Recession risks have changed quite a bit the past week, from Trump delaying tariffs and repealing some Chinese electronics tariffs. Goldman took back their 65% recession call to 45% after Trump delayed Phase II of tariffs for 90 days. Since a high degree of interest rate pricing is dependent on the risks of a recession and timing of those risks, I wanted to look at some of the factors affecting recession odds more closely.
But first, my quick takes on the numerous events of the past week:
· Last week, I wrote: “The main bearish catalyst I see is if Trump delayed the full implementation of tariffs from April 9 to “May 9,” because “so many countries called and we made great progress” [Trumpspeak] He would be lying, but the date move would give the markets some relief.” Apparently a bunch of CEOs and world leaders did enough screaming/sobbing to have Trump change tack. There are a few takeaways from this episode.
· There is a Trump put. It is claimed that this was for bonds, but I’m pretty sure the Trump put also holds for equities. The fact that he cares so much about the markets limits how “crazy” he’s going to get. Trump’s bargaining position has been severely weakened if he is seen to be swayed by so many “soft” factors.
· Most trade deals will get done, with the US getting noticeably more favorable terms than before. As a baseline, all countries should be offering zero tariffs on US goods, and zero nontariff barriers. AT A MINIMUM. Netanyahu even offered to zero out the trade balance and there was allegedly no deal. I’m not sure if this was just Trump asking a friend to help posturing. Trump does not have the resolve to fight a long trade war with the world – he wants to settle on trade deals and move onto the growth aspect of this policies.
· It shouldn’t be a coincidence that the first countries to call (Israel, Japan and Korea) are all allies that need our military assistance. If you are going to pattern bargain, you start with the countries you expect can give you the best deal. With “75 countries” calling, I’m guessing there are plenty of candidates with whom Trump can pick the best deal(s) and try to use that as a template for other countries.
· It looks like from MOST of the world we got something (initially?) meaningful that we didn’t have before (zero tariffs and zero nontariff borders and maybe a little something else). So I can see why the stock market (initially?) surged. I think we won the battle but lost the war. I’ll discuss this in a future post.
· I’m curious as to what happens to China. Trump is obviously eager to call a truce. His “call me please” comments sound really pathetic. I’m 90/10 on the following outcomes: (90%) Somehow Xi and Trump talk in the next few weeks – possibly through an intermediary (so neither has to call each other) and China also goes to “10% reciprocal tariffs” (on top of the other tariffs) like the rest of the world for 90 days. (10%) China refuses to talk to the US for 6+months and waits until US inventories of key components, rare earths, pharmaceuticals, etc run out.
· I think Trump misread the current situation with China. #ConceptofaPlan While in the long run the US may have a strategic advantage, in the short run I think China does. We need a ton of things they make, they are the driver of goods inflation (and our consumer stability), and they own a ton of our assets. We cannot build capacity in a short period of time. China can easily support their industries, and they will undoubtedly dump their products on everyone else - not profitable, but not catastrophic.