We’ve made the Barataria position very clear – that current federal policy is doomed to trash the stock market and somewhat damage the overall economy. That wasn’t talking about new tariffs, however. As the mechanism for screwing things up shifts, the predictions as to how it will all go down have to shift.
So here we are, trying to make some sense of the senseless. It’s more of a crapshoot every day.
The announcement that there would be new tariffs on imported steel and aluminum has been in the works for a long time. Trump, as a dedicated devotee of industrial economics from a long-gone era, has long promised this. It’s just something he just wants to do.
Why? No one can say. It’s not as though it would save that many jobs or do anything useful. Cheaper steel from Canada, Brazil, South Korea, and Mexico (in that order, about half of imported steel) makes manufactured goods in the US cheaper. You don’t have to watch “How it’s Made” too many times to realize that about half of the segments start with, “A worker unloads a roll of (steel, aluminum) into the automatic press …”
What this must do is force money out of the stock market.
Looking at the flow of money determines momentum and thus the future. Traditionally, in the US, money to invest in big things went one of two places – into the stock market or into the bond market. The latter is dominated by federal debt. When money goes into bonds, interest rates go down money is cheap. When it goes into stocks, headlines are made and companies have money to invest that way.
With a limited pool of domestic money that’s pretty much how it went.
Recently, an important source and sink have entered the mix. Money also can sit idle in a number of ways, which it has been. Idle money is one of the great forces preventing serious inflation, along with new technology which makes manufactured goods cheap and keeps wages suppressed. Note that on “How It’s Made” that the press is, indeed, usually automated.
We also have money flows in and out of the nation from other countries. This is a measure of relative confidence in the US as compared to the rest of the world. When the Chinese stock market bubble was bursting and Europe looked hopeless, money came here. Some of that was money that left here during the quantitative easing period that was supposed to help us recover faster.
These last two sources and sinks for money are the ones that we have to worry about the most. Idle money is good if you are worried about inflation (and we all should be) but horrible if you want your 401k to rise or jobs to be created. Foreign money flows are similar, but also affect the relative position of the US.
New tariffs are going to push money to the sidelines and away from the US, without any doubt. The immediate effect of the announcement was that interest rates dropped slightly as money fled from stocks to bonds, but that will definitely reverse. This will only accelerate the nervousness and chase all the money out of the market.
International confidence in the US is waning, and it will be further eroded by really boneheaded moves like this.
What is the future of debt and equities markets here in the US? At this point the best prediction is the lamest one – this can’t be good. Exactly how ungood is yet to be seen. Doubleplusungood, maybe?