Hot take on Tarriffs/Markets/Trump...
What do we think? Does anyone else believe the Trump admin is trying to kill the market so we can lower yields and continue feeding the debt fueled economy at a more reasonable interest cost? We now spend more per year on treasury interest than on military spending. I saw this take recently online and wanted to bring the convo here. Lets try to keep the discussion macro focused, your personal thoughts on the president as an individual have already been expressed by others, so lets keep it professional.
Based on the most insightful WSO discussions, tariffs under the Trump administration have been a double-edged sword for markets. While the administration's "America First" trade policies aimed to protect domestic industries, the implementation of tariffs often led to higher consumer prices and retaliatory measures from trade partners, particularly China. This created uncertainty in global markets and put pressure on sectors reliant on international trade.
The idea that the administration might intentionally "kill the market" to lower yields and manage debt costs is an interesting theory, but it doesn't align with the broader economic strategies observed. Trump's policies, such as corporate tax cuts and deregulation, were designed to stimulate growth and boost market confidence. However, the trade wars and protectionist measures did introduce volatility and risk, which could indirectly impact yields and debt servicing costs.
It's worth noting that the U.S. spending more on treasury interest than military spending is a significant macroeconomic concern. Rising interest rates, as seen in recent years, exacerbate this issue. The Fed's monetary policy, including rate hikes, plays a critical role here, as higher rates increase the cost of servicing debt. While the Trump administration's fiscal policies, including tax cuts and increased spending, contributed to the growing deficit, the broader structural issue of debt-fueled growth predates his presidency.
In summary, while the administration's policies had mixed effects on markets, the notion of intentionally suppressing markets to manage debt costs seems unlikely. Instead, the interplay of fiscal policy, trade tensions, and monetary policy created a complex environment with both opportunities and risks for investors.
Sources: https://www.wallstreetoasis.com/forum/investing/the-trump-effect-on-markets-a-financial-not-a-political-analysis?customgpt=1, https://www.wallstreetoasis.com/forum/trading/trumps-trade-war-are-consumers-and-investors-screwed?customgpt=1, The Truth About Trade, You Ready? | The Daily Peel | 1/11/21, Margs with Daddy JPow | The Daily Peel | 5/5/22
I wouldn’t be surprised if this is the rationale, though this would be one of the gutsiest propositions I have seen an administration undergo. With all things considered, this does align with Bessent’s goal of a lower 10yr yield that he has been very open about, but at the same time, you have to rely on some pretty extreme assumptions regarding investor sentiment and the Fed’s reaction to make this plan work out.
We all know there are near-term inflationary risks associated with Trump’s tariffs, and the question becomes whether the Fed when looking at the macro economy will place more emphasis on that near term inflation risks or if it will focus (correctly) on the downside risks to growth that will lower medium-to-longer term inflation concerns.
This is not that outlandish of an assumption for the Trump admin to make since it is probably likely with cooling wage growth and a fairly tight labor market that the Fed will focus on its long run outlook.
However, investors are still trying to piece together the rationale for tariffs and how to fairly price treasuries, but I think with Trump himself and his cabinet pushing the contraction narrative, they are most likely trying to squash any inflation narrative for investors by spooking markets (which has somewhat worked so far).
Also the 10yr is inching towards its yield floor, so Bessent needs a cut in the federal funds rate if he wants to break below 4% specifically.
Honestly interested to see if this is a gross over-analysis of Trump having poor trade policy insights/Trump trying to give farmers a case for subsidies since they contributed significantly to his campaign.
Your rationale is logical. This would be one of the ballsiest things a president has ever done if this is his intent and its pulled off successfully. Personally, I think he’s thinking more in terms of boosting domestic manufacturing and increasing revenue (to try and balance the budget and/or offset tax cuts), but we will see. Going to be an interesting year.
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