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. (…)

Enjoy the Good Inflation News While You Can Uncertainty over tariffs will still leave the Fed reluctant to cut rates.

US inflation had a positive surprise for a change, with the headline consumer price index rising by 2.8% in the 12 months to February, compared to January’s 3.0% and an expected 2.9%. Once food and energy are excluded, the “core” measure came in at 3.1%, which was similarly below expectation (3.2%) and January’s outcome (3.3%). (…)

Inflation is declining but very slowly because of obdurate services inflation. This is the breakdown of the CPI headline into its four main components, which can be produced using Bloomberg Economic Analysis (ECAN <GO> on the terminal).

The more sophisticated statistical versions of underlying inflation produced by different teams of Fed economists confirm this picture. The trimmed mean (excluding the biggest outliers in either direction and taking the average of the rest) and the median CPI, produced by the Cleveland Fed, are falling slowly but remain above the 3% upper bound of the Fed’s target.

The inflation of goods and services with sticky prices (which take a while to change and in practice only go upward), as measured by the Atlanta Fed, is also falling, but very slowly. It’s still at a level that’s too high for comfort. They’re all above their highs for the years leading up to the pandemic: (…)

Controversy continues to surround the official measure of shelter inflation, which is gauged from the average of all leases currently in force. Exclude shelter, and the rest of the index is inflating at almost exactly 2%: (…)

Zillow’s index signaled serious inflation and subsequent disinflation, and stabilized more than a year ago: (…)

At any rate, in the short term, the market is working on the assumption that inflation is trending up again. One-year inflation breakevens derived from bond prices suggest inflation will touch 4% over the next 12 months, and average 3% over the next 24. If those numbers prove accurate, it would be very difficult for the central bank to cut rates further:

For the immediate future, tariffs remain the most critical variable: How widely will they be applied, and at what rates? That story unwinds and grows more complicated with every day. Bloomberg’s new Global Trade Policy Uncertainty index confirms intuition that confusion is radically higher now even than it was during Trump 1.0: (…)

The other reason why Fed cuts are probably a long way off comes from the asymmetry of its decisions. Like everyone else, central banks often make mistakes. But erring on the side of leniency, and letting inflation take off, probably appears a much more serious error at present than the alternative hawkish error of hiking and needlessly sparking a recession.

The last mistake the Fed made — in the company of other central banks — was to believe that the inflation of 2021 would prove transitory. It was a dovish mistake. That leads to particular reluctance now to cut without some certainty on tariffs, and on inflationary trends. (…)

The Bank of Canada clearly sided on the inflation mandate yesterday (see below).

Also, Mr. Powell and his FOMC pals found their scapegoat last Sunday when Trump acknowledge that his policies (!!!) might cause a recession.

Wage Growth Tracker Was 4.1 Percent in February

The Atlanta Fed’s Wage Growth Tracker was 4.3 percent in February, up slightly from 4.1 percent in January. For people who changed jobs, the Tracker in February held steady at 4.2 percent. For those not changing jobs, the Tracker in February was 4.4 percent, up from 4.1 percent in January. 

Consumer Angst Is Striking All Income Levels Signs of weakness are showing up in spending on everything from basics to luxuries

Pretty much along the lines of my Monday post Danger Zones. This is the WSJ:

American consumers have had a lot to fret about so far this year, between never-ending tariff headlines, stubborn inflation and most recently, fresh fears about a recession. These concerns seem to be hitting spending by both rich and poor, across necessities and luxuries, all at once.

Take low-income consumers: At an interview at the Economic Club of Chicago in late February, Walmart Chief Executive Doug McMillon said “budget-pressured” customers are showing stressed behaviors: They are buying smaller pack sizes at the end of the month because their “money runs out before the month is gone.” McDonald’s said in its most recent earnings call that the fast-food industry has had a “sluggish start” to the year, in part because of weak demand from low-income consumers. Across the U.S. fast-food industry, sales to low-income guests were down by a double-digit percentage in the fourth quarter compared with a year earlier, according to McDonald’s.

Things don’t look much better on the higher end. American consumers’ spending on the luxury market, which includes high-end department stores and online platforms, fell 9.3% in February from a year earlier, worse than the 5.9% decline in January, according to Citi’s analysis of its credit-card transactions data. (…)

Citi’s analysis of its U.S. credit-card data shows that spending has fallen across most retail categories. In the retail quarter to date, spending plunged 12% and 22% on apparel and athletic footwear, respectively, compared with a year earlier. But even less-discretionary categories such as food retail, aftermarket auto parts and pet retail are seeing moderate declines. (…)

But it isn’t all about tariff fears, or even some broader sense of uncertainty. Many also have less cold hard cash on hand. Checking and savings deposit balances across all income levels have declined over the 12-month period through February and are getting closer to inflation-adjusted 2019 levels, according to card data tracked by Bank of America Institute. Wage growth for all income groups has slowed over the past year, per data from the Federal Reserve Bank of Atlanta. Americans’ inflation-adjusted debt balances are starting to surpass prepandemic levels.

What this means is that consumers generally are less able to absorb shocks, just as uncertainty is soaring. It is hard to blame them for turning cautious, even if that means the economy suffers.

From my March 10 post:

But there are more and more indications that even the affluents are looking for ways to save.

• WMT says that 75% of its market share gains comes from affluent consumers shopping its stores
• Costco membership keeps rising rapidly (+6.8% last quarter) with its parking lots hosting more and more fancy cars (I personally saw a Bentley a few weeks ago).
• Companies of all types are talking of “a more cautious consumer”, including Target, Best Buy Co., Macy’s Inc., Abercrombie & Fitch Co. and Victoria’s Secret & Co.
• “The affluent customer that’s shopping Macy’s is just as uncertain and as confused and concerned by what’s transpiring” in the economy.” (Macy’s CEO)
• The Conference Board survey showed that young consumers — those below the age of 55 — with incomes above $125,000 had the largest declines in confidence, and expectations for the job market fell for the first time since last fall.
• From a recent Wells Fargo Money Study conducted from September 5 to October 4, 2024
  • 67% say they are able to pay their bills but have little left over for “extras”.
  • 50% say they have more debt than they feel comfortable with.
  • 76% of US consumers are reportedly cutting back on spending, up from 67% in 2024.
  • 74% say they have delayed travel plans.
  • 39% say they have put off renovating their homes.
  • 30% have put off buying a home.
  • 87% say now is a good time to save.

The so-called resilient consumer is thus split in 2 camps:

• the less affluents are already squeezed and struggling by the 23% increase in the cost of living since 2019 (food +29%, energy +32% rent +27%),
• and the more affluents who are beginning to feel it and could really retrench if inflation hits hard and/or if equities decline significantly. The wealth effect does work both ways.

CEOs Don’t Plan to Openly Question Trump. Ask Again If the Market Crashes 20%. Behind closed doors, business leaders air plenty of concerns about the administration and its policies

Early on Tuesday, dozens of corporate executives and others assembled at a Yale CEO Caucus not far from the White House just as news emerged that the Trump administration planned to potentially double tariffs on steel and aluminum from Canada. Those in the room responded with a mix of groans and shocked laughter.

“There was universal revulsion against the Trump economic policies,” said Jeffrey Sonnenfeld, a professor at the Yale School of Management, who organized the invite-only summit that included corporate bosses such as JPMorgan Chase’s Jamie Dimon, billionaire Michael Dell and Pfizer’s Albert Bourla. “They’re also especially horrified about Canada.”

That sentiment wasn’t apparent hours later, when many of the same chief executives from the Yale event attended a question-and-answer session with President Trump at the Business Roundtable. There, the exchange was largely cordial and executives didn’t ask the president any pointed questions about his tariff strategy, according to people familiar with the event. (…)

Yet as the stock market enters correction territory and companies rush to stockpile goods and reorder supply chains, few are complaining openly and directly about the president’s trade strategy. That is a departure from the public stances CEOs often took during Trump’s first term, on issues ranging from immigration to climate policy.

In an impromptu poll at the Yale event, the CEOs made it clear that things would have to worsen significantly before they publicly criticized the president. Asked how much the stock market would need to decline for them to speak out collectively, 44% said it would have to fall 20%. Another 22% said stocks would have to fall 30% before they would take a stand.

Plenty want to say nothing under any circumstances: Responding to the same survey question, nearly a quarter of CEOs said they didn’t see it as their role to publicly push back against the administration. On questions about national security, CEOs were more open to critiquing the president. (…)

One reason for the muted critique in this Trump term is that many business leaders welcome Trump’s promises to push deregulation and lower taxes—and hoped the tariff threats would mostly serve as a short-lived bargaining chip, some CEOs say.

Some corporate bosses say they believe they can have more of an impact in talks behind closed doors, rather than in public. They worry public criticism will make them a target of the president’s bully pulpit and prompt him to dig in, not retreat, from his tariff agenda, they say.

“I’ve been struck by how fearful people are and how unwilling they are to speak out. That has just not been true in the past,” said Bill George, a former CEO of medical-device company Medtronic, who remains in touch with executives across industries. “They don’t want to get on the wrong side of the president and his constituents.” (…)

“Trump listens to a chorus, not just one individual,” said Reince Priebus, who served as chief of staff during Trump’s first White House. Priebus was hired this week to be a senior adviser at Centerview Partners to help the boutique investment bank’s clients navigate the new political landscape. (…)

In a survey of more than 300 executives conducted last month, 47% said they were optimistic about the U.S. economy, a 20-point drop from the 67% who voiced optimism in the fourth quarter of 2024, according to the Association of International Certified Professional Accountants, which conducts the quarterly survey. (…)

George, the former Medtronic CEO, said several business leaders he has spoken to in recent weeks say it is nearly impossible to make long-term investments, projections and decisions with so much uncertainty in Washington. Many worry about what could happen to their businesses if Trump and his officials attack them, a reason some companies have considered legal settlements or other moves to win his favor.

BTW, Bloomberg reports:

It would be comforting to report that Trump gave a convincing explanation of his policies when he addressed the Business Roundtable, a group of America’s top CEOs, on Tuesday. But alas we cannot report that — or anything — because the press were unceremoniously kicked out of the meeting.

From my January 6 post Fear:

“Real power is, I don’t even want to use the word, fear.” (Donald J. Trump to Bob Woodward in 2016)

I fear the “word of the year” will be “fear”. (…)

Fear is also a tool in U.S. politics, often used to threaten elected officials performing their civic duties. (…)

Congresspeople must now decide if they vote on the basis of what’s best for the country or what’s best for them personally.

“Can you image what the next two years are going to be like if every time that Congress works its will and then there’s a tweet? Or from an individual who has no official portfolio, who threatens members on the Republican side with a primary and they succumb?” Neal said in a fiery floor speech Thursday night.

“This institution has a separate responsibility based on the separation of powers,” he warned. (…)

There are no friends, no allies anymore. Only supreme objectives that must be achieved, any which way, no debating accepted.

Corporate officers need to balance their own personal political/moral inclinations with an objective assessment of what President Trump might do for the country’s economy and for their respective companies in a world where being friends or not can be more consequential than it normally is.

When did we see a similar movie before?

This time, the arms are fear and money. (…)

Amid much uncertainty, investor fear is understandably totally focused on equity valuations, with many indicators flirting with historically high levels while sentiment measures suggest rampant complacency, if not irrational exuberance.

Is the fear of heights justified? (…)

The fear is thus about the amplifier effect a tariff war could have if and when the economy slows. (…)

My word of the year? Caution!

Sentiment reflects itself on valuation.

Since the 2022 lows, the S&P 500 Index forward earnings are up 13% and the forward P/E 47%, from 15.4 to 22.6. In effect, increased valuation is responsible for some 70% of the Index appreciation since the 2022 low. A repeat is doubtful. (…)

The only sure prediction: it won’t be a tranquil year.

Well, that’s foresight, isn’t it!!!

Investors’ fear of heights amid strong turbulence resulted in a quick 10% drop in the S&P 500 forward P/E. But analysts are also getting worried of their elevated earnings growth projections as Ed Yardeni illustrates:

The fear is particularly obvious in the MegaCap-8 P/E ratios, down 16% so far vs 4% for the ex-MegaCap-8 P/E:

Obviously, people are reducing their equity exposure and are thus selling what they own most.

New York Shopping Trips by Canadians Dwindle Over Trump’s Taunts

(…) Vehicle and truck crossings at the US-Canadian border in western New York are down 13% this year as fewer Canadians make the trip, said Mark Poloncarz, who runs Erie County, which includes Buffalo. The county’s initial sales tax receipts have slipped 7% through mid-February, a $4.9 million reduction in revenue. Poloncarz blames the decline at least partly on a drop in Canadian visitors. (…)

The US is poised to lose about 3 million Canadian visitors this year, a 15% drop that will translate into $3.3 billion of lost spending, according to Tourism Economics.

“The setback will be large enough to affect profits and seasonal hiring in destinations that count most heavily on Canadian travelers,” said Adam Sacks, president of Tourism Economics, a unit of Oxford Economics. (…)

In total, about 20 million Canadians visited the US in 2024, spending $20.5 billion and propping up 140,000 jobs, the US Travel Association estimates.

Already this year, Canadian visitors traveling by car fell 23% in February to 1.2 million, the second straight month of year-over-year declines, according to Statistics Canada. Another drag is coming from the Canadian dollar, which has fallen about 6.1% against the US dollar during the past year. (…)

“We are starting to see groups that typically have trips planned saying, ‘You know, we are going to stay in Canada,’” said Fred Ferguson, chief executive officer of the American Bus Association. (…)

In a survey released last month, polling firm Leger found that almost half of Canadian travelers said they were less likely to visit the US in 2025 compared with last year, a response that was particularly prevalent among people over 55 and higher-income households. (…)

In a subsequent poll, Leger found signs of a broader breakdown. According to that survey, most Canadians have reduced their purchases of US goods and 30% said they considered the US an enemy country. By comparison, 31% said they considered the US an ally. (…)

Bank of Canada Cuts Policy Rate to 2.75% as Economy Faces ‘New Crisis’ Central bank must balance the risk of tariff-fueled higher inflation and the damage to growth from U.S. trade policy, Gov. Tiff Macklem says

(…) “We’re now facing a new crisis,” Bank of Canada Gov. Tiff Macklem said at a press conference, after cutting the central bank’s target for the overnight rate to 2.75%, down after seven straight cuts from 5% just nine months ago.

Trade uncertainty is roiling consumers and business executives, he said. Fresh polling by the central bank, conducted from late January to late February, suggest households are fretting over job security and intend to exert caution in spending; and many businesses have scaled back hiring and investment plans. Macklem said the central bank expects domestic demand in the first quarter to be “quite weak.”

Offsetting the case for deeper rate cuts, Macklem said, is the risk that hefty U.S. tariffs on Canadian imports, accompanied by retaliation from Ottawa, fuel an acceleration in inflation. The Bank of Canada sets rates to achieve and maintain 2% inflation. But short-term inflation expectations among businesses and households have climbed, according to polling data, and firms are reporting higher costs attributed to the trade conflict. (…)

“What we don’t want to see is that the first round of price increases [from tariffs] have knock-on effects, causing other prices to go up,” he added. “That becomes generalized and ongoing inflation. That’s what we can’t let happen here.”

A weaker Canadian dollar would also push prices upward, he added. (…)

The gap between the Bank of Canada’s main interest rate and the Federal Reserve’s policy rate is now at its widest level since 1997. One-fifth of Canada’s economic output is tied to exports to the U.S., and the Bank of Canada has previously warned that a prolonged trade conflict with Washington could knock GDP by 3% over a two-year period. (…)

Ahead of the rate decision, economists were also looking for clues on whether the central bank would put more weight on inflation risks or growth risks. Afterward, economists concurred the central bank leaned toward inflation risks.

Rate policy, Macklem warned, “cannot offset the impacts of a trade war. What it can and must do is ensure that higher prices do not lead to ongoing inflation.”

JPMorgan Strategists Say US Stocks Overplay Recession Risk

US equities are pricing in a recession risk much bigger than credit markets, leaving room for a positive surprise, according to JPMorgan Chase & Co. strategists.

Stock volatility and credit spreads typically move in tandem but have started diverging this year as the S&P 500 slides over fears that President Donald Trump’s policies will derail economic growth. The S&P 500 is currently pricing a 33% probability of a US recession while credit is pricing in 9% to 12% odds, strategists including Nikolaos Panigirtzoglou and Mika Inkinen wrote in a note.

“While there is clearly elevated uncertainty in the near term as the Trump Administration has at least initially prioritized more disruptive polices, the risk is that credit markets are proven right,” they said. (…)

Goldman Sachs Group Inc. and Yardeni Research reduced their S&P 500 targets this week. Teams at Citigroup Inc. and HSBC Holdings Plc downgraded their recommendation on US equities while Morgan Stanley’s Michael Wilson expects the benchmark to drop a near 2% more to 5,500 in the first half of the year. (…)

The S&P 500 moved into its fourth week of selling in a decline that has quickly morphed into a flight from all of last year’s winning bets. Mechanical selling flows, deleveraging from hedge funds and a collapse in sentiment saw stocks since struggling to find a floor so far. (…)

“If US equity ETFs continue to see mostly inflows as they have thus far, there is a good chance that most of the current US equity market correction is behind us,” they wrote.

This chart shows that credit spreads have risen in sync with the decline in the S&P 500 Index (inverted):

The Trump Put Is Kaput!

The epicenter of all this vertigo continues to be the White House. More and more economists are increasing their odds of a recession. We raised ours to 35% a week ago. JP Morgan’s economists raised their odds to 40% today.

We didn’t raise our recession odds today, but we did lower our S&P 500 targets for the end of 2025 and 2026 to 6400 and 7200 from 7000 and 8000. We aren’t cutting our earnings outlook yet, but recession fears caused by Trump Turmoil 2.0 are already causing the forward P/E and forward P/S of the S&P 500 to tumble, led by the valuation multiples of the Magnificent-7.

The stock market started the day with a nice boost from a cooler-than-expected CPI inflation rate. The one-month annualized rate was 2.6%, the lowest since August 2024.

Then stock investors were reminded by the latest tariff tiffs that tariffs may soon boost inflation.

Furthermore, the bond yield mostly rose all day, unnerving stock investors. That’s because the Treasury reported that the US budget deficit for the first five months of fiscal 2025 hit a record $1.147 trillion. It is very disconcerting to see outlays continue to rise faster than revenues, which shouldn’t be happening when the economy is expanding.

Meanwhile, a “Go Global” strategy (as measured by the MSCI All Country World Ex US index) continues to outperform “Stay Home” (the MSCI US). Global investors are clearly signaling that they are finding cheaper stocks overseas with happier earnings stories, particularly in China and Europe than in the United States, currently. That could change if the trade war started by President Trump worsens. No wonder gold continues to be one of the best performing assets right now.

The Bull-Bear Ratio compiled by Investors Intelligence fell to 1.3 during the past week. From a contrarian perspective, that’s a buy signal. The only problem is that the President continues to give investors vertigo. Speaking outside the White House on Tuesday, where he was testing out his brand new Tesla car with Elon Musk, Trump called the stock market “a fake economy.” That’s after he said on Sunday, “you can’t really watch the stock market.”

Potential corporate insider “behind the curtain” signs emerge

The Sentimentrader Corporate Insider Velocity indicator shows the velocity of corporate insider buying versus selling. It takes the 4-week rate of change for insider buys and subtracts the 4-week rate of change for insider sales. This measurement, at times, offers a “hidden” look at insider activity that is not necessarily apparent in straight “insider buys” and “insider sells.”

For the record, this indicator is not intended to be used as a standalone trading system. However, it does have a history of offering “early alerts” that few investors see.

The chart below shows our Corporate Insider Velocity indicator, which looks at open market transactions by corporate insiders of the S&P 500 component stocks. The red dots highlight those rare occasions when the indicator value crossed above 30. The most recent signal occurred on 2025-03-10.

The table below summarizes results and shows subsequent S&P 500 performance signal-by-signal performance.

Again, it is important to emphasize that many factors influence the stock market and that a rare signal from a somewhat wonky indicator should not be relied upon solely as a basis for buying stocks. With that caveat and the other regarding minuscule sample sizes in mind, the results are compelling and suggest that investors at least remain open to the bullish case despite recent market weakness. (…)

Does this shift constitute a “buy” signal in and of itself? Not necessarily. But the history – though small in sample size – suggests that investors should be paying attention.

Trump Takes On Ireland Over Trade at St. Patrick’s Day Event

The Irish prime minister went to the White House Wednesday with a crystal bowl overflowing with green shamrock—and a mission to protect his country’s American-fueled economic boom from President Trump’s tariff onslaught.

Trump’s response: We want our companies back. (…)

Ireland is seen as among the most vulnerable to the next phases of Trump’s tariffs plan, which could see all European Union goods hit with levies.

Ireland’s goods trade deficit with the U.S. has soared and is now the largest in Europe. The tiny nation with deep connections to the U.S. has been making a fortune off low-tax plays by American companies such as Pfizer and Apple. (…)

“This beautiful island of five million people has got the entire U.S. pharmaceutical industry in its grips,” said Trump on Wednesday. “There’s a massive deficit that we have with Ireland. We want to even that out.” (…)

“April 2 is going to be a very big day,” he said, referring to the day he has said more tariffs could begin. “The United States of America is going to take back a lot of what was stolen from it by other countries.” (…)

The U.S. trade deficit in goods with Ireland jumped to a record $87 billion last year, according to U.S. Census Bureau data, overtaking Germany, the EU’s traditional export powerhouse. That is despite Ireland having a population of 5.4 million, versus Germany’s nearly 85 million. Only China, Mexico and Vietnam have larger goods-trade imbalances with the U.S.

A surge in pharmaceutical imports is driving the deficit. U.S. companies are likely producing drugs including popular weight-loss treatments at Irish factories and sending them back home, said Brad Setser, a senior fellow at the Council on Foreign Relations.

Ireland’s pharmaceutical exports to the U.S. rose 42% last year to $50 billion, according to U.S. trade data. That’s roughly equal to U.S. passenger vehicle imports from Mexico. (…)

Trump has singled out pharmaceuticals as a potential target for sectoral tariffs. Alexander Valentin, senior economist at Oxford Economics, calculated Ireland’s pharmaceutical output would drop by 12% if tariffs are levied on the sector at 25%.

Many large U.S. pharmaceutical companies report owing little to no tax on their U.S. operations despite making the bulk of their revenue there, according to Setser, thanks to tax setups in Ireland and places such as Singapore.

A tax overhaul by Trump in his first term, meant to discourage tax dodging by U.S. companies, unintentionally renewed the flight of companies to Ireland. Trump cut the U.S. domestic corporate tax rate to 21% and imposed a minimum 10.5% rate on worldwide profits. But the lower rate on income from abroad, along with favorable Irish rules around intellectual property, encouraged some companies to move even more business to Ireland.

The shifting of IP has caused huge distortions to Ireland’s economic data, a phenomenon known as “Leprechaun economics.” It also leads to quirks in the U.S. data: The largest trade partner of Indiana—where drugmaker Eli Lilly is based—is Ireland.

The activity isn’t all on paper. U.S. companies directly employ 211,000 people in Ireland, according to the American Chamber of Commerce Ireland. (…)

In recent years, foreign-owned companies have contributed more than 80% of Ireland’s corporate tax take, according to the government’s revenue department.

Tariffs or a further cut in the U.S. tax rate could encourage U.S. companies to book more of their profits in America, a blow to the Irish treasury, said Gerard Brady, chief economist at the Irish business lobby group Ibec. But he doesn’t expect U.S. companies to abandon the Irish operations they have spent years building.

“Those sites take 10 years to build and get regulated and up and running. They wouldn’t be easy to move,” he said. “And without them being here, you wouldn’t have the level of profitability which feeds back to U.S. shareholders.” (…)

BTW:

Judge Halts Trump Order Targeting Law Firm Perkins Coie Administration improperly targeted the firm based on its clients’ political positions, according to a court ruling

A federal judge blocked most of a White House executive order punishing Perkins Coie, saying the administration had put itself at odds with the First Amendment by targeting the law firm based on President Trump’s dislike of its work for his political opponents.

U.S. District Judge Beryl Howell in Washington, D.C., issued her decision in lengthy remarks at the end of a Wednesday hearing, excoriating the administration for an order that she said likely violated the Constitution on multiple fronts and threatened to undermine bedrock principles of the U.S. legal system, namely that even the unpopular or politically disfavored are entitled to protection and representation under the law.

Howell, who was nominated by President Barack Obama, issued a restraining order that prevents Trump from blocking the firm’s access to federal buildings and stripping its clients’ government contracts.

She said Trump’s order had the potential to ripple through the legal industry, sending the message that law firms represent the president’s enemies “at their own peril.”

“I’m sure many in the legal industry are watching in horror what Perkins Coie is going through here,” Howell said.

Law firms have been in the president’s crosshairs since he took office, and Trump recently pledged to target several firms. He has issued a narrower order aimed at another large firm, Covington & Burling, which has provided legal services to a former special counsel, Jack Smith.

Trump’s March 6 order said Perkins Coie had engaged in “dishonest and dangerous activity,” citing the firm’s work for Hillary Clinton in her failed presidential bid, including its role in working with an opposition-research firm that compiled a discredited dossier against Trump. The president also criticized the firm for working with liberal donor George Soros and adopting internal diversity initiatives.

In Wednesday’s hearing, the Justice Department said the president has the power to decide who is a national security risk, a determination that led to the executive order. “We absolutely believe he has that power,” said Chad Mizelle, Attorney General Pam Bondi’s chief of staff.

Perkins’ attorney, Dane Butswinkas, said the order had put his client in financial peril. “It will spell the end of the law firm,” he said.

Trump’s order directed government agencies to require that contractors disclose any business they do with Perkins Coie. The president also instructed agencies to terminate any government contract “for which Perkins Coie has been hired to perform any service.”

The firm said agencies already have asked its clients to disclose whether they have relationships with the firm. Perkins said it has lost several major clients within a matter of days and is at risk of losing others, many of whom compete for government contracts.

Mizelle said that Perkins Coie was only speculating on potential harms and that clients may choose to leave for reasons other than the order, including because there is a new administration.

Major law firms have been reluctant to challenge Trump publicly, but a coalition of 20 state attorneys general filed a brief supporting Perkins, saying the executive order sent a “menacing message to attorneys nationwide.”

Fear is the word!