This is an audio transcript of the Unhedged podcast episode: ‘Tariffs up. Markets down’
Robert Armstrong
And the fifth angel sounded. And I saw a star fall from heaven unto the earth, and to him was given the key to the bottomless pit. And he opened the bottomless pit. And there arose a smoke out of the pit, as the smoke of a great furnace. And the sun and the air were darkened by reason of the smoke over the pit. And there came out of the smoke locusts upon the earth, and unto them was given power, as the power of scorpions of the earth have power.
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That’s Revelations 9. I read it to capture the mood of markets this morning, the day after Trump announced his reciprocal or so-called reciprocal tariffs.
Aiden Reiter
So-called is right.
Robert Armstrong
This is Unhedged, the markets and finance podcast of the Financial Times and Pushkin. I am Rob Armstrong, coming to you from Unhedged headquarters in New York City, a city that is still standing as of 10.06 this morning. And I am joined by my colleague Aiden Reiter. Aiden, how are you enjoying your apocalypse?
Aiden Reiter
You know, I was just saying that I put on a tie today because if the ship is going down, you may as well look nice.
Robert Armstrong
Yes, that’s what I’m talking about. It’s like Admiral Nelson standing bravely on the poop deck as the bullets fly around him.
Aiden Reiter
Or the people on the Titanic playing the violin as it sank slowly into the waters.
Robert Armstrong
Yes. So let’s just go through the numbers. These may be completely, almost certainly will look completely different by the time you listeners are listening to this podcast, but S&P down well over 3 per cent, the Nasdaq down well over 4 per cent, Big Tech is getting killed, Apple’s down 9 per cent, the banks are getting murdered, the dollar’s down 2 per cent, Treasury yields have fallen 18 basis points. For those of you who don’t nerd out on Treasuries, that’s a big drop. Europe is down, Japan is down. China is only down a little bit. Oil is down $5 to $67. So everything, it’s a sea of red, to use a somewhat biblical piece of imagery for you. Where do you wanna begin, Aiden? There’s so much to say and reflect upon here.
Aiden Reiter
Well, maybe let’s go to the news conference that our president gave us yesterday.
Robert Armstrong
OK, great.
Aiden Reiter
So he came out and, you know, there was a lot of fanfare. He brought in a retired union worker and then he laid on the tariffs. And these tariffs were much bigger than people expected.
Robert Armstrong
Much bigger.
Aiden Reiter
Right? We had gotten a couple of Wall Street estimates saying, oh, well, you know, the effective tariff rate after this might be between 10 to 20 per cent.
Robert Armstrong
Most people were even in the low end of that, like 10 to 15, kind of. (Buzzer sound) (Laughter)
Aiden Reiter
Exactly. And you know, totally wrong. It seems like the US’s now-effective tariff rate is somewhere between 20 and 30. That makes us ironically, one of the highest tariff nations in the world.
Robert Armstrong
Yeah, no, it’s . . .
Aiden Reiter
Or at least in the developed world, I should say.
Robert Armstrong
We’re back to, you know, almost 100 years ago. The last time we had tariffs this high it was the era of the Smoot-Hawley tariffs. Smoot-Hawley is one of those phrases people use to scare economists’ little children into eating their vegetables.
And I thought what was most important, and part of what the market is responding to here, is that he said, President Trump said very clearly this reciprocal, reciprocal, reciprocal. What they do to us, we are going to do to them.
And the reality of the tariffs, even under the most charitable interpretation, is not that. Starting with the fact that every country, whatever their tariff status, gets 10 per cent. So right there and across the board, a 10 per cent tariff is not a reciprocal tariff. That’s point number one.
Point number two is this absolutely . . . I was gonna say something else, but I’ll say unusual calculation they use to arrive at the tariff number.
Aiden Reiter
Yeah. So maybe it’s worth backing up a little on reciprocal tariffs, and that this was an idea that had been kicking around the Republican world for six to seven years. In 2019, it was brought up by a bunch of people in the House saying, we’re gonna go line by line on other people’s, on other countries’ products. So you charge me 10 per cent for coffee, I’ll charge you 10 per cent for coffee. If you are somebody who knows how coffee works, that’s a bad idea. The United States does not make a lot of coffee, whereas Columbia makes a tonne of coffee. Matching their tariff would result in much more expensive coffee for all Americans.
Robert Armstrong
Even barring the fact that reciprocal tariffs are difficult, right? This is not them.
Aiden Reiter
Exactly. This is not line-by-line reciprocal tariffs as they originally, you know, put out. And this is also not exactly matching the reciprocal rate — you know, the average effective tariff rate of other countries.
Instead, they used what seems like a very bizarre calculation, which is you take the US’s bilateral trade deficit with every country, divide it by the imports to America. So America, the things that you get . . .
Robert Armstrong
Of each country, yes.
Aiden Reiter
For each country and divide by two. Now, I used to be a consultant, which meant I made up a lot of math. This is really dumb made-up math.
Robert Armstrong
Yeah. Well, what it shows you is what fundamentally, like I don’t understand and I don’t know anyone who does understand why you would choose that particular calculation, but it does have one salient characteristic, which is that it bases the size of the tariff on a given country fundamentally upon that country’s trade deficit, not its tariff levels, not what you do to us, we do to you. It’s fundamentally if you have a high trade deficit with us, you’re gonna get a high tariff. Again, this is not a reciprocal tariff by any description. And it implies that any trade deficit the United States may have with another country is because of unfair treatment by that country of the United States.
Aiden Reiter
It makes sense in that, you know, originally when Trump started hitting on tariffs in his first campaign, it was all about bilateral trade deficits. So in that regard, this sort of makes sense, but as you said, it’s not reciprocal.
But where it doesn’t make sense is it’s really looking at the absolute value of goods coming from these countries either, right? This is just based on percentages. So if you have a country like Laos, for example, it has very high tariffs because they are a very closed, authoritarian nation. They don’t do a lot of trade with US to begin with. Because they have such high tariffs, even though the reasons we’re not trading with Laos have almost nothing to do with unfair treatment, we are now charging them 48 per cent, because they essentially have this 95 per cent tariff rate that they calculated.
Robert Armstrong
So we have to kind of highlight that this calculation is so strange that it actually makes it more difficult for the world to know what happens next.
Aiden Reiter
Yeah. I spoke with a former leader of the WTO, and his point, and he used to be a trade negotiator for the United States. And his point was, well, one would think that originally, if you’re gonna have these negotiations, they’d wanna understand what was going behind the numbers to say, oh, well, you know, you’re saying that’s a VAT, but actually that doesn’t apply to US products, etc. But this has nothing . . . It’s not based in reality really. So based on what . . . (Overlapping speech)
Robert Armstrong
Right. So what do you negotiate? And also, I’ll just read this quote, which comes from a Wall Street strategist. It was quoted by our colleague Robin Wigglesworth this morning. And I love the kind of administrative understatement of this quote. This analyst wrote: We worry this risks lowering the policy credibility of the administration on a forward-looking basis.
Now I think what that means is, if everybody thinks the administration is as crazy as a sack of ferrets, that is gonna change their risk appetites in a significant way.
Aiden Reiter
Absolutely, and I think that’s being really reflected in the bond market.
Robert Armstrong
Yes. So yeah, Treasuries are off 18 basis points. That’s growth expectations coming down. It’s flight to safety because growth expectations are coming in, is how I would describe it. The two-year, by the way, is also down. So it’s all across the curve, major step-down, on top of decreases in bond yields that we have seen in recent weeks and months. So this is a big move, given where we started from, and we’re clinging to above 4 per cent. And I don’t know, I should look up where we are right now. But I wouldn’t be surprised if there is a three in front of the 10-year bond yield when we close the day, which would be a very significant moment.
Aiden Reiter
I mean, to some degree, it might also reflect people expecting the Federal Reserve to cut later this year more than they had priced in. By looking at trade-implied futures last night — I haven’t checked this morning — originally they were pricing in three 25-basis-point cuts. It seems like they’re edging up towards more, thinking that the growth is going to be much more impactful than the inflation.
Robert Armstrong
Yeah. Let’s talk about, that’s an important point you bring up, let us talk about how the Fed is gonna respond to this, because it’s a pretty tough position they’ve just been placed in.
Aiden Reiter
Yeah. As we’ve said a couple of times on the podcast, the Fed has been staring down stagflationary pressures from tariffs, right? They slow growth and they kick up inflation. This is a supercharge of both those pressures, right? So they’re still caught between the same issue, but it’s just gonna be a question of which side of their mandate is going to take over.
Robert Armstrong
It’s the moment of truth. Which one do you really care about, employment or the inflation rate?
Aiden Reiter
Exactly. So I spoke with some people who used to work at the Fed and they suggested that after a three-year struggle with the inflation numbers, they’re going to be really dragging their feet on making a cut.
Robert Armstrong
Yes. So imagine the following scenario. We do see these tariffs increase inflation, which it makes sense they would in the short term. We can have an argument about what adjustments come in six months, whether things normalise a little bit. Even if the importer absorbs some of it, the consumer is gonna get some of it. So we’ll get some inflation. And suppose all of this causes a real growth slowdown. And the Fed comes out and says, we’ve gotta focus on the inflationary bit. We’re not budging, we’re not cutting rates. How is this administration gonna respond to that from the Fed?
Aiden Reiter
Yeah. This administration will be very angry, right? They want . . . Trump has wanted the Fed to cut even before this. Interestingly, you know, some people on Wall Street have talked about well, but there might be a Fed put, right? If the economy gets really bad the Fed is going to step in. But this is not Covid-19. This is not a moment where we know the entire economy is about to completely grind to a halt. It’s going to take a couple of months for numbers to really show up in the data, right? Inflation, labour data, they’re all moving.
Robert Armstrong
Right, so it’s a very important question for the Fed and all policymakers around the world to think to themselves, am I gonna react to the first move in markets or in the economic data, or am I gonna sit on my hands for a while and watch how this develops?
Aiden Reiter
And I think based on recent comments from Fed chair Jay Powell, they’re gonna sit and wait.
Robert Armstrong
Good guess.
Aiden Reiter
Yeah. I mean, we’ve spoken before about, you know, the Fed doesn’t wanna get into a little tango with the market where the market thinks they will start coming in to save them. And the Fed then feels like, oh, well, I have to come and step in because the market is falling, right? Japan has sort of made that mistake in the last two years. So we don’t wanna wade into that territory, and Chair Powell certainly does not want to.
Robert Armstrong
Quite right. Now, I think we should talk about one really good thing. And I think it is being overlooked, but it’s really important, which is the relatively soft treatment that the administration meted out to Canada and Mexico, right? That it will continue to be the case that the USMCA — am I getting that acronym right?
Aiden Reiter
Yes. Although they call, in every country they call it different. In Canada they call this the CMUSA.
Robert Armstrong
(Laughter) OK. But this is the trade deal that Trump struck in his last term with our immediate neighbours Canada and Mexico. And it exempts a very important subset of goods trade from tariffs: basically goods that were originated mostly somewhere in the Americas. One of the three countries gets soft treatment and that stays in place. And Canada and Mexico will not face additional tariffs, which was on the table and thought about.
And that, for me, this is a ray of sane sunshine on an otherwise cloudy day full of insanity because we know, we learned from Brexit, for example, that geographical proximity is extremely important to trade and these are our immediate neighbours and we know it would be bonkers to turn all those supply chains that cross and recross those borders. It would be bonkers to just throw those all away.
Aiden Reiter
Yeah, Canada and Mexico are our largest bilateral trade partners. That being said, some people might say this, oh, OK, USMCA is gonna stay in place, or this could just be a reprieve for a little bit.
Robert Armstrong
Yeah, and speaking of reprieves, it was very interesting, I thought, that the items where we expected industry or sectoral tariffs were not included, are exempted from these national tariffs. So we’re talking about pharmaceuticals, lumber, copper and . . . Those are the big ones, I think. And those are precisely the areas that the administration has flagged as being national security interests and so forth. So we know that those didn’t get away scot-free. There is some set of tariffs. Oh, semiconductors was the fourth one, right? Well, there is some more news coming on the tariffs in those very important industries. That’s a sword of Damocles that is still hanging over the head of the market.
Aiden Reiter
Canada, Mexico, industrials — not for now, but eventually.
Robert Armstrong
Interesting that the dollar is down. My little tariffs 101 handbook, which I read when all this stuff kicked off, told me that tariffs should be dollar positive, right, that you increase the price of imports. The way the system adjusts is that the dollar goes up, which makes imports more affordable. It’s the relief valve. But we’re not seeing that this morning.
Aiden Reiter
No, we are not.
Robert Armstrong
What do we make of that?
Aiden Reiter
It could be partially a reflection of the growth slowdown, right, so people think that the US will grow more slowly. It could be a reflection of a flight to safety to US Treasuries, in part.
Robert Armstrong
Yeah. But that would actually go the other way, right, because that would create demand for dollars to buy those Treasuries with.
Aiden Reiter
But that suggests that the flight to Treasuries we have seen is from within the US, as opposed to (overlapping speech).
Robert Armstrong
Yeah, it’s probably more from within the US. And there’s always, of course, technical explanations, especially on the first day after something like this happened. It could be that a bunch of traders were wildly on the wrong side of the bet and everybody’s scrambling to get on the right side of the bet, and the dollar can keep on rising tomorrow once the deck chairs on the Atlantic have been appropriately rearranged. The Titanic. Yes, that’s what I meant.
Aiden Reiter
The Titanic, yeah. The Titanic was on the Atlantic, right? (Robert laughs) I mean, it could just be also that there’s going to be a global growth slowdown, and that has not kicked into a dollar smile just yet, but eventually it will.
Robert Armstrong
It might, yeah.
Aiden Reiter
And for listeners who don’t know the dollar smile, the idea is when the world economy is doing poorly, everybody floods back to the dollar. When the world economy’s doing great, people go to the dollar.
Robert Armstrong
Yeah, but it’s in the middle that it tends to fall. Interesting also, another thing that surprised me a little bit, gold is down this morning. It bounced a little bit, but gold, as our listeners will know, has been on a staggering run. It’s over $3,100. You know, when it was $2,100, everyone said, oh, this is as high as this can possibly go. Demand for gold gets destroyed in the 2000s. But nope.
Interesting it’s falling. What that suggests to me is people are selling everything that isn’t nailed down. In other words, people wanna get liquid, as they do at moments like this, and it doesn’t matter if it’s gold or anything else. Just sell it, or sell a little bit of it.
Aiden Reiter
But you know, it did go up right after his announcement. So, you know, there was an immediate run to fear. Or run away from fear, I guess.
Robert Armstrong
Right. OK, here’s a question for you, Aiden. We got this one note of sanity among the cacophonous irrationality — this moderation of the position towards Canada and Mexico. Do you think that signals — and I certainly hope it does, but I honestly don’t know what to think — that what we’re seeing is the first round, the first hyper-aggressive round of a negotiation that the United States has initiated, then that we might see moderation in the weeks and months to come?
And we also don’t know, frankly, how other countries are gonna retaliate. But there’s one signal in the market that suggests that they might retaliate strongly, which is that the big US tech companies in general, and Apple Computer in specific, are getting absolutely kicked in the teeth this morning. Apple was down like 10 per cent at one point.
And what that tells me is those are the American companies par excellence and they are gonna have a huge target painted on their forehead. They’re also the most expensive things that have run up the most and maybe you just sell them because you have huge gains in those already. But I also wonder if people are seeing the European Union, who got a 20 per cent tariff slapped on them yesterday, is gonna go after US tech and US services.
Aiden Reiter
That’s possible, right? But I read that as these are companies that have incredibly integrated supply chains in Asia specifically, and there are extremely high tariffs on Asia, both because a lot of countries in Asia have relatively high effective tariff rates on the United States for a variety of reasons, industries they wanna protect, etc.
But reading between the lines, it seems like they might have settled on this calculation approach because it both targets China and targets the countries around China that China has tried to use to get around US tariffs in the past. So, again, the calculation could have incorporated that, couldn’t have, who knows. But the point is, tariffs on Asia are particularly high.
Robert Armstrong
I’m glad you mentioned this and I have a question for you, smarty pants. Our rough guess is the tariffs on China, once you stack them all up, meaning you put the new tariff from yesterday — what was the new tariff we got yesterday?
Aiden Reiter
We got 34 per cent on China.
Robert Armstrong
34 per cent and you add that to the 20 per cent already in place and you get to over 50 per cent. And it was confirmed by the White House yesterday that that’s . . . We’re talking about 50 per cent tariffs.
Aiden Reiter
And it could be higher, because first of all, there were already tariffs in place both under the Trump and Biden administrations. So the effective tariff rate on China was already something like 6 to 7 per cent, I believe. So, all right, that takes you up to almost 60.
And then you have the Venezuelan oil tariff. China imports oil from Venezuela, as does the US, we should note. And Trump said he would put 25 per cent tariffs on anybody that imports Venezuelan oil. So that brings our tariff currently on China, our largest bilateral deficit, and essentially the factory floor of the world, to almost 100 per cent.
Robert Armstrong
Yeah. It’s hard to imagine that will really happen, but even if it’s 50 per cent, it’s unbelievable.
Aiden Reiter
It’s crazy.
Robert Armstrong
I mean, the dollar stores are down, but, like, all the stuff we import from China, right? You know, I mean are you gonna pay, like for all that annoying plastic stuff you buy for your kids, are you gonna pay 50 per cent more for all that stuff?
Aiden Reiter
And then on top of that, this bit going back to the tech companies, not only are they very well-embedded in China, they’ve tried to diversify to other countries. Apple’s trying to diversify to Indonesia, to Vietnam. (Robert makes buzzer sound) Yeah, exactly. (Robert laughs) You’ve completely undercut their industrial strategy.
Robert Armstrong
Wait, here’s the question I wanted to ask you because you know so much about China and you’re so clever. Chinese stock market is down less than 1 per cent this morning after a 50 per cent tariff from the United States. Explain that to me.
Aiden Reiter
Well, we’re assuming that Chinese stocks were always about, were all about fundamentals.
Robert Armstrong
Yeah, fundamentals. Yeah, that’s fair.
Aiden Reiter
And they might not have been . . . They were also probably undervalued. Also, the tech surge is definitely a big part of the story in China, and that hasn’t been changed by this. And if anything, you know, investors in China might be feeling that with US growth about to plummet, with United States’ soft power now really, really hurt by this, China might be poised to take advantage of the situation. But that might be reading too much geopolitics into the stock movements. I mean, you’re the one with a PhD, you tell me.
Robert Armstrong
(Laughter) We haven’t mentioned, Aiden, the most important topic of all in this whole discussion, though.
Aiden Reiter
What would that be?
Robert Armstrong
Which is penguins, as you know. The penguins have been taking advantage of America for a long time, which is why the White House announced yesterday a 10 per cent tariff on the McDonald Islands.
Aiden Reiter
And where are the McDonald islands?
Robert Armstrong
I don’t know, but I have been told by reliable sources that the only people who live on the McDonald Islands are penguin people. So those penguins are about to learn a hard lesson in the costs of taking advantage of Americans.
Aiden Reiter
Do you think Trump was bought out by the seal lobby?
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Robert Armstrong
(Laughter) We will hear more about the various lobbyists coming to the White House from the animal kingdom after a short break.
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Listeners, welcome back. This is Long and Short, that portion of the show where we go long things we like and short things we don’t like.
I’m gonna go long Tips (Treasury inflation-protected securities). As several bond traders told me yesterday, Tips do really well when inflation is headed up and growth is headed down. And it sure feels like we’re in one of those situations now. So I like the tip here.
Aiden, are you long or short than anything?
Aiden Reiter
I am. I am short the spending power of the average American. Not that I don’t like it, but I don’ think it’s going to do well after these tariffs. I think we do a little bit of a disservice to the world when we call tariffs tariffs. Really they are taxes, and they are going to disproportionately hurt lower-income Americans who spend more and more of their weekly pay cheque on the essentials or cheap goods that might come from China. This is going to really hurt their wallets. And they’re also going to be facing a lot of the pressures of the slowdown, more so than other households. So I am concerned, and I think we all should be.
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Robert Armstrong
Listeners, these are crazy times, so until we come back into your feed next week, stay sharp out there.
Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. Special thanks to Laura Clarke, Alastair Mackie, Gretta Cohn and Natalie Sadler.
FT premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to FT.com/unhedgedoffer.
I’m Rob Armstrong. Thanks for listening.
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