Even though the business press likes to obsess over the ponies stocks, as we saw with Trump’s tariff climbdown, it’s the bond markets that hold the whip hand. Yes, we understand full well that according to Modern Monetary Theory, this should not be so.
But since the Federal Government has only selectively applied the lessons of MMT (that what matters in determining the spending of a currency issuer like the Federal Government is productive capacity, ergo policies should focus firmly on increasing that), we instead have spending programs and tax breaks that favor rentier sectors like the military, health care, housing, and higher education.
So, Federal budgeting becomes a fight over pork. That further creates incentives not to understand what sounder policies would look like, since it would result in big changes in priorities, as in oxen being gored (to mix our barnyard metaphors).
So Trump’s fealty to really bad economic prescriptions and his ego-driven propensity to seek to do “deals” quickly, as if they were like sexual conquests where more is presumed to be better, are already catching up with him. Mind you, individually, these issues are for the most part widely acknowledged. But when you put them all together, the picture is mighty ugly:
Even further declines in approval ratings . From a fresh Reuters/Ipsos poll:
President Donald Trump’s approval rating ticked slightly lower this week to 42%, matching the lowest level of his new term as Americans kept a dour view of his handling of the U.S. economy, according to a new Reuters/Ipsos poll.
The results of the three-day poll, which concluded on Sunday, showed a marginal dip from a week earlier when a Reuters/Ipsos survey showed 44% of Americans approved of the job Trump was doing as president.
As an aside: when I was trained to do survey research for a summer job, the instructors pounded on the importance of sticking exactly to the questionnaire. They pointed out that the question “What do you think of the job Jimmy Carter is doing?” would get about 10 points less in approval than “What do you think of the job Jimmy Carter is doing as President?” So the survey instruments are already designed to give the President the benefit of the doubt.
Oddly, Trump is doing a smidge less badly in public perceptions of performance on the inflation front:
Some 33% of respondents in the latest Reuters/Ipsos poll gave Trump a thumbs up on how he was managing the cost of living, up from 31% a week earlier.
Retailers will be, in large measure, passing on tariff-driven price increases . Walmart (NYSE: WMT ), standing up to Trump’s demands to “eat the costs,” will be widespread. Some smaller businesses may try to get by on strained profits so as to preserve customer orders (and maybe even the customers’ businesses).
Moreover, as happened during the Biden inflationary period, there are sure to be vendors who will increase prices because they can, under the cover of widespread tariff price hikes. Confirming that view, from the Guardian in Majority of US companies say they have to raise prices due to Trump tariffs:
A majority of US companies say they will have to raise their prices to accommodate Donald Trump’s tariffs in the US, according to a new report.
More than half (54%) of the US companies surveyed by insurance company Allianz said they will have to raise prices to accommodate the cost of the tariffs. Of the 4,500 companies across nine countries, including the US, UK and China, surveyed by Allianz (ETR: ALVG ) only 22% said they can absorb the increased costs…
The majority of companies (60%) in the report said they expect the tariffs to have a negative impact on their business, with less than half saying they expect positive export growth this year, down from 80% who had said the same at the beginning of the year.
The article reminds readers that many companies stockpiled, so the full effect of the Trump tariffs will take some time to kick in.
Mind you, these increases are taking place even at Trump’s tariff climbdown levels.
Trump’s tariff strategy is going pear-shaped . Trump seemed to be serious about the batshit idea of getting a whole bunch of trade deals done quickly as if he had the staff levels and they had the acumen to do that. There is simply no way all that many will be done by the end of his 90-day pause.
Treasury Secretary Bessant has tried to get in front of that problem by claiming that foot-draggers and small fry will default to “Liberation Day” levels, and could do so before the 90 days expires. If you want to spook the markets again, this is just the way to do it.
In fact, big nations, both sensing that the Trump team has bitten off way way more than it can chew, and not being willing to be railroaded into a speedy (as in sure to be not sufficiently well considered) agreement, are putting the brakes on the process, as in the attempt to muscle Japan with timing demands, as well as content. From Reuters:
Japan’s top trade negotiator, Ryosei Akazawa, said on Tuesday there was no change to Tokyo’s stance of demanding an elimination of U.S. tariffs in bilateral trade negotiations.
Tokyo will not rush into clinching a trade deal if doing so risked hurting the country’s interests, he said.
“The slew of U.S. tariffs including reciprocal tariffs as well as those on automobiles, car parts, steel and aluminium, are regrettable. There’s no change to our stance of seeking a review, which is to say an elimination, of them,” Akazawa told a regular press conference.
In keeping, Bloomberg reported two days ago that many countries are quietly hardening their trade talks stances, and that includes not letting the US bully them about timing. Reading between the lines, most are not going public with that change, one assumes so as not to trigger Trump’s fragile ego. From the Bloomberg account:
China’s defiant stance in negotiating a tariff truce with the US has convinced some countries they need to take a tougher position in their own trade talks with the Trump administration….
“This shifts the negotiating dynamic,” said Stephen Olson, a former US trade negotiator who’s now a visiting senior fellow with ISEAS — Yusof Ishak Institute in Singapore. “Many countries will look at the outcome of the Geneva negotiations and conclude that Trump has begun to realize that he has overplayed his hand.”…
While officials are loathe to signal publicly any hardening of their approach, there are signs particularly from larger nations that they’re realizing they hold more cards than previously thought and can afford to slow the pace of negotiations.
Perhaps I am reading too much into a Bloomberg story about the negotiations with India, but it gives the strong impression that India has taken the lead in devising the sequencing. That’s not what one would expect if the US had a good idea of how to manage the process. From Bloomberg:
India is discussing a US trade deal structured in three tranches and expects to reach an interim agreement before July, when President Donald Trump’s reciprocal tariffs are set to kick in, according to officials in New Delhi familiar with the matter….
The talks are still ongoing and there’s no clarity if the Trump administration has agreed to a three-stage process for a trade deal.
Trump’s voodoo economics are contributing to the eagerness to get tariff “deals” done to fix his deficit bad math . Trump apparently really believes that tariffs can fill the gap of his planned tax cuts; one of the drivers of Bessant’s over-eagerness to reimpose bigger, broader tariffs is to fill the budget hole. But from the get-go, experts said that was impossible.
And that was before getting to the fact that DOGE has come way, way, way short of Trump fantasies of spending reductions. From the Washington Post on May 9, in Even with DOGE cuts, the U.S. has spent $166 billion more than last year:
From January through April, the first three and a half months of Trump’s term, spending increased by $166 billion…
Defense spending increased by $39 billion compared with fiscal 2024, CBO found. Spending on the Department of Homeland Security, which the administration has supercharged in attempts to deport 1 million immigrants in the calendar year, jumped by $18 billion.
But the largest drivers of the spending are the items that traditionally weigh on the U.S. balance sheet: Social Security, Medicare and Medicaid…
The bleak spending picture has factored into the rhetoric surrounding Trump and Republicans’ massive tax, immigration and energy package, legislation that the president and his allies have dubbed their “big, beautiful bill.”
Fiscal hard-liners are seeking guarantees of at least $2 trillion in spending cuts as part of the measure, which seeks to make permanent trillions more dollars in tax cuts from Trump’s 2017 Tax Cuts and Jobs Act.
Republicans are struggling to meet that mark.
Not surprisingly, some Congresscritters are not willing to jump off the budgetary cliff with the Trump team . Mind you, this is in addition to the big fight over Medicaid cuts. Medicaid is not sufficiently well understood to be what passes for socialized medicine in America, in combination with the obligation of emergency rooms to treat all comers. Let us not forget that Medicare even covers nursing home care.
The professionals, as in bond and currency investors, are voting no with their trades . We are getting unhappy commentary from newsletters that if anything have been evenhanded to mildly bullish in their market takes. For instance, today, from Ipek Ozkardeskaya, Senior Analyst at Swissquote Bank:
US equities retreated yesterday—ending a six-day rally—and the US dollar weakened as the selloff in long-term US Treasuries continued. The move came amid fraught budget negotiations in Washington over deficit spending and a proposed giant tax-cut bill, further exacerbated by Moody’s recent US rating downgrade. The concern is simple: if the US can’t cut spending while also enacting sweeping tax cuts, the deficit will continue to balloon. And if markets—if investors—aren’t willing to play along, there’s little the government can do. Remember the Liz Truss mini-budget crisis in the UK? If investors say no, it’s no. At the moment, investors remain skeptical. The US 30-year yield is hovering just below the 5% mark—its highest since 2023 and edging closer to levels not seen since 2007.
In FX markets, option traders remain pessimistic about the dollar’s prospects for 2025. The one-year risk reversals—a gauge that reflects whether investors are hedging more with calls or puts—have dropped to the most negative level on record, according to Bloomberg. This is notable because risk reversals have rarely turned sharply negative in the past. Investors typically don’t hedge against dollar depreciation; historically, the greenback has attracted safe-haven flows during global market stress. But that relationship appears to be breaking down. If the dollar is no longer seen as a reliable safe haven, then investors need to hedge FX risk when buying dollar-denominated assets—even S&P 500 or Nasdaq stocks. That added demand for protection can in turn amplify pressure on the dollar.
In summary, the dollar is now facing a double whammy: downward pressure from weak growth expectations and a cautious Federal Reserve (Fed), combined with a possible erosion of its safe-haven status.
In case you think this is just one commentator, Jamie Dimon is singing from the same hymnal. Some press reports said that a Jamie Dimon interview with Maria Bartaromo, which Trump saw, in which Dimon politely but firmly questioned the wisdom of the Liberation Day tariffs, was instrumental in the climbdown (Dimon recognized that Trump is a cable TV addict and Trump might see his clip).
From his latest warning at an annual investor meeting as reported yesterday via CNN:
JPMorgan Chase (NYSE: JPM ) CEO Jamie Dimon says the full effects of tariffs have yet to be felt and that markets are exhibiting an “extraordinary amount of complacency” in the face of those and other risks.
“When I’ve seen all these things adding up that are on the fringes of extreme, I don’t think we can predict the outcome, and I think the chance of inflation going up and stagflation is a little bit higher than other people think,” Dimon said during his company’s annual investor day on Monday. “There are too many things out there, and I think you’re going to see the effect.”
“Even at these low levels, if they stay where they are today, [those are] pretty extreme tariffs. And you also don’t know how every country is going to respond,” he said. And trading partners are responding by cutting deals with other countries, he added.
In addition, Dimon said the US cannot quickly resort to domestically produced goods for those imports, adding that it takes three to four years, at minimum, to build a manufacturing plant.
Perhaps some readers have better crystal balls than I do. But I don’t see how Trump gets out of his budget/deficit mess. With tariffs, implemented via diktat, um, executive order, he can turn on a dime, even if pretty much everyone else gets whiplash.
But spending plans, tax policies, and the resulting legislation all take time to devise, negotiate, and get passed. Trump does not have the luxury here of a fast redo when longer-dated Treasury yields again rise to market-wobbling levels. The Trump team looks to be cooking up a big, bad stew of stagflation, assuming we don’t get something even worse as the result of the threat of bone-headedly destructive fixes, like a selective default via the forced extension of Treasury maturities.
So, as bad as the picture above looks, do not underestimate the ability of Team Trump to make things worse.
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