 260 could be 200 or 180. Worst case, that's possible if there is no pivot coming from Washington.

And so when you reprice the stock market with, say, 200 instead of 260 in earnings, and you put a 20 multiple on it, where are you? You're down another 1,000 points from today on the S&P 500 index. So this is a shock, supply shock, big one. Historically, as large as Smoot-Hawley in the Great Depression, will it sustain?

Will there be a pivot? We don't know. We could have Canada and the United States announce on Sunday, we're setting aside the 25% tariffs on each. Kumbaya. Let's make love, not war. And the market will take off like a rocket. We don't know. Today, China retaliated the other way. And look what happened. So that's where we are.

And people may say, David, oh, if earnings go from 260 to 200, it's a 25% decline in the S&P. That is big, but it could be even bigger because the multiple, as you referenced, goes down as well. So it's no longer a price-to-earnings ratio of 22. It could be 18 or 17. David, what about the impact on the real economy? Because folks watching this might say, oh, the earnings on the S&P went from, going to go from 260 to 200. Who cares? My 401k is down a little bit. Who cares?

Trump is going to he's bringing money back. There is an announced headline figure of multi-trillion dollars, the calculations that we can get into a second. And we're going to build things in America and they're going to be millions of jobs. What do you say to that? Well, there are two pieces to it. It would be very nice to have capital inflows come back. It would be very nice to everybody who's promised something if they actually deliver half of it.

It would be extraordinary. Where are we going to get 25 million people to fill the jobs that have the skills while we're in the process of deporting marginal workers or scaring them away? So you need a labor force if you're going to do that kind of thing. Number one, we don't have it. Remember, we were at an unemployment rate below 4%.

Where was the labor force? And without importation and immigration, importation of labor and immigration, how are you going to fulfill it if you actually do get to build a plant? Now, let's get to that. If I announce today, I'm going to give a billion dollar investment in a large facility, and I'm going to make a widget in Indiana or Arizona,

between today and when the widget plant is operating, how much time does it take?

Does it take four years, two years, six years to get it, equip it, staff it? Where do I get the equipment? Do I buy the machine and robot from Germany or do I make the robot here? And do I know how to make the robot? And if it's from Japan, what's it going to cost me? So this is a very complicated supply chain. It's nice to announce, Jack.

Much harder to see the results. We have had, with the CHIPS Act, inducements and incentives. We have had several years of ongoing construction in the United States from foreign companies who are making the investment here. How many of those plants, which have been several years in the making, are operating fully?

They're not there yet. Takes a while. So to make war with tariffs now, and why do it this way? That's what makes it worse. The whole thing here is a two-step. We'll do the tariffs. We'll get the big money. We'll estimate the revenue so we can deliver the tax cut today

and do it in the budget negotiations, which are taking place right now and may actually get the first round this weekend. David, so I think the argument would be that if there's not enough labor, you just pay people more so that building stuff in America would increase wages, which would be good for people. You know, Dave, for a long time, like corporate earnings have outpaced

productivity and workers' earnings. So in real terms, worker earnings have not budged that much in many, many decades. So maybe this thing would be overdue. I'll also say the male labor force participation rate from 25-year-old to 54-year-old, so theoretically men who maybe should be working, used to be basically 100%, 97%, and now it's 89%. Maybe there are a lot of men who are

you know, in the basement, so to speak, and they should, maybe they should be in the factory. I am all for getting them out of the basement. I'm all for higher real wages. Who would be against that? This is a very strange way to find out. And when you're operating on assumptions, the only thing you know about a forecast and the assumptions is the forecast is wrong.

That's all we know about a forecast ever. I've been doing this for over half a century. Every time I made a forecast, the first thing I knew is it was wrong. If I could get close, wonderful. But a shock, which has a multiplier effect, second derivatives, which we don't even know, and we have imposed it globally, which means if it's fulfilled around the world,

We have raised the price level of the entire world. And what have we done? We've imposed sales taxes on ourselves. This is a sales tax on Americans by the American government. That's what it is. So call it for what it is. I would like to see it work out, of course. But markets are telling you.

They don't believe it. And economists are telling you this would be a strange outcome for this type of shock. The only people that are defending it are the existing politicians who are embedded with it, and now they're stuck in concrete. And that's going to be the question. Can they move their feet, pivot, and negotiate? Or have they created enough

enough expectation, enough sentiment change, that even if they turn it around, people say, wait a minute, fool me once, fool me twice. I don't believe you anymore. I don't believe anything you say. And if you're in a foreign location, I can't deal with you. You're crazy.

Now, Bill Ackman was out saying, I think it was Ackman, who said, sometimes you negotiate by being crazy and make the other side think you're crazy. I've had deals like that. But with government policies, you want to do that and have the head of the other government say, gee, I better make a deal with him because I think he's crazy? Think about what I just said. Is that a way for geopolitical events?

To be driven? I don't know. I'm skeptical. Yeah, I'm having a hard time, David, seeing if these tariffs are actually implemented at the current level. So there's no part of the deal. And this is just what the tariffs are. I'm having a hard time seeing how prices either won't go up massively or they'll go up massively and people won't pay them. And so there'll be a recession either in real time.

I think, David, actually, in terms of my judge of Americans is that these tariffs right now are not super unpopular. Obviously, everyone on Wall Street hates them and the market is revolting against it viciously. But I think that most Americans say, hey, I want to build things in America. A lot of Americans say, hey, I want to build things in America. You know, when I was growing up, we used to build things in America.

I mean, Fox News is making graphics of Donald Trump as a doctor who's fixing the American economy. So that tells me that the economic and financial pain that we have witnessed so far is nowhere near sufficient for there to change a mood in order to put pressure on politicians. What do you think? I agree with you, Jack. I don't think we've had enough pain. I don't think we're anywhere near the pain it takes to trigger change.

in the politician. The politician sticks to their guns until they run out of ammunition, and they are no longer believed, and the constituents pound them. And we have seen the beginning signs of some pounding in town hall meetings, and we just saw an election outcome in Wisconsin, and we saw margins in two elections in Florida. I live in Florida, two very red districts.

with margins shrink half of what the Trump margin was just a few months ago. Where this goes remains to be seen. Remember, we haven't had the tariffs in place yet. We haven't had somebody go by the car and say, sticker shock, oh my gosh, that's coming, but it hasn't happened yet. There are people who are thinking about it, but let it happen.

Let the first person have to face 10% higher for an automobile and say, holy cow, I didn't want to do that. Now that takes a while. It's coming unless there's a pivot. Right, David. And those tariffs are coming quickly. We're recording in Friday, April 4th, so two days after Liberation Day. And the floodgates

floor of tariffs of 10% on every country goes live tomorrow. So you know, midnight, midnight in one minute. So in basically 12 hours, we're gonna be in a 10% tariff world for us on the rest of the world. And then the reciprocal tariffs, which are in the rest of the world, which very greatly and we will get into their methodology. They are set to go in on April 9, which is a Wednesday. And if nothing has changed, yeah, I mean,

I think you and I alike, you knowing a lot more than me, are foreseeing strongly negative outcomes. David, let's just talk about how these tariff rates were set. I think the Trump administration and President Trump, when he was campaigning, he, and going back literally many, many decades, he's made the case that other countries tariff us, we don't tariff them. And I think that argument is

Number one, I mean, it makes sense to me, and I think it makes sense to many, many Americans, and it's quite convincing. I mean, if China is terrorizing us at 40% and we're terrorizing them at zero, it's so unfair to us. If Australia is terrorizing us at 40%, we're terrorizing them at zero. That's unfair. If the European Union, they're being so unfair to us. And...

David Gardner : So David I I also didn't know what to think about I didn't you know have enough confidence and hadn't done enough work to have a view on it really. David Gardner : But I found that argument a little bit convincing, but you know earlier this week I looked into it and the rates of tariff that other countries tear of us is not particularly high in in the EU it's.

5% to China, it's around 5%. It is single digit. India actually has very high tariffs in the double digits, which is very high for a large economy. But they actually have a trade surplus with the rest. Sorry, they have a trade deficit with the rest of the world. I think they have a trade surplus with us. So then you say, okay, other countries are, as President Trump would say, cheating at trade. So it's all about non-tariff trade measures. So you're

They're talking about a value-added tax, consumption tax, currency manipulation. So having a weak currency and other measures like in China, they just lend money to 1,000 different auto manufacturers at extremely low interest rates using the state-controlled banking system. And they stimulate industry. I think the more you go into that, it goes, David, from a China is tariffing us and it's unfair to...

you know china is just making cars at a cheap level and being more competitive than us and to me i if

Maybe I'm just too much of a stickler. I'm too much of a nerd on a lot. But if President Trump said, China is too competitive, the EU is too competitive, and we need to be more competitive, and we need to protect our industry, so we need to erect tariffs. To me, just intellectually, that would be a little bit more accurate, I think. But I'm having a hard time finding how EU and Australia and even China are

cheating at trade. And people in the comments may say, Jack, you're such an idiot, but look into it and tell me what you find, because I haven't been able to find that much. I'm in agreement with your assessment, Jack. Let's unpack it to see if we can simplify something. I'm a country and I have very low wage rates. I have poorer people than in the United States.

And I don't cheat on my currency. I allow the market to set the currency exchange rates. I don't intervene. I support my local economy. And my manufacturing wage is half of what yours is in the United States. And I sell to you. And you say it's unfair that you produce a product

and sell it to me at a price that I can't even match because of my cost structure in America. Is that unfair? Depends on your point of view. The word fair itself, in my opinion, is a four letter word that's applicable eight different ways depending on who's saying it and who's accusing someone else. If I manipulate my currency to make what I'm selling to you

cheaper than it ought to be, and you are buying from me at a price that is a bargain for you, meaning your 350 million American citizens are getting a subsidy from me at my expense to sell a widget to you. Do we really want to punish?

the 350 million Americans who are deriving a benefit at the expense of a foreign government that is making a policy mistake. I would say, bring it on. You want to make my life more

successful and pleasant today because you are imposing a policy on your citizens to subsidize me, the wealthy American, and your poor citizens are paying that price? Should I say I won't accept the subsidy? I want to pay a higher price so you behave differently? I mean, there are so many pieces to this.

If we think about the last time we did this, we imposed tariffs. We went through a depression. We came out in the 30s. We triggered economic changes worldwide. We fought a world war. After the war, we won. It's a good thing, or we wouldn't be having this conversation. What did we then do? We said, look, we don't want to do this again.

Let us give aid to rebuild our prior enemies, the Marshall Plan. Let us begin to negotiate a reduction round of trade. And we did. We had a general agreement on tariffs, and we created organizations to have trade. And we're the ones who invited China to come into the World Trade Organization.

Now, you think about 30 years of declining protectionism. What happened? Inflation declined. Real wages went up. The entire world benefited from a decline in protectionism. We are now the leading, leading country in the world, invoking protectionism in various forms and

sponsoring isolationism for America. That's what we're doing. So David, I think real wages did go up, but I think real wages for the other countries went up way more in the United States, maybe, I think. So maybe other countries, trade has been, and free trade has been better for China than it's been for the US. Where's the starting level? If you're way down here, you're going to accelerate

faster, and you're going to go farther. If you're here, if, I mean, look at the levels, the changes in levels. So what's wrong with a world where real wages are improving for a lot of people? They are invested in peace, not war. Their lifestyle improves. Their standard of living gets better. I've traveled to a hundred countries, Jack.

When you go visit a country where the income per capita is equivalent to a couple of hundred dollars a year, and you see large numbers of very poor people, and you think, gee, if they had one more manufacturing job structure, and everybody's income went up a few dollars a year,

It would be a 50% change, and it would be $50 a year per person, and it would be insignificant as we think about it. But the stabilizing effect and beneficial effect for the entire globe would be enormous, and it has been. And now we're going through a reversal. Where this leads, nobody knows. So if a politician says, oh, it's going to be terrific, maybe it will.

And if somebody else says, I'm worried about war and geopolitical instability, maybe they're right. We're playing with fire. And we're playing with fire because we're using massive shock. And we don't know how it's going to turn out. I would have done it differently. You want to raise tariffs 10% across the board and trigger it and stop.

and then go through a negotiating round. The markets expected that, people expected that. Trump had articulated enough as much as he's into hyperbole in his methods of communicating. But that was what the messaging had been. The delivery was with a club, not a small stick. And that's why we're getting the reaction we're getting.

So, David, you're making a full-hearted defense of free trade, which I'm glad we're having here in Monetary Matters. My critique was more about the methodology. But David, just to play devil's advocate, isn't in standard economic theory, from Adam Smith to John Maynard Keynes,

They love trade. They love, I make fish. David, you make shoes. I trade. I'm good at making fish. If we're catching fish, you're good at making shoes. The reality, of course, is funny is that you're a way better fisherman than I am. But and we trade in that there are gains from trade.

And if I don't sell as many fish to you as you sell me shoes in currency terms, that's fine. That's not a bad thing. Of course, there's going to be trade deficit countries and trade surplus countries.

Isn't it true, David, though, that countries, it was supposed to be a balanced game that, okay, maybe for a few years, I run a surplus. And I guess that strengthens my currency that makes me less competitive. And therefore, you're able to sell a lot more shoes to me and that then you have the trade surplus. And it's kind of like hot potato. Yeah.

And in other words, you know, we all everyone at, you know, after fishing goes and plays poker. And on Monday, I win a lot of money and I take it from everyone else. On Tuesday, you win a lot of money. You take it from everyone else. But there's there's a balance in that game. Whereas in the U.S. trade surplus, U.S. trade account, we have just run massive, massive deficits. And now China has a trillion dollar trade surplus, which is just absolutely massive. So do you I think,

Trump is saying that there's something unfair about that and that there is an imbalance there that needs to be resolved. Would you agree, even in principle, even in a small way, with the claim that persistently large trade deficits for the United States and persistently large trade surpluses for China are

Is it resulting, is it global imbalance and it's resulting in other global imbalances that might need to be rectified or addressed? Your thoughts. - Well, imbalances happen, no question, no debate there. So think about it. If the United States runs a budget deficit, it has to finance itself. Who lends money to the US? Americans lend it to themselves.

And foreigners who have the benefit of their incoming dollars paying for things they're sending to us take the dollars and recycle them. And so if we run a trade deficit, we run a current account deficit.

Surplus. A capital account surplus. So if you have to say, do we want to have a capital account surplus? Well, do we? If we're going to run deficits and have to finance ourselves, where are we going to borrow from? How are we going to get that?

And so there's two sides to the trade deficit. And there's a third piece, which we haven't spoken about. The United States runs about 1.2 trillion total trade deficit. Round numbers. The United States also runs a 300 billion surplus in services. Notice, notice, no one mentioned services on Liberation Day.

No one mentioned $300 billion in services. Now, what are the services? Leisure, hospitality, tourism. What are we doing? We are chasing away the tourists. Canadian flights to the United States are down 70%. I read recently in the log of the bookings of airlines. I live in Florida.

The largest cohort of foreign, non-American tourists that come to Florida are Canadian. In the last few days, I've been talking to hotels and restaurants, to a fishing guide on Lake Okeechobee. He had five Canadian bookings last year. He has one. So,

Do we want to hurt the restaurant in Florida that caters to a Canadian clientele that has decided not to come here because of what's going on in this battle with Canada? So this is not straightforward, just the trade deficit. The second thing is, if we want to expand services, the services surplus,

Where is it? It's in financial services. One of the great powers, great competitive advantages of the United States

is financial services. We are so good at it. We have such well-functioning capital markets. We have a regulatory and supervision structure which is trusted more than other countries. And we have a currency which is 60% of the world reserves. And we have a rule of law contractual system which we depend on.

And what are we doing with all these pieces? We're dismembering them. And then we have to ask ourselves, do we really want to be in a system, in a ruble or in a Chinese currency? Do we really want to adjudicate disputes in business in a Chinese court or in a Russian court? I mean, this is craziness. So the disruption we're having is massive. Where it leads, no one knows.

Will it pivot or not? We don't know. And as you said, and I agree with you, there has not yet been enough pain experienced by American citizens who are slow to anger. But when they get angry,

Their congressman is going to know it. And you know that's happening because you have had a political leader say to the members of Congress in his party, don't hold a town hall. Can you imagine in America telling a congressman, don't hold a town hall? And the ones who did and faced the fire.

and had discussions with their constituents, went up in esteem because they had the courage. They weren't spineless politicians. I admire a politician that is willing to take the heat

Most of them are afraid of their shadow and they're spineless. And that's why this is happening now. Well, David, that is something you cannot say about President Trump, is that he's spineless and that he can't take the heat. He seems quite willing to take the heat. Oh, well, he's in his second term. He has no political risk except what will come out of his own party. We did see a little change in the U.S. Senate.

For strange reasons. Where that will evolve, we don't know. Trump has put us on a course, and we will find out soon enough what the outcomes will be. Markets, Jared, don't like it. The man on the street has not fully encountered the change in prices.

The only people who have encountered the change are the federal employees who are being discharged continuously. And that's new. We haven't hit the man on the street yet. It's coming, but it hasn't hit him yet.

David, it's a really important point you made about the current account deficit. The U.S. has a massive goods deficit with the rest of the world. We import way more than we export. But when it comes to services, we export more services than we import. David, a lot of

services is restaurants, hotels, and the like, but a lot of services is what, you know, very highly advanced capitalistic companies. Basically it's just try them charging the rent. So anytime you buy an app that when you pay, you're paying the app company, Apple takes, I don't know, is it 20 to 30 and maybe even higher percentage of that. And it calls that services PayPal, a company that, you know, I've looked into it in the past.

When you have just errant cash in your PayPal account or on Venmo, they earn interest on that and they call that value-added services. So a lot of services is just kind of the US charging the other country's

And maybe if there's retaliation, those other countries might not be so keen to be charged rent. And also, we have a massive, massive capital surplus. The way that the balance of payments balances is China runs massive surplus, India, all these countries, Europe, massive surplus. They recycle those dollars back into U.S. financial markets.

That's why the stock market is so high. That's why the credit spreads are so low. That's why despite the mammoth amount of US government debt, the 10-year is not at 10%. Basically, from the 1980s, debt has gone nowhere but up and yields have gone nowhere but down with some exceptions.

David, I feel like people... I shared my own views, David, in an interview yesterday, a conversation yesterday. And from my own audience, I got very negative comments, which I'm very lucky that it's rare that I see a negative comment. So it did strike me quite intensely, to be honest. But I think people think I'm making a moralistic claim that

I tear protectionism is bad and free trade is always good. You seem to think that I'm glad that you came on for balance to make that case. I'm not even saying that. I'm just thinking that I think the more tariffs, if these tariffs are invented, that there's going to be massive economic pain and that financial markets are going to decline in value. I'm not making a claim that, you know, that's a bad thing. I'm just saying that's what I think is going to happen. Well, we're going to find out.

This is a new course of action for the United States in size and scope. And therefore, what tomorrow is, is going to be a surprise for all of us. But I would add one little thing to what you said. The biotech company of 18 employees that was in Princeton, New Jersey, in a matter of a month and a half, is in Austria.

16 of the 18 worked there, and two took the payout. Biotech. The biotech in Spain, instead of the United States, which is chasing a new cure or a new treatment, is in Spain, not in the United States. So if you take the creative energy, the innovation, and you take the talent

and you say, listen, you don't have to put up with all this craziness. Come here. Be here. Innovate here. Learn here. Research here. And what you develop, the world will, if interested, will purchase, and they'll purchase it here. That's globalization. Now,

The detractor who emails me, by the way, Jack, when I write the Kotak report and put out a newsletter, and I suspect I think you're on my list and see you. And now I get hate mail too. I get called all kinds of names. That goes with the territory. But if you think about where is innovation getting incentives, and if you make it more difficult,

you create more turmoil. Uncertainty is a magic cliched word because it says we can't assign a probability to an outcome. We don't know, which means it can be anything. So it's been overworked, but it's true. My view is enough damage has already been done by Washington in less than 100 days to plant the seeds of distrust everywhere.

for a year, for two years. So it's not reversible. It's already happened. Whether we see the outcomes from it remains to be seen. No one tracks the company of 18 employees that was in Princeton, New Jersey, two months ago and is now in Austria.

It's a speck on the radar screen. It's happening. And the same thing is happening with the very wealthy, the family office. I personally know two large family office components that are becoming citizens in the European Union because the cost of a couple million to have a citizenship and dual passport is small. What happens to the capital flow?

under those conditions. They don't give up American citizenship. They remain an American taxpayer. Where's the capital redeployed? In the United States growing or somewhere else? And I see that happening because I'm in a consulting type of business. And who are my clients? Rich people. Poor people cannot become a citizen in Malta. They don't have the money to buy the citizenship.

David, what are you seeing amongst the very wealthy? Because I'm just someone, I look at the stock market's crashing and the dollar is selling off at the same time. Normally, as you know, the dollar rallies when there's a risk-off episode. To me, that interpretation says foreigners and wealthy foreigners are selling assets and they're basically pulling money from the American stock market and America itself, the dollar itself. Are you seeing that in what you're observing either within domestic

wealthy folks or international rich people? The answer is yes in both. And you can have a metric for it. And you can look at the credit default swap on the United States trading in euro. And when I looked yesterday, the one-year, five-year, and 10-year tenors, which are the key maturities, were all above 40 basis points. 40 basis points.

on the credit default spot of the United States of America, denominated in Euro. Now you say to yourself, well, why don't we see it here? Why aren't our interest rates 40 basis points higher? Because they are being stabilized here by the Federal Reserve. And you saw the Federal Reserve take a step towards stabilizing by reducing the QT. Now,

It was a divided vote. Okay, we had a governor, we know him, and he voted, he dissented rare, didn't dissent on the interest rate. He dissented on taking QT lower. Chris Waller is a very skilled economist and central banker. I know him personally. He's sharp and smart. He's worried about the inflation risk. And now you have J-PAL today saying,

I'm worried about the inflation risk coming from the tariffs. We have to stay where we are right now for the Fed. The Fed cannot fix the damage, Jack, from a tariff war that it didn't create. The Fed cannot fix a supply shock. It doesn't create them.

just like it can't fix an oil supply shock. The Fed doesn't know how to drill for oil. We are facing the shock. So this is an experiment, a grand experiment in the history of the country. We're in the middle of it, watching it in real time. And every day we're going to get up and it'll be new and different. Look how exciting it is for you.

I enjoy watching you. You're a little younger than I am, so you can enjoy the excitement more robustly. I am enjoying this. I mean, you mentioned oil. I just want to mention that Brad Setzer, an expert in trade and in balance of payments, who was a senior trade advisor to the Biden administration and has served in the Treasury administration as well, I saw him share his analysis that if the Trump tariffs that were announced on Wednesday, Liberation Day, are actually implemented—which

which again, they're so high that they might do a deal and lower them and they still be super high and cause a recession. So what I'm saying,

if those super high rates are actually implemented, it would be close, basically the same as a $100 increase in the price of oil. Not oil going to $100, $100. So it's at $60, it's gone down a lot. So $160 oil, that's basically where it got in 2008. And also if there's a price shock from tariffs,

people might not just buy stuff. Like they is, you're assuming it's a 2022 scenario where people buy stuff and that, you know, there's a clearing price. People, there could just be a recession. But David, I want to share your insight. And do you have any advice or counsel for people in the market now who may be perturbed? How should people be thinking? How should people be feeling? What advice do you have to them so they don't do something stupid? Valium is good.

A shot of whiskey, if it's a good shot of whiskey. I like mine neat at five o'clock in the afternoon. It's good for my arthritis. I always say to investors, to the investor class, panicking in the midst of a shock is a dangerous thing to do. The time to panic is before you should panic.

So if you were worried about transitions, you should have made portfolio. I don't like the word should. I want to take that back. You could have made portfolio changes in anticipation of disruption six or eight weeks ago or two months ago. If you didn't do it, and now you're looking at a NASDAQ that is 20% lower and say, oh, I'm going to get out because it could go down another 20%.

Well, maybe it could. Maybe it will. But history would say there is a durability in this great American system of ours, even when it is tested as severely as it is currently tested. Now, I've always been a believer in that, Jack. And I remember an oil shock. I was in the business when the oil price was $3 and went to $12.

because of a war in the Middle East. So I have a little memory of an oil price shock. I can't remember much about what happened since, but I can remember that. Shocks in a resilient economy end up triggering innovation, higher productivity, and we go through turmoil, and then we come out the other side. The oil price shock in 1973 took eight years.

Those were rough. I was in them. I was young, but I was in the business managing portfolios. I watched what happened to interest rates and employment, the supply shock from an oil shock, which you just brought up as a possibility. I watched that shock. We could have that again. The question, I think, is how much would the country stand then eight years? Now,

I don't think Americans have that patience. So my suspicion is more pain, market turmoil, sentiment damage already done, take a whole year to replace it, to repair it under the best circumstances. But I still believe there's a resilient quality to the United States in our system, regardless of the disruption

that a president and his inner circle are trying to introduce. My biggest worry is not in the economic side, it's in the public health side, because I've devoted my entire life, as you know, to that area. And the damage I see happening in the health sector worries me. And it worries me economically, because the health sector in total is 18% of GDP in the country.

And it's one of the reasons I'm still here and alive. You know that. So I'm more worried about that than I am against the price of an imported French wine. I'll drink it anyway, and it'll be 25% higher. Thank you for that, David. And I'll just add to that, that if people sell now because they expect a market decline of 20% from here,

And they're correct, but they don't get back in at the bottom and they don't get back when the price goes up another 20 or 25%. And then they don't get back up once it's a new bull market. Once again, that is also a great risk. So people should be aware of that risk. David, you mentioned public health. You've got a new book out called The Fed and the Flu, Parsing Pandemic Economic Shocks.

Tell us about your book. Why did you decide to write this? What's it about? And what does the history tell us about the connection between public health and financial markets? Well, thank you. The book was an enterprise of the last four years, Jack. I have three wonderful co-authors. Without them, this book wouldn't be possible. And we addressed...

the idea of pandemics, epidemics, plagues, and what are the economic effects and outcomes in wages, inflation, in payments. How do you translate the shock of a plague to the economic financial elements? There are a thousand books about pandemics, epidemics, pathogens, and disease. We don't need another one about that.

And there are a thousand books about economics and its characteristics. What we tried to do is take the two, look at the transition. And it was triggered by a research paper that was done at the very beginning of COVID by three very sharp economists out at the San Francisco Fed. And the paper is referred to in the book and how it operated because it was so important.

And then we decided let's build on their work because this is so good. It could be a book. So they looked at 19 pandemics over 800 years using the Bank of England database and they came to some remarkable observations. All 19 had similar economic outcomes.

Now, they might be more modern versions, but what happened was about the same in trajectory and time. We looked at that and said, can we find more evidence to support that conclusion? So we did, all the way back to ancient Greece, to antiquity. And sure enough, the human being hasn't learned anything when it comes to an epidemic or a plague. We behaved the same.

Anyway, that hasn't changed. And the observations of that are in the book. The support for that statement is in the book. What happens to money, wages, inflation, assets in the book, all of that is described. And I could do a two-minute summary.

David, actually, we are going to end this conversation now because we just wanted to get a quick update there for our audience over the weekend. Accomplished investors such as yourself, what you're thinking about tariffs and the market turmoil, people should check out. And by check out, I mean buy the book.

But we are right after this going to do a long-form interview about the book that we are going to release later in April because the content, you know, going back to ancient Greece, it's a little bit more evergreen. So people can find you, David, on Twitter at David Kotak GIC. The GIC, of course, stands for Global Interdependent Center. People should check that out. I, of course, am on Twitter at JackFarley96. And people can find Monetary Matters on Apple Podcasts, Spotify, WeChat.

wherever else shows are found and also on YouTube. If you are on YouTube and you're watching it, please like and importantly subscribe. I think something like 70% of people who watch our content are not subscribers. Why? You got to subscribe to it so you don't miss our interviews. David, thanks again. And thanks everyone for listening. Thank you, Jack. Thank you. Just close this door.