Month: March 2025

CONSUMER WATCH

The Bank of America Institute data suggest a decent February (over a weak January), particularly in services:

Consumers’ credit and debit card spending per household dropped 2.3% year-over-year (YoY) in February, compared to a rise of 1.9% YoY in January, according to Bank of America aggregated card data. However, that decline reflected the extra leap day in February 2024, which boosted spending last year and depressed the YoY growth rate for February 2025. Seasonally adjusted (SA) spending per household rose 0.3% month-over-month (MoM), with the three-month seasonally adjusted annualized growth rate (SAAR) at 2.4%.

Spending continued to be strong in services in February on a MoM basis, though there was a continued decline in restaurant spending. Additionally, retail spending (ex- gas and restaurants) was flat MoM, after declining in January.

Via The Transcript:

• “In February, our first quarter trend started out weaker than we had planned or expected. Now I think that’s consistent with what you’ve heard from other retailers who’ve reported.” — Burlington Stores ($BURL ) CEO Michael O’Sullivan
• “We are lowering our RASM guide today by 3 points to an increase in the 2% to 4% range year-over-year…2 points are primarily due to softness in bookings and demand in large part due to the macro environment.” — Southwest Airlines ($LUV ) CEO Bob Jordan
• “There’s certainly — we have also seen weakness in the demand market. It started with government…we’ve seen some bleed over to that into the domestic leisure market. Good news is that international, long haul, Hawaii, premium, all remain really strong. But we have seen government and some low-end consumer leisure weakness, which also appears consistent to me with a lot of other data that they look at.” — United Airlines ($UAL ) CEO Scott Kirby
• “Every CEO I talked to right now is talking about, it just doesn’t feel as good as it did in the fourth quarter…There’s no question in this quarter and a lot of it is because of the reorientation, the destabilization, understanding what’s going on…People are pausing, consumers are pausing, M&A is pausing, corporations are pausing, everybody is pausing and you start — you’re going to start seeing that in the economic results. And the question is, will we start seeing elevated inflation starting in the second quarter when it starts rolling into — through the economy?” — BlackRock ($BLK ) CEO Larry Fink

Airline bookings are a good advance indicator of “don’t buy now so you don’t have to pay later”…

The FT offers some more recent data points:

• Footfall to US stores fell 4.3% YoY in early March, according to RetailNext, a consultancy — extending declines that began at the start of the year.
• Placer.ai, which aggregates signals from consumers’ mobile devices, has recorded fewer visits to big-box stores including Walmart, Target and Best Buy in recent weeks.
• Sales of discretionary general merchandise fell by 3% in the week ending March 8 compared with last year, continuing a string of annual declines in February, data from Circana showed.
• Traffic to US fast-food restaurants was down 2.8% in February, according to Revenue Management Solutions, with visits at breakfast time dropping by double digits. “It’s the easiest meal to make at home or skip entirely,” the consultancy said.
• Four big US airlines this week warned of a slowdown in demand, in part due to retrenchment by leisure travellers.

Also via The Transcript:

“Economic uncertainty is a big deal, and we have really seen some weakness in March. So that has led to the guide that we issued earlier today, and you’ve seen this…This is disappointing.” — American Airlines Group ($AAL ) President Robert Isom

Even services are now weakening.

Hmmm…

Consumers and Businesses Send Distress Signal as Economic Fear Sets In

(…) President Trump’s stop-and-start trade wars and other rapid-fire policy changes are making Americans feel gloomy about the economy. Their 401(k)s are down, and their expectations for inflation are up. Now they are paring back spending on extras such as vacations and home-improvement projects.

The University of Michigan’s closely watched index of consumer sentiment nosedived 11% to 57.9 in mid-March from 64.7 last month. Sentiment among Democrats was the lowest ever recorded, including the depths of the 2008-09 financial crisis. Even Republicans are feeling worse, although many think that any short-term economic pain caused by Trump’s moves will be worth it. (…)

Bleak sentiment about the economy can become a self-fulfilling prophecy. Nervous consumers tend to cut back, which weighs on spending and economic growth. While economists have been marking down their estimates for the economy, they still expect it to grow. (…)

In February, small-business uncertainty reached its second-highest level in the more than 50 years that the National Federation of Independent Business has been polling small-business owners, the group said. The highest reading was in October, just before the election. Sales expectations declined for a second month in a row after surging following the vote. (…)

The article goes on with stories of several businesses seeing sales declines in recent weeks.

Anecdotes are all investors can feed on until hard data reflecting Trump 2.0 reality start coming in. Ed Yardeni is among the increasingly shaky optimists:

We continue to bet on the resilience of the economy. However, we acknowledge that it is being severely stress-tested now by Trump 2.0’s tariff turmoil and shotgun approach to paring the federal workforce.

Perhaps the biggest surprise is that President Donald Trump wasn’t bluffing or even just exaggerating when he often said during his presidential campaign rallies that he loves tariffs. (…)

On March 7, Commerce Secretary Howard Lutnick said, “We’re going to make the External Revenue Service replace the Internal Revenue Service.” In other words, revenues from tariffs will replace revenues from taxes on individuals and corporations. That’s simply dangerous and delusional nonsense. It certainly isn’t passing the sanity test in the US stock market. (…)

Of course, the above assumes that funding the External Revenue Service of America doesn’t instigate a global trade war, which might cause a depression and a collapse of global trade, including US imports! That is probably a bad—and very dangerous—assumption, since some countries are already retaliating against Trump’s tariffs. So far, that group consists of just Canada, China, and the European Union. But lots of others may join the fray on April 2, when the US is scheduled to impose reciprocal tariffs. (…)

Our message to the White House: Mr. Trump, don’t build your tariff wall! Tear down tariff walls around the world by negotiating free-trade deals! (…)

The latest batch of economic indicators released on Monday, Tuesday, and Wednesday supported our resilient economy scenario with subdued inflation. (…)

Yet Goldman’s economists cut their real GDP growth projection for 2025 from 2.4% to 1.7% in response to Trump’s tariffs. That was on Tuesday. On Wednesday, Goldman’s strategists lowered their year-end S&P 500 target from 6500 to 6200.

(…) we can’t ignore the potential stagflationary impact of the policies that Trump 2.0 is currently implementing haphazardly.

Today, we are blinking on the valuation multiple of the S&P 500. But for now, we are sticking with our strong estimates for S&P 500 companies’ aggregate earnings per share of $285 this year and $320 next year. We are still targeting forward earnings per share—i.e., the average of analysts’ consensus estimates for this year and next, time-weighted to represent the coming 12 months—of $320 at the end of this year and $360 at year-end 2026.

On the other hand, under the circumstances discussed above, we are lowering our forward P/E forecasts for the end of 2025 and 2026 to a range of 18-20, down from 18-22. That lowers our best-case S&P 500 targets for the end of this year from 7000 to 6400 and for the end of next year from 8000 to 7200.

The worst-case scenarios using the same forward earnings and the same 18 forward P/E assumptions would be 5800 and 6500 for this year and next year.

That’s if President Trump relents, as we expect he will to avoid a recession that would cost the Republicans their majorities in both houses of Congress in the mid-term elections in late 2026.

One of the best economists and strategists now tells us that, hoping that the self-proclaimed Tariff Man will soon come to his senses and, within 2 weeks, suddenly leaves the table without showing his professed winning hand simply saying, with a totally straight face, “sorry folks, only bluffin’, but t`was fun!’’

With all due respect to Ed, this is fantasy!

We are too late in the game, everybody`s chips are in the pot. Everybody is apparently losing but, supposedly, The Donald. If he “relents” now, he loses all credibility. He’s done as a poker player.

President Donald Trump on Thursday [March 12] doubled down on his escalating tariff plans, even as his economic agenda continued to rattle investors and contribute to a weekslong stock market sell-off.

“I’m not going to bend at all,” Trump said when asked about his tariff plans during an Oval Office meeting with NATO Secretary General Mark Rutte.

“We’ve been ripped off for years, and we’re not going to be ripped off anymore,” he said.

Trump specifically said he would not change his mind about enacting sweeping “reciprocal tariffs” on other countries that put up trade barriers to U.S. goods. The White House has said those tariffs are set to take effect April 2. (…)

Trump added, “There’ll be a little disruption, but it won’t be very long.” (CNBC)

Yardeni keeping his “strong estimates for S&P 500 companies’ aggregate earnings per share of $285 this year and $320 next year” looks increasingly risky. Cutting his P/E range shows his weakening confidence.

EARNINGS WATCH

From LSEG IBES:

495 companies in the S&P 500 Index have reported earnings for Q4 2024. Of these companies, 73.7% reported earnings above analyst expectations and 18.8% reported earnings below analyst expectations. In a typical quarter (since 1994), 67% of companies beat estimates and 20% miss estimates. Over the past four quarters, 78% of companies beat the estimates and 17% missed estimates.

In aggregate, companies are reporting earnings that are 6.9% above estimates, which compares to a long-term (since 1994) average surprise factor of 4.2% and the average surprise factor over the prior four quarters of 6.6%.

Of these companies, 63.4% reported revenue above analyst expectations and 36.6% reported revenue below analyst expectations. In a typical quarter (since 2002), 62% of companies beat estimates and 38% miss estimates. Over the past four quarters, 62% of companies beat the estimates and 38% missed estimates.

In aggregate, companies are reporting revenues that are 1.2% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.3% and the average surprise factor over the prior four quarters of 1.2%.

The estimated earnings growth rate for the S&P 500 for 24Q4 is 17.1%. If the energy sector is excluded, the growth rate improves to 20.6%.

The estimated revenue growth rate for the S&P 500 for 24Q4 is 5.2%. If the energy sector is excluded, the growth rate improves to 5.8%.

The estimated earnings growth rate for the S&P 500 for 25Q1 is 7.8%. If the energy sector is excluded, the growth rate improves to 9.4%.

Earnings are indeed very strong. Trailing 12-m EPS are now $245.37, up 9.4% YoY.

But equity investors are dubious, telling analysts to curb their enthusiasm…

…even more than what they have done so far:

Actually, forward EPS have only declined 0.9% to $270.36 since peaking at $272.92 in January. Forward EPS are still up 7.5% YoY. Ed Yardeni’s $285 EPS forecast is 5.5% above consensus which is still 11% above 2024 actuals. His P/E range applied on the EPS consensus puts the S&P 500 Index between 4868 and 5409, down between 4.1% and 13.7%.

The current P/E of 20.9x “shaky” forward EPS is still above the high end (20.0) of its historical range:

Ed is playing Trump’s poker game with a twin set of seemingly inflated chips.

Some charts FYI:

• We all agree that consumers will get hit by broadly rising prices (though possibly only transitory) “but we`re OK with that and it won’t be very long”.
• The bigger, more damaging and longer lasting risk, is that employment is impacted. The March employment report comes out April 4. The latest JOLTS report was OK but that was for January. The more timely and well correlated Indeed Job Postings series (through March 7) shows a clear break in labor demand since January and accelerating since mid-February. The next employment report could really jolt the market. Companies will seek to protect their profits amid rising costs and highly uncertain demand trends. Investors might not want to wait and see through this extraordinary chaos.

• This is what awaits the world.

• Soft data: Consumers are totally confused and worried. Note how historically weak some of these readings are:

• Hard data: Bloomberg tracks debit card transactions daily. The January exuberance has totally disappeared in late February. The 28-d m.a. only remains positive because of the late-January stronger data points.

• Hard data: weekly unemployment claims, after slowing to nearly zero in January-February, bounced back up 5% YoY since mid-February. Claims had been declining most of 2024 (last data point March 19):

• Trump better be right because the federal government has little wiggle room if the “strategy” results in more than “a little distortion”.

• J.P. Morgan reckons that a bit more than half of the expected 11.6% profit growth comes from further margin expansion…

• … which only happens in the Mag-7 companies.

• Where would multiples go if earnings don’t deliver?

The stakes are high. We all have our own chips in Trump’s game and if he loses, we’re no winners: the potential combo of declining profit and mean reverting P/E multiples could take equity markets down another 15-25%.

• To return to the high end of its 15-20 P/E range: 4900 on stable trailing EPS;
• To return to its median P/E of 17.5: 4300 on stable trailing EPS;
• To return to the Rule of 20 Fair Value: 4100 on stable trailing EPS;
• Add your estimate of the profit damage and your estimate of the currency damage.

That’s the risk. Upside potential? 5800  (+3%) this year and 6500 (+15%) next year per the optimistic (hopeful?) Ed Yardeni. Two-year Ts will give you 8.2% risk-free for 2 years.

• Sentiment is now so low, tempting contrarians. But maybe just not before a solid base has formed.

• Another reading from Callum Thomas: “Similarly, my Euphoriameter indicator still looks kind of early in the process of rolling over from record high levels. This one is *not* at buy levels, and if anything is maximum bearish from a market cycles analysis standpoint (the worst signal is when it goes really high *and then rolls over*).”

Source:  Topdown Charts Euphoriameter

Slumping Stocks Threaten a Pillar of the Economy: Spending by the Wealthy Consumer spending is highly dependent on the affluent, who are highly dependent on the stock market

(…) The Harvard economist Gabriel Chodorow-Reich estimates that with all else equal, a 20% drop in stocks in 2025 might reduce growth by as much as a percentage point this year. The S&P 500 at Friday’s close was down 4.1% so far in 2025. (…)

The S&P gained 53% over 2023 and 2024, both reflecting and sustaining a strong economy. Alongside higher home prices, stock gains handed the wealthiest Americans more funds for a shopping spree. The top 10% of American earners now account for roughly half of all spending, up from 36% three decades ago, according to Moody’s.

As of 2022, families in the top 10% of income, on average, each owned about $2.1 million of stocks, about 32% of their net worth, according to a recent Federal Reserve survey. In 2010, stocks made up about 26% of average net worth for this group. Over the past four years, this group of top-10% earners has boosted spending by 58%.

It is not just the best-off who are pouring into stocks. Vanguard and Fidelity report record participation and contributions to their 401(k) plans for wage earners. At the end of last year, 43% of American households’ financial assets were in stocks, the highest share ever, according to Fed data. Many lower-income households don’t own equities, but the proportion that do continues to climb. (…)

U.S. households owned more than $56 trillion of stock at the end of last year, directly or through products such as mutual funds, according to Fed data, so the cents add up.

The economists Sydney Ludvigson and Martin Lettau studied wealth effects in the early 2000s. They concluded that steady stock gains boost spending over time, but that people usually don’t overreact to short-term fluctuations in the market.

Once in a while, a big move in stocks proves persistent and does change the course of consumer spending, Ludvigson said in an interview. The challenge for economists, she said, is that you can’t know which rallies or routs will be lasting until they are in the past.

This chart plots households net worth deflated by PCE inflation and the savings rate. The latter declines when real wealth growth exceeds its trend line and vice-versa.

Trade War With Europe Puts $9.5 Trillion at Risk, U.S. Firms Say Damage could ripple far beyond whiskey and Champagne, American business group warns

The escalating trade war between the U.S. and Europe threatens a commercial relationship that is worth an estimated $9.5 trillion in two-way trade and investment, say American businesses caught in the crossfire.

The American Chamber of Commerce to the European Union, which represents U.S. companies that operate in Europe, said tariffs risk damaging far more than just sales of goods that are directly taxed. They could also harm trans-Atlantic investments, which are more than three times as valuable.

Two-way trade in goods between the U.S. and Europe, including the U.K., hit a record of about $1.3 trillion last year, while total trade in services between the two economies was estimated at more than $750 billion, AmCham EU said in a report published Monday.

But sales by companies that have invested across the Atlantic were far higher, the report said. European affiliate sales in the U.S. were likely above $3.5 trillion and U.S. affiliate sales in Europe were likely more than $4 trillion last year, according to estimates from the report’s authors. (…)

President Trump has largely focused on trade in goods when talking about the U.S.’s trade relationship with Europe. He has repeatedly raised concerns about the U.S. goods trade deficit with the EU, which was $235.6 billion last year, according to the Commerce Department.  (…)

The impact of tit-for-tat tariff threats could be even broader, said Dan Hamilton, a fellow at Johns Hopkins University and one of the authors of the AmCham EU report. The EU could retaliate against the U.S. by taxing services, where the U.S. has a trade surplus. And tariffs could have spillover effects on companies’ trans-Atlantic activities.

More American foreign direct investment goes to Europe than to the rest of the world combined, according to the AmCham EU report. European firms account for almost two-thirds of global foreign direct investment to the U.S.

Tariffs might make it harder for a European company to send parts that it makes in Europe to an affiliate’s U.S. factory, while countertariffs from the EU or another U.S. trading partner could make it harder to export a final product from the U.S., Hamilton said. Policy uncertainty could lead companies to hold back on trans-Atlantic investments.

“The ripple effects of conflict in the trade space will not be confined to trade,” Hamilton said.

China Economic Pickup Tops Forecasts Before Tariff Pain Deepens

Chinese consumption, investment and industrial production exceeded estimates to start the year, pointing to signs of resilience for an economy still in need of more stimulus as Donald Trump’s tariffs threaten growth.

The upswing suggested Beijing’s pro-growth pivot since late September continued to feed momentum for the world’s second-biggest economy. At the same time, the property market stayed under pressure and unemployment rose, a sign of vulnerabilities that could be exposed if US tariffs inflict more pain across China’s manufacturing sector.

Retail sales clocked their best reading in the first two months since October, the National Bureau of Statistics said Monday, while industrial output exceeded the median estimate in a Bloomberg survey of analysts. Growth in fixed-asset investment marked the fastest since the gain in the first four months of 2024. (…)

An expanded program to subsidize consumers and businesses who trade in old equipment is helping lift demand, while front-loading of shipments by exporters is propping up manufacturing.

As authorities increasingly turn the attention on generating more consumption — their top priority this year — the goal is to shift from what one official called China’s previous “supply-focused” approach to one driven by both supply and demand. (…)

China’s front-loading of shipments abroad has been supporting industrial production at the start of the year, while an early roll-out of fiscal stimulus this year contributed to faster infrastructure investment growth, according to Jacqueline Rong, chief China economist at BNP Paribas SA. Exports reached a record $540 billion in the first two months of the year.

However, a prolonged property sector slowdown continues to weigh on the economy and higher tariff woes loom ahead, she cautioned. The floor space of new home sales shrank again in the last two months and property development investment slumped 9.8%, according to NBS numbers.

“The real estate sector will remain a drag on the economy this year,” Rong said. “Looking forward, the tariff impact on exports will become evident sooner or later, and the downside risks on exports will definitely show up.” (…)

• China Home Prices Fall at Faster Pace Despite Revival Effort

Prices in 70 cities, excluding state-subsidized housing, dropped 0.14% from January, when they slid 0.07%, National Bureau of Statistics figures showed Monday. Values of used homes fell 0.34%, the same pace as a month earlier. (…)

In a precarious sign, used-home prices dropped 0.1% from January in top-tier cities, falling for the first time since authorities introduced a major stimulus package last September. Such prices are widely seen as a bellwether because they face less intervention by local governments and sales of secondhand homes have surpassed those in the primary market.

Residential sales dipped 0.4% in the first two months from a year earlier, improving from a 17.5% drop last year, other data showed Monday. (…)

Year-on-year price declines eased slightly. New-home prices fell 5.22% in February, compared with January’s 5.43% drop, the statistics bureau said. Existing-home values slid 7.53%, versus 7.8% in January. (…)

China’s leaders unveiled more steps to shore up the property market at a national parliament meeting this month, where they also set a bullish economic growth goal despite the escalating trade tensions with the US under President Donald Trump.

They included a pledge to give regional governments more say in how they buy unsold homes to clear inventory. Policymakers are considering scrapping a price cap for local authorities during that process, Bloomberg reported. The changes could improve some of the plan’s unattractive economics for both developers and state buyers. (…)

The Real Threat to American Soft Power Moral authority matters more than foreign aid.

(…) In Washington’s foreign policy circles, the destruction of USAID has also prompted a paroxysm of anxiety about the US’s place in the world. The consensus holds that by throttling foreign aid, the administration has inflicted grievous damage to American soft power. There is also the obligatory hand-wringing about the vacuum that might be filled by China.

But just as the public overstates the magnitude of foreign aid spending, policy wonks have a tendency to overstate its contribution to American soft power. For those of us who grew up in the shadow of the Cold War, American influence was less about the flow of dollars and more about the image the country projected of itself as the proverbial shining city on the hill. It’s what Trump and Musk plan to do to America — not to foreign aid — that may tarnish that image and do the most damage to US soft power.

The concept of soft power emerged from the mind of Joseph S. Nye, a Harvard professor and former Clinton administration official, in a seminal 1990 essay for Foreign Policy. Nye would go on to author several books and monographs on the topic, including the definitive Soft Power: The Means to Success in World Politics.

Since then, the concept of “soft power” has become a kind of secular religion among foreign policy professionals worldwide — and Nye’s book one of the scriptures of international-relations theory.

Nye defined soft power as “the ability to affect others to obtain the outcomes one wants through attraction and persuasion rather than coercion or payment.” The soft power of a country like the US, he argued, rested on “its resources of culture, values and policies.”

Where does foreign aid fit in? Amid the whine of Musk’s wood chipper, I put the question to Nye himself. His response was telling: Aid, he said, is merely an instrument of foreign policy, and the pulverization of USAID may affect American soft power — but only marginally. Of far greater import, Nye said, are international perceptions of Trump’s assault on America’s culture and values.

Nye pointed to Trump’s bullying of allies such as Canada and his threats to annex Panama and Greenland, as well as his disregard for international bodies like the World Health Organization and frameworks like the Paris Agreement. “The impact of these things will be more profound in the long run,” he said.

This view was echoed by Victoria De Grazia, professor emerita of history at Columbia University and co-editor of Soft-Power Internationalism: Competing for Cultural Influence in the 21st-Century Global Order. She added “deporting people and terrorizing minorities” to the list of Trump’s infringements on American values, but said the greatest damage to US soft power is the country’s failure “to uphold the liberal order” — that intricate web of institutions, norms and relationships that has defined the post-1945 world. (…)

The Soviet example should be a cautionary tale for contemporary China, which has spent the better part of two decades attempting to manufacture soft power through economic engagement with the developing world. The parallels are not exact: Unlike the moribund USSR of the 1980s, today’s China can tell a compelling story about lifting hundreds of millions of its citizens out of poverty. But the similarities are nonetheless striking.

Like Moscow then, Beijing now aspires to near-total control over its global image management. But it has been even less successful than the Soviet Union at hiding how it treats its own people. Again thanks to modern communications technology, more people know about the forced labor camps for Uyghurs in Xinjiang, for instance, than were aware — in real time — of the gulags in the USSR.

Beijing’s obsession with message control only undermines its credibility, according to Nye: “Because there’s total Communist Party control over media and civil society, the narrative is treated with suspicion.” Ohnesorge concurred, observing that America’s free press, which mercilessly exposed flaws in US society and government throughout the Cold War, paradoxically strengthened the country’s soft power. “Soviet propaganda never worked because it was obviously propaganda,” he said. (…)

But if China faces a Sisyphean task in acquiring the soft power it so desperately craves, the US may be racing headlong in the opposite direction. Nye cautioned that the damage Trump does to American soft power cannot easily be fixed. (…)

BTW:

Trump Says Both Reciprocal and Sectoral Tariffs Coming April 2

“April 2 is a liberating day for our country,” Trump said. “We’re getting back some of the wealth that very, very foolish presidents gave away because they had no clue what they were doing.”

That’s a lot of “very, very foolish presidents”.

President Trump’s net approval for handling of the economy fell to -12% in the last CNN survey, lower than any any point in his entire first term (and consistent with other recent polls). But the Republican base continues to overwhelmingly approve the President — 92% overall & 88% still approve his handling the economy — suggesting full steam ahead from the White House for now. (Bruce Mehlman)

Trump’s Tariffs Have McKinley Turning in His Grave The 25th president used reciprocity to press for an expansion of trade. The 47th is going backward.

By Phil Gramm and Donald J. Boudreaux in the WSJ:

(…) On April 2, President Trump plans to take his protectionist policies global. If he does, it will be the beginning of the end of the trading system that built the modern world.

Mr. Trump’s policy turns the traditional meaning of reciprocal trade on its head. He wants to achieve reciprocity only by raising tariffs, almost certainly triggering retaliation.

Reciprocal trade policy as envisioned by President William McKinley, whom Mr. Trump often cites as his role model, recognized that by the dawn of the 20th century America had emerged as an economic colossus capable of producing an abundance of products that could be profitably exported. As McKinley explained, “the expansion of our trade and commerce is the pressing problem. Commercial wars are unprofitable.”

McKinley’s reciprocal trade policy was aimed at opening markets for U.S. products with agreements that lowered tariffs on imported products proportionately as other countries lowered theirs on U.S. products. President Franklin D. Roosevelt used reciprocal trade policies to back the world out of the Smoot-Hawley tariff. His successors used reciprocal trade to lift the majority of the world’s population out of poverty and achieve 75 years of peace and prosperity.

The Trump perversion of reciprocal trade co-opts a politically appealing phrase to justify his preferred policy. While the president uses European and Japanese tariffs on American cars to justify comparable tariffs on U.S. imports, nowhere does he propose real reciprocity.

He could eliminate the 25% U.S. tariff on imported trucks as an inducement to other countries to eliminate their tariffs on U.S. automobiles. Mr. Trump denounces high tariffs on U.S. exports to Central and South America and would use his theory of reciprocity as an excuse to raise U.S. tariffs on imports from those countries. But real reciprocity would be achieved by eliminating the quota on U.S. imports of sugar, for which Americans pay twice the world price, in return for Central and South American countries lowering their tariffs against U.S. products.

The timing of Mr. Trump’s actions could hardly be worse. America now dominates the tech industries. Because of our strong comparative advantage in high-tech and artificial intelligence, these industries are obvious targets for retaliation.

There is something to the claim that history repeats itself. The trade wars that wrought havoc in the 20th century occurred because of America’s efforts to protect agriculture from foreign competition in the 1920s and ’30s, when we had seized a strong comparative advantage in industrial production. World War I had crippled European agriculture as millions were pulled off farms to fight. Crop prices soared and American farmers enjoyed an economic heyday. But when the war ended, agriculture production recovered in Europe and world farm product prices plummeted.

Because the farm vote was the marginal vote in national elections, Congress rushed to pass the 1922 Fordney-McCumber tariff to protect American agriculture. When that tariff failed to alleviate the agriculture distress, Herbert Hoover, running for president in 1928, promised to support additional farm tariff protection. Efforts to provide that protection ultimately produced the Smoot-Hawley Tariff Act of 1930 as industry piggybacked on the support for farm tariffs to pile on industrial tariffs as well.

The result helped turn a financial panic into a worldwide depression.

Tragically, the 1922 tariff made it virtually impossible for Germany to pay its war debts, triggering devastating hyperinflation. We all know what happened next: Smoot-Hawley helped usher in a global depression with its economic and political carnage.

Politics in America sped the collapse of the world market in an effort to protect agriculture when it was a declining source of employment and income. At the same time, this protectionism denied a world market to U.S. manufacturing, where employment and wages were rising.

Why was the 2024 election so focused on manufacturing jobs? The percentage of jobs in manufacturing has been in secular decline for more than three quarters of a century. Wages in manufacturing are lower on average than wages in the service industries. Technology has continued to expand America’s industrial capacity while employment in manufacturing as a share of total nonfarm employment has fallen by 75% since 1946.

Manufacturing jobs were at the center of the 2024 election because industrial workers have become swing voters. We are today taking actions to protect manufacturing jobs the same way we did with agriculture a century ago. In the process, we are imperiling our access to the world market in high-tech and AI, which are the economic future.

There is no lesson in the second kick of a mule, but it is important to remember that under the protectionist policies of the first Trump administration the trade deficit rose, employment in manufacturing as a percentage of total employment continued to decline, and economic growth, which reached a 13 year high in 2018 under Mr. Trump’s deregulatory and tax-cut policies, slumped under his tariffs. This was all before the pandemic started.

Protectionism has an unblemished record of failure both economically and politically throughout American history. Yet the Trump administration seems determined to employ protectionist policies that failed the first time it employed them and that have never spurred economic growth. Protectionism now threatens not only the prosperity that could be created with deregulation, budget-deficit reductions and tax cuts, but also imperils America’s world leadership and the peace and prosperity that leadership has produced.

There’s more to the McKinley story that Trump should know:

As an Ohio Congressman, McKinley had authored the Tariff Act of 1890 (known as the McKinley Tariff), which significantly increased import tariffs and earned him the nickname “Tariff Man of the 1880s”. This legislation raised average duties across all imports, making it one of the highest tariff regimes in American history.

The tariff was not well received by Americans who suffered a steep increase in prices. The 1890 tariff was also poorly received abroad. Protectionists in the British Empire used it to argue for tariff retaliation and imperial trade preference.

Inflation was particularly high on what the NYT called “necessaries” such as farm products (+6-8%), textiles (+4%), metals and metal products (+6%), building materials (+5%) and “miscellaneous” (+11%) per BLS research.

In the 1890 election, Republicans lost their majority in the House with their number of seats reduced from 171 to 88.

In the 1892 presidential election, the Senate, House, and Presidency all fell under Democratic control. Lawmakers immediately started drafting new tariff legislation, and in 1894, the Wilson-Gorman Tariff passed, which lowered US tariff averages.

Trump’s contention that the 1890s were “probably the wealthiest ever because it was a system of tariffs” also does not verify.

Real GNP fell about 4% from 1892 to 1893 and another 6% from 1893 to 1894. By 1895 the economy had grown past its earlier peak, but GDP fell about 2.5% from 1895 to 1896. During this period, the population grew at about 2% per year, so real GNP per person didn’t surpass its 1892 level until 1899.

McKinley was reelected in 1900. By 1901, as he began his second term as president, McKinley had come to believe that it was time for the United States to liberalize its trade relations with other countries. He intended to build public support for this new program through a series of speeches during the fall of 1901.

On September 5, 1901, just one day before he would be fatally shot by an assassin, President William McKinley delivered what would become his final public address in Buffalo, NY. In this historically significant speech, McKinley made the now-famous statement that “commercial wars are unprofitable,” signaling a notable shift in his economic philosophy toward more open international trade relations.

The complete statement was:

The period of exclusiveness is past. The expansion of our trade and commerce is the pressing problem. Commercial wars are unprofitable. A policy of good will and friendly trade relations will prevent reprisals. Reciprocity treaties are in harmony with the spirit of the times; measures of retaliation are not.

The Trade War Will Pound Stocks High American asset prices require a large U.S. capital surplus, the mirror image of a trade deficit.

By Greg Jensen, co-chief investment officer at Bridgewater Associates in the WSJ:

(…) No matter how the spat is settled, American partners are realizing that they can’t rely on the U.S. Allies shouldn’t expect this to be only a four-year fever dream. Germany’s announcement of a major defense and infrastructure plan last week is a signal of this shift. Major allies will find a way to live in a new world order.

Markets will be slow to price the ramifications of this global push for self-sufficiency. Asset prices require a large U.S. capital surplus, the mirror image of a trade deficit. The U.S. push to reduce trade deficits and escalate tensions with key allies puts at risk the ability of U.S. assets to draw in capital from the rest of the world.

Foreign countries hold far more U.S. assets than the U.S. holds in foreign assets. Europe and Japan have for years stashed their surpluses in the U.S. Major institutional investors are reassessing the wisdom of having such a disproportionate amount of their assets in the increasingly unreliable U.S.

Foreigners don’t need to sell those assets to create a rout; if they stopped buying them it would be devastating for U.S. asset prices. (…)

U.S. multinationals can expect retaliation from countries facing headaches from Trump administration policies. Countries that run trade deficits have the upper hand because they import more than they export. China’s decision to add more U.S. companies to its “unreliable entities” list and launch antitrust investigations into Google are a taste of what would occur in a trade-war escalation. The reimposition of digital service taxes in Europe, which would disproportionately hit Silicon Valley, is also a possibility.

Beyond trade policy, the Trump administration’s push to reduce fiscal deficits will alter the environment for U.S. equities. Strong profit growth has been in part the consequence of rising fiscal deficits. Total savings need to add up to total investment, and for corporate profits to rise, some other player in the economy must spend.

Since the pandemic, the sector that has overspent the most in the U.S. is government, and the U.S. has also run higher deficits than most other economies. These deficits have worked their way through the economy to support corporate profits, and the reduction in deficits will turn previous support for U.S. equities into a drag.

Investors should be prepared for what the Trump administration’s trade policies will mean for their portfolios. It’s a dangerous time to be overexposed to U.S. assets, and almost everyone is.

Trump also claims that he will balance the budget with the help of Musk and his DOGE trolls.

Ironically, while we all know that correlation is not necessarily causation, it can be argued that government deficits are an important source of corporate profits since government spending flows to consumers and corporations.

Federal government expenditures were 18.6% of GDP in 2000. They are now 24%.

This first chart shows the inverse relationship between federal deficits and corporate profits over time.

• Federal debt and profits:

• YoY changes:

The Tariff Man and the Chainsaw Man may not be friendly to equities unless tax cuts and productivity timely counterbalance.

The other related risk is potentially declining multiples from their current high perch. P/E ratios importantly feed on confidence and visibility.

• ECB’s Lagarde Warns of Severe Global Fallout From a Trade War

• Bank of France Chief Says Trump Economic Policy Is a ‘Tragedy’

The S&P 500’s Meltdown Into a Correction Only Took 16 Days

This marks the seventh-fastest correction in records going back to 1929, data compiled by Bloomberg show. It took 16 sessions for the S&P 500 to sink 10%. Three of the seven fastest drawdowns happened under President Donald Trump – in 2018, 2020 and now. (…)

Credit markets are now beginning to confirm the growth angst that’s fueled a more than $5 trillion equity wipeout since late February.

The cost to protect high-grade debt against default has hit the highest intraday level since August. Hedging across popular high-yield ETFs jumped, while at least six companies opted to postpone bond sales.

It’s more evidence that the intensifying trade spat is threatening America’s investment and consumption cycle.

“If credit spreads continue to widen much more from here, I think it tells you that the market is starting to price in a high chance of a recession,” said Priya Misra, portfolio manager at JP Morgan Asset Management, who has decreased credit risk exposure recently.

Fear is everywhere, even at Tesla. This is too funny!

Tesla warns Trump administration it is ‘exposed’ to retaliatory tariffs Elon Musk’s electric-car maker says levies could make it costlier to produce vehicles in the US

(…) In an unsigned letter addressed to US trade representative Jamieson Greer, Tesla said it “supports” fair trade but warned that US exporters were “exposed to disproportionate impacts when other countries respond to US trade actions”. (…)

The group said in its letter that tariffs could increase the costs of making vehicles in the US and make them less competitive when exported overseas. It also urged the administration to avoid making minerals that are in short supply in the US — such as lithium and cobalt — even more expensive to import.

One person familiar with the process of sending the letter said: “It’s a polite way to say that the bipolar tariff regime is screwing over Tesla.”

The person added: “It is unsigned because nobody at the company wants to be fired for sending it.” (…)

• US firms are paying a substantial premium for aluminum over London prices. (The Daily Shot)

Why Cooler Inflation Isn’t Lifting Markets

February’s inflation data provided conflicting stories. Both the CPI and PPI came in cooler than expected, but neither cheered the stock and bond markets. That’s because the components of both gauges that feed into the Fed’s preferred PCED inflation rate were actually a bit hotter. In addition, January’s PPI increase was revised up from 0.4% to 0.6%. So it’s unlikely that the Fed will lower the federal funds rate (FFR) anytime soon even if economic growth slows.

It won’t be until March, or perhaps even sometime during Q2, that Trump’s tariffs start to boost the inflation data. (…)

Empty bus seats, cancellations en route to Jays spring training

One of Rob DeNure’s charter buses arrived in Myrtle Beach, S.C., this week with just three passengers on it.

The owner of DeNure Tours in Lindsay, Ont., said demand for American travel has plummeted since U.S. President Donald Trump won the election, and the only reason the bus set off for Myrtle Beach is because just enough tourists are booked for a return trip to Canada on it. (…)

DeNure would usually operate weekly tours from the Toronto-area to Myrtle Beach and more trips to other destinations. Instead, he’s cancelled around 10 trips this year.

“We feel like we’re back in the pandemic where demand has dropped to just zero,” he said. (…)

He said bookings to U.S. destinations dropped by roughly half since the election last November and have almost stopped entirely since the trade war. (…)