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Afford Anything | Make Smart Money Choices
First Friday: Tariffs Grab Headlines, But These Financial Changes Nobody Is Talking About Will Impact You Too
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- [00:00]
Paula Pant
On Wednesday, the White House rolled out the most significant tariffs we've seen in over a century. On Thursday, markets around the world reacted with what can only be described as a panic. The s and P500 just experienced its worst single day drop in five years. Everyone is talking about it. Headlines are screaming about supply chain disruptions, economic slowdowns, and the potential return of both inflation and a recession. So, yikes. And also, yes, we are going to deep dive into all of that. But here's the thing. In the shadow of these massive headlines, several critical economic and financial stories are getting completely overlooked. These are stories that directly impact your student loans, your mortgage, your investments, even how the government is treating Bitcoin. So here's what we're going to do today. First, we'll explore the important economic stories that aren't making headlines, but that deserve your attention. We're going to talk about the changes to student loan forgiveness that might catch millions of people off guard. We're going to talk about new evidence, new research around index fund investing that confirms what afforders people in the afford anything community have known for years. We're going to talk about major consolidation in the mortgage market that might affect your next home purchase. And we're going to talk about a surprising government move to establish a strategic Bitcoin reserve. And then in the second half of our episode, we'll tackle what's on everyone's mind. These massive new tariffs, their potential impact on the economy and what it means for your financial future. And to help us make sense of it all, I've brought in someone with extraordinary credentials. Bob Elliot spent 13 years at Bridgewater Associates, which is the world's largest hedge fund, where he spent 11 years as the head of Ray Dalio's investment team. During the 2008 financial crisis, he directly advised the treasury, the Federal Reserve, and the White House. He graduated magna cum laude from Harvard. And we sat down face to face on Thursday, yesterday, the first Thursday of the month of April, right in the middle of the S&P 500 drop, we sat down to talk about what's happening. And I'm going to share some clips, some excerpts from that in the second half of today's show. Welcome to the Afford Anything podcast, the show that understands you can afford anything, but not everything. Every choice carries a trade off. Now, if you're new here, welcome. And you should know that we are typically not a news show. We are a show that interviews guests. We answer listener questions. But there's one exception, and that's on the first Friday of every month, once a month on the first Friday of the month, we release an episode that covers the current economic news. And these days, that economic news has a lot of people asking a lot of questions. And we're going to cover that today. So welcome to the April 2025 First Friday Economic Update. We're going to start by sharing the economic stories that are not in the headlines. If you have student loans, there may be changes to your repayment plans, but those changes are in flux and there's a lot of both confusion and misinformation. So let's take a moment, for those of you with student loans, to establish precisely what is going on. On March 7th, the White House issued an executive order titled Restoring Public Service Loan Forgiveness. And I urge you, by the way, not to read the news articles, the secondary sources about it. Go to whitehouse.gov and read the original executive order, which we will link to in the show notes. That's how you cut through other people's interpretation of it and read the direct source material. What does it say? First, it establishes that in 2007, Congress established the Public Service Loan Forgiveness Program in order to encourage Americans to enter the public service sector by promising to forgive their remaining student loans after they completed 10 years of service in qualifying public service jobs while also making 10 years of minimum payments. This, of course, opens up the question, what jobs are considered public service and what organizations are considered public service organizations? In other words, what qualifies as the public service sector? This executive order states that the definition of public service excludes organizations that, quote, aid or abet violations of federal immigration laws, that support terrorism, that support child abuse, that engage in a pattern of aiding and abetting illegal discrimination, or that engage in a pattern of violating state tort laws, including laws against trespassing, disorderly conduct, public nuisance, vandalism, and obstruction of highways. What does that mean? Fundamentally, if you work for an activist organization, and particularly one that engages in civil disobedience, or that works with undocumented immigrants or transgender youth, your work no longer qualifies for Public service Loan forgiveness. You are, of course, still free to engage in that work. You simply don't get the student loan forgiveness at the end of 10 years. Now, the order does not specify whether or not people who are currently enrolled or who are close to being finished with that 10 year mark will be grandfathered in. Likely, they will not be. And so if this is you, my recommendation would be to readjust your budget with the assumption that you will not have any student loan forgiveness that you will have to pay off your student loans yourself. Now, I say that in part because nearly 2 million borrowers might be heading for default and many don't know it. So what has happened is that at the start of the COVID 19 pandemic, the Department of Education paused federal student loan payments. But then they kept that pause in effect for a very long time for four years, four and a half years actually. The pandemic, of course, as we all know, started in March of 2020. The Student Loan Systems Masterclock resumed on October 1, 2024. That pause, that four and a half year pause, was so long that many people may simply be out of practice for paying their student loans. It's possible that many people may not even realize that payments have resumed if they've missed the notifications. And so currently 9.2 million borrowers are late on their payments. Now, of those, 5 million borrowers are under 90 days late and and the other 4.2 million are over 90 days late. There are a total of 43 million student loan borrowers in the US so the 9.2 million who are late represent about 1 in 5. One factor that may be contributing to the confusion into the late payments are changes to income driven repayment plans. And so there are a few things that are going on here. First, there's the save plan, S A V E which stands for saving on a valuable education. This plan is currently being debated by the courts who are debating whether or not the plan is legal. Eight million people have enrolled in SAVE and those 8 million SAVE borrowers currently do not have to make any monthly payments. While the courts are deciding whether or not the save plan is legal, there is also the pay as you earn plan, which is an income driven repayment plan. And there's also an income contingent repayment plan. Now, the form to enroll in both of those plans was removed from the Department of Education's website more than a month ago. Which means if you're already in one of those two income driven repayment plans, pay as you earn or income contingent. If you're already in one, you're still there. But if you want to enroll in one of those, you currently cannot, no new people can join. This is likely to change in the future. Right now the form is down as the Education Department needs to update it in order to be compliant with recent court rulings. It should be noted that the form has been down under the previous administration, the President Biden's administration as well, which is to say it is routine for the form to go down from time to time. Why are people making a big deal about it being down now when it actually goes down fairly regularly? Well, it's because student loan payments across the board were paused until October of 2024 and they were on a four and a half year pause. And so required payments have only been in force for the last six months. And that's why people are paying attention now when the form goes down as opposed to two years ago when nobody needed to make payments anyway. There's a new report out from the SP that confirms what we've all known, which is passively managed index funds outperform actively managed funds. Every year, S and P Global Ratings publishes reports that compare actively managed funds with a variety of stock indices. In March they released their Year End 2024 report which showed that passive index funds in 2024 outperformed about 2/3 of all actively managed funds. And it also showed that that 1/3 of the managers who outperform in any single year are generally not the same as those who outperform in the following year. And so when you compound the results over 20 years, about 90% of actively managed funds produce inferior returns to low cost index funds as well as index ETFs, exchange traded funds. And so the report concludes, quote, it is not impossible to beat the market, but if you try, you are more likely to achieve the returns of the bottom 90% of active managers. And so this report, the year end 2024 report, which was released last month, adds to an already massive body of evidence that shows that index fund investing is the optimal strategy for ordinary investors. There are two counterarguments to this. One states that this time is different because the market is so highly concentrated. You have a very small handful of a few tech stocks, the Magnificent Seven, that right now those seven stocks comprise 1/3 of the value of the S&P 500. And in last year 2024, those seven stocks drove more than half of the market's overall return. And so the argument is an active manager can cycle you out of that unhealthy over concentration of stocks. People also argue that as the popularity of indexing grows, investors are piling money into the market without any regard for company earnings or company evaluation. And that creates mispricing. And active managers can act as a counter remedy to that. Essentially, as the popularity of indexing grows, big companies continue to get bigger simply because in the index model, more money flows to the winners. And so those are the two counterarguments that are made. But the rebuttal is that if you look at the history of the stock market, the type of concentration that we have is not unusual. In fact, there was a study conducted by Hendrik Bessembinder that found that only 4% of publicly traded U.S. stocks have accounted for virtually all of the U.S. stock market's returns in excess over treasury bills. So the delta between T bills and stock market returns, virtually all of that can be attributed to 4% of publicly traded U.S. stocks. Now, that's since 1926. So there's a long history of eras in the stock market that have been dominated by a couple of companies. Railroad stocks in the early 1900s, Internet stocks in the 1990s, bank stocks in the early 1800s. The New York Stock Exchange started in 1792. Shortly after it began, almost three quarters of its value was bank stocks. That being said, most of the good data that we have, the better record keeping is really over the past 100 years, which is why so many of our studies go back to 1926. So all of that is to say that the new report from the S and P, from S P Global Ratings confirms what you and I already know, which is passively managed index funds beat actively managed funds about 90% of the time. There's big consolidation in the mortgage market. Rocket companies bought Redfin and Now they're buying Mr. Cooper, which means that Rocket is now going to represent one out of every six mortgages in the US So last month was a huge month for Rocket. On March 10, Rocket announced that it would be acquiring Redfin in an all stock transaction for a value of 1.75 billion, which comes to $12.50 a share. Now, the website Redfin has around 50 million monthly visitors. It lists around a million active listings both for purchase and rental. And it works with a staff of 2,200 real estate agents, which means that Redfin agents rank in the top 1% of agents working at any nationwide brokerage. So the deal between Rocket and Redfin combined, this highly visited real estate brokerage website with this massive mortgage lender, right? You go to Redfin to search for a home, to look at homes and to find an agent. And then once you do that, you need a mortgage lender. Boom. That's where Rocket comes in. So it created that integration in the system. And now a couple days ago, Rocket made another announcement that kind of took everybody by surprise. They announced that they were going to buy Mr. Cooper for 9.4 billion. Mr. Cooper is a loan servicer, right? So now they've got the trifecta. They've got home search, they've got mortgage origination and they have loan servicing. They have the whole life cycle. This deal now puts Rocket in charge of a loan book that's worth 2.1 trillion across 10 million clients. Why does that matter? Well, at a time when there's enormous upheaval and uncertainty in the US Mortgage market, we're also seeing consolidation of the major players and we're seeing relative upstarts become dominant forces. We're used to thinking of mortgage lenders and loan servicers as major financial institutions. Wells Fargo, JP Morgan Chase, and these financial institutions have been around for a very long time. Wells Fargo was founded in 1852. By contrast, Rocket Companies was founded in 1985 and it went public in 1998. It started as a mortgage broker, then it became a mortgage lender. In the late 90s, it shifted to an online focused mortgage lender. In 2003, it bought Quicken Loans back from Intuit. And in 2004, it launched quickenloans.com, it survived the Great Recession. In November 2010, it closed its 1 millionth loan. And here we are today, more than 7 million mortgages. And now hyper consolidation with the entire life cycle beginning from when you start searching for a home to when you find an agent. You get pre approved, you get the mortgage, you make the purchase, and then you get your loan serviced for the next 30 years. It now tracks all of that. And what's notable is that it's the company that started in the 80s that's doing it, not the company that started in the 1800s. To be clear, they're both in the game, but it's the newer company that's dominating. And there's a good chance that many of you who are listening to this either are or will be a customer of this life cycle behemoth, not only when you conduct home search and when you apply for the original loan, but now also for the following decades of loan servicing. We are establishing a strategic Bitcoin reserve and a digital asset stockpile. An executive order from the White House, which was issued on March 6, establishes both a strategic Bitcoin reserve and a digital asset stockpile. Now, many in the media have used these terms interchangeably, but they are distinct. The digital asset stockpile is simply a protocol by which assets that are forfeited get moved into the stockpile. So you've got the CIA, the FBI, ice, you have these disparate agencies that may be seizing digital assets. The digital asset stockpile is a holding space, a repository for digital assets that are seized. And so the digital asset stockpile, quote, shall not acquire additional stockpile assets other than in connection with criminal or civil asset forfeiture proceedings or in satisfaction of any civil money penalty imposed by any agency, end quote. So what this means is that the government will not be going out and acquiring new digital assets. With the exception of bitcoin, which we'll talk about in a moment, the federal government is not going to be going out and buying Ethereum, Solana Cardano to put into the digital asset stockpile. This is simply a stockpile of cryptocurrency that gets seized in a criminal or civil proceeding. And it can only go into the stockpile if there's a final adjudication and a final forfeiture. The government can seize cryptocurrency, and it can then later go back as restitution for the victims, or it can go back to the person from whom they've seized it, if that person wins their court case. But through the establishment of this digital asset stockpile, the FBI and the CIA and other agencies are legally required to report it. And the government, rather than discarding it right away, now has a protocol for where and how they will stockpile those assets. So that is the establishment of the digital asset stockpile. And the other portion of it is that the Secretary of the treasury can treat it sort of like a managed fund, but with only outflows. So the inflows are seized, but the Treasury Secretary is free to manage the outflows and sell off portions of it if they want to. So it gives the Treasury Secretary discretion over how to manage, almost act like a fund manager or a pseudo fund manager, in the sense that they get to manage the outflow of money. They get to manage the selling, but not the buying. The other thing that the stockpile will do is establish an audit to figure out just how much cryptocurrency the government currently has. There has not been a formal audit done, so we don't actually know how much they currently have. And so the stockpile creates a centralized account so that we will know how much is on the federal balance sheet. That's the digital asset stockpile. But separately, the same executive order also establishes a second thing, which is a strategic bitcoin reserve. Now, the bitcoin reserve is purely for preservation. It's so that the government can hold a reserve of bitcoin on its balance sheets. And by creating this bitcoin reserve, the government is functionally saying that among all cryptocurrencies, bitcoin is special. Now, Bitcoin is special for a variety of reasons. It was the original cryptocurrency. It is the most valuable one with about a $2 trillion market cap. It's most widely accepted as a store of value around the world. It is the only cryptocurrency without an issuer. It has never been hacked, meaning it's never been counterfeited. Even though, of course, with a $2 trillion market cap, there is massive incentive for a talented hacker to try to do so. So in that regard, it's been tested in a very robust way, and it has withstood this security scrutiny. As to how much Bitcoin the federal government currently has on its balance sheet, we don't know. There's an estimate that we currently have around 200,000 bitcoin left on the federal balance sheet, but we don't actually know because there's never been an audit. So this executive order provides for that first audit. What we do know, because we have the sales records, is that we once had around 400,000 bitcoin on the federal balance sheet, and we sold that for $360 million. If we had held that, it would be worth 17 billion today. In hindsight, you could argue that we made a. A mistake of prematurely selling Bitcoin, and we don't want to make that same mistake again. Although, of course, opponents of Bitcoin will make the counter argument that that $360 million worth of Bitcoin could easily have, in a theoretical hypothetical, alternate universe, could have gone down to zero. And so at least we got 360 million from the deal. And they would probably further make the argument that we would not want to be in the business of engaging with a speculative asset, that taxpayer money shouldn't be used to hold Dutch tulips. That's what the opponents of Bitcoin would say. By contrast, the proponents of Bitcoin say, you know what? Bitcoin is not Dutch tulips. It is among all cryptocurrencies. Bitcoin, for the reasons I previously outlined, is a special one, right? Bitcoin cannot be compared to some meme coin that's out there. Bitcoin is official currency. It is legal tender in El Salvador. The IRS considers Bitcoin property for taxation purposes. And the treasury defines Bitcoin as a convertible currency with an equivalent value in real currency or one that can act as a substitute for it. So the establishment of a Bitcoin reserve creates for, as the word reserve implies, a reserve in which there is a prohibition against selling. And so that's one of the big distinctions between the reserve versus the stockpile. The stockpile, the Treasury Secretary can sell those assets in order to, you know, balance the portfolio. The outflows of the portfolio. The reserve, there's a prohibition against selling. The purpose of the reserve is to hold. It is a purely a holding mechanism and not a selling mechanism. With the Reserve, the Treasury Department is allowed to figure out strategies for acquiring more Bitcoin if, and this is key, if that acquisition is budget neutral and does not impact taxpayers or the deficit. And so one of the major criticisms that people have lobbed against the Bitcoin reserve is, ah, you know, the government shouldn't be spending taxpayer money or running up the deficit in order to buy Bitcoin. Well, it's not. It states so clearly in the executive order that the strategic Bitcoin Reserve, quote, provided that such strategies are budget neutral and do not impose incremental costs on United States taxpayers, end quote. So they're not spending taxpayer money, they're not running up the deficit. They're simply looking for budget neutral methods of holding Bitcoin in reserve on the federal balance sheet. The Federal Reserve met April 18th and 19th in a meeting that was so uneventful that it barely made the headlines. As everybody expected, they decided to maintain the interest rate at exactly where it is. No changes. So the federal funds rate continues to be between four and a quarter to four and a half percent. That was a move that shocked absolutely no one going into the meeting. Markets were pricing in a near 100% certainty that that was what was going to happen. And sure enough, it did. The Fed released a statement on March 19th stating, quote, the unemployment rate has stabilized at a low level in recent months and labor market conditions remain solid. Inflation remains somewhat elevated, end quote. The Fed stated that they will continue to monitor what's going on and make any future monetary policy changes based on new information. But right now they're taking a wait and see approach. Speaking of a wait and see approach, what's happening with the trade war, with tariffs, with prices, with the stock market? How do we separate the fear and outrage that is fueled by the headlines from the reality of what's happening on the ground? What is it that we know and what is it that we fear? Based on pure conjecture, we're going to cover all of that next. You know, the thing about life insurance is that it's not something that you buy for yourself, it's something that you buy for your loved ones. Because you want to make sure that if the worst were to happen they would have some kind of safety net that they can use to pay off debts or cover big ticket items. And with policygenius, you can find life insurance policies that start at just $292 per year for $1 million of coverage. Some options are 100% online and let you avoid unnecessary medical exams. People will use life insurance to cover mortgage payments, or you can use it to cover college costs or even invest the money. And with policygenius, you can compare quotes from America's top insurers side by side for free. There are no hidden fees. They have a licensed support team that will answer questions and handle paperwork. And they're the country's leading online insurance marketplace with thousands of five star reviews on Google and trustpilot. Secure your family's tomorrow so you have peace of mind today. Head to policygenius.com or click the link in the description to get your free life insurance quotes and see how much you could save. That's policygenius.com so I'm in Atlanta right now and I'm here to help my parents. They just bought a home, one where they can age in place, a one story home. They wanted some help in tackling home projects. My dad actually brought this up. He was the one who suggested it and I totally agreed. He was like, I really want to spend some time looking at Wayfair and seeing what items they have. Because when you're doing these home renovation projects or like when you're moving into a new place or moving out of a new place, there's so much that's available on Wayfair. I mean, they have everything from kitchen cabinet hardware to floor and wall tile. They've got lighting, they've got sinks and faucets, they've got appliances, vanities, vanity lights, mirrors. For the renovation that they're doing, we've been for the last couple of days scouting Wayfair, looking at the options and the selection is massive. Absolutely. I mean, no matter what your style is, no matter what your budget is, whether you want modern or classic or just whatever your aesthetic and whatever your price point, they've got it. There's a huge, huge selection of home improvement items. And so whatever your spring home goals are, whether you need a light refresh or whether, like my parents, you're doing a total, total home renovation on a new purchase, shop the best selection of home improvement online. Get renovating with wayfair. Head to wayfair.com right now. That's W-A-Y-F A I R.com Wayfair Every style, every Home.
- [28:39]
Bob Elliot
This episode brought to you by Progressive Insurance do you ever find yourself playing playing the budgeting game, shifting a little money here, a little there, hoping it all works out well? With the name your price tool from Progressive, you can get a better budgeter and potentially lower your insurance bill too. You tell Progressive what you want to pay for car insurance and they'll help find you options within your budget. Try it today@progressive.com progressive casualty insurance company and affiliates price and coverage match limited by state law. Not available in all states.
- [29:22]
Paula Pant
Welcome back. Before we start the second half of the show, I want to make a note that today, the first Friday of April, is the last day that you can enroll in the second and final beta cohort. It's the final day to enroll in the final beta cohort of our course on how to get a raise. So the course is called you'd Next raise. It is all about how to ask your boss for more money. We are in development, we're testing it, but we're opening it up to anyone who wants to be part of our final beta cohort, our dress rehearsal cohort. If you decide to join the cohort, not only do you get to shape the course, but you also access it for a deep discount, a 37% discount relative to what it's price will be when it's ready for full release. If you're interested, go to afford anything.com yournextraise that's affordanything.com yournextraise and today is the last day. Today, the first Friday of April, is the last day that you can enroll. We close our doors at midnight. Affordanything.com yournextraise now let's turn to what's dominating the headlines. And I want to note that I'm recording this section at 9:30pm Eastern on Thursday. So everything I'm saying is current as of that time. However, things are changing so quickly that it's anyone's guess as to what the situation is going to be 24 hours from now. As of 9:30pm Eastern on Thursday, the financial markets just experienced their worst day since the depths of the pandemic. So The S&P 500 dropped almost 5%, 4.8% and that was the biggest single day decline since June of 2020. Financial analysts refer to this as a technical correction. The NASDAQ 100 fell even further. It dropped 5.4%. That's its worst day since September 2022. The tech sector was hit particularly hard. Apple fell 9% Nike, which relies heavily on global manufacturing, fell 14% and small companies also got hit pretty hard. The Russell 2000 index dropped 6.6%, which pushes it into bear market territory. It in total has lost more than 20% since its peak in late 2021. So small caps are not doing very well, which was the reason for that debate that we hosted between Paul Merriman and Dr. Carsten Jeska a few episodes ago. They joined us on episode 590 to debate whether or not you should be investing in small caps. So afford anything.com episode590 to catch that small cap deep dive debate. Why is the market falling right now? Well, the White House has imposed what economists are referring to as the steepest US Tariffs in over a century. The new policy establishes a universal 10% tariff on all imports to the US and even higher reciprocal tariffs that target specific countries that have trade surpluses with the U.S. one research group called Evercore ISI says that these changes will increase America's weighted average tariff rate from about 2% last year to approximately 24%. So it is as a weighted average more than a 20% increase virtually overnight. The implementation timeline is pretty aggressive. So the universal 10% tariff takes effect this Saturday, April 5, and the country specific reciprocal tariffs begin next Wednesday, April 9. The rates for those are going to vary pretty significantly by country. So the EU faces tariffs of 20%, India 27%, Vietnam 46%. China is going to see combined tariffs of 65% when the new reciprocal rates stack on top of existing levies. And the administration is also closing this one particular loophole. It's called the de minimis loophole, which previously allowed products that were worth less than $800 to enter the US without tariffs. So by virtue of closing the less than $800 loophole, that change could significantly impact E Commerce and a lot of the cheaper goods that flow in there are some exemptions. So Mexico and Canada are not going to face these new tariffs as long as they comply with the USMCA trade agreement. And for certain countries there are sector specific tariffs, like for example a new 25% tariff on automobiles. Those sector specific tariffs will replace any country specific rates rather than add to them. So a framework to think about as you're thinking through tariffs and specifically the way that the US has historically imposed tariffs, is that in the past it was much more common for tariffs to be sector specific. So if there was a particular sector of the economy that the US Wanted to protect, historically we would impose tariffs to protect a given sector. It's historically speaking, less common for tariffs to target any import from a given country. And what we're seeing right now is a mix of both, although the concentration is country specific rather than sector specific, but there is a mix of both. And the administration has indicated that they're going to be looking at placing additional tariffs on imported semiconductors and pharmaceutical tariffs specifically. They said that imported semiconductors is pretty much a done deal and those are going to be starting very soon. While pharmaceutical tariffs are under review now, one thing that is going to unfold in the coming days is what the international response is going to be. Will other countries impose higher retaliatory tariffs or will they focus on negotiating with the administration? We'll see. Japan's prime minister, for example, appears to be more focused on negotiation rather than retaliation. But it's quite clear that many countries around the world are worried. One former Japanese defense minister was quoted as saying, quote, we are approaching a national crisis, end quote. We meaning Japan. Meanwhile, back in the U.S. economists are warning that American consumers are going to feel the impact in different phases. So for some sectors, like cars, automobiles, it takes a while to feel the impact because you don't go out and buy a car every week. So for the average consumer, higher prices on new cars is not something that's likely to affect your day to day life. On top of that, of course, if car prices become prohibitive, you have a lot of discretion as to how you can react. You can delay buying a new car for a couple of additional years. You could buy used cars and sure, over a long period of time, we will feel supply effects. You know, if tariffs stay in place for many, many years, eventually we will start to see tightening in the used car supply, et cetera. But that's the type of sector specific tariff that really takes a while for the effects to trickle to the average American consumer. By contrast, the grocery store is a place where you do go every week, and that's likely where you're going to feel it first. Produce like bananas from Guatemala, grapes from Peru. That's likely where we're going to start to see the first effects. Now, I should add that Commerce Secretary Howard Lutnick has talked about the fact that there is certain produce that you cannot produce in the United States. So mangoes, for example, are hard to grow in the US at scale, you could potentially do it in certain parts of Florida, California, Hawaii, Puerto Rico, but simply due to the type of climate required to produce mangoes, that's not a fruit that we're ever going to really be able to produce at scale. And so according to Commerce Secretary Howard Lutnick, it's likely that items like mangoes could receive an exemption because it would be impractical to try to onshore any major mango industry in the U.S. by contrast, other items like wine, whiskey, beer, we can make that here. And so those categories are less likely to receive any exemptions. All of that is to say that it is likely that the first way in which you are going to notice the impact of tariffs in your day to day life outside of your portfolio is at the grocery store. If the tariffs stay in place, there is the possibility of either inflation or a recession or both. According to the research group Capital Economics, the inflation rate, which as of last month was 2.8%, may exceed 4% before the end of 2025. And research from Moody's, which is a credit rating agency, states that a recession could be likely if the tariff policies are fully implemented. The administration contends that a recession would be short term pain. That in their view, is required for the re on shoring of manufacturing jobs in the United States. And President Trump has said, quote, remember, there are no tariffs if you build your plant or make your product in the US End quote. To help make sense of these dramatic developments, I'd like to play two clips from an interview that I conducted on Thursday, April 3rd with Bob Elliot. As you recall, he spent 11 years as the head of Ray Dalio's investment team and he directly counseled the treasury, the Federal Reserve and the White house during the 2008 financial crisis. In this first clip, I ask Bob if tariffs will lead to the onshoring of jobs. Does this mean that manufacturing is coming back to the US if we were.
- [39:54]
Bob Elliot
In a circumstance where, let's say there's a 25% tariff on all manufactured goods that are coming to the United States and that that would persist for the next 10 years or 20 years, then businesses could start to think hard about whether it made sense to invest in things like automation or domestic production relative to the costs of importing goods and paying the tariff, either directly or indirectly. The challenge really is in an environment of a lot of uncertainty about how these policies are going to play out. Businesses are, they're basically frozen. I mean, think about it. If you were running a business, say a car company, and you were looking at this environment and what you've experienced in the last eight weeks is 25% tariffs, 0% tariffs, 25% tariff, 0 and 25, what do you do with that? I mean, that is a extremely challenging environment. And it's one in which what you see is that business is always in an environment of high uncertainty. Just pull back. They just wait and see. It's also one of the reasons why, if you look at things like CEO confidence numbers for major US Corporations, they're the lowest that they've been since the financial crisis.
- [41:03]
Paula Pant
Is that because they don't know how to invest in an environment where things change. So, I mean, on a near daily.
- [41:09]
Bob Elliot
Basis, how can you have any confidence when you don't know what the rules are? And I think that's the core challenge that businesses are facing. And while of course consumer demand is a primary driver of the economy, the fact that businesses are now basically curtailing any incremental spending on investment means that support to the economy has really evaporated. So it really is now down to basically whether households spend or not in an environment where they're effectively getting, in an indirect way, one of the biggest tax hikes that they've experienced the last hundred years.
- [41:44]
Paula Pant
Right. How long would tariffs have to stay in place in order to create that re onshoring of jobs?
- [41:52]
Bob Elliot
Well, if you think about, let's just say in the, in the auto space, one of the things that's important to think about is we have created incredible efficiency in our manufacturing sector. The total amount of manufacturing sector output over the last 5, 50 years has gone up by multiples, whereas the employment has been cut massively. And part of the reason why businesses have been able to do that onshore is they run very, very tight production that's intended to meet incremental demand. If you have a factory and it's not running essentially three shifts a day, fully employed, that's wasteful and that's just not acceptable in today's environment. In the competition that these companies face. What that means is in order to build new productive capacity, let's say in cars, 50% of US cars are met with domestic production and about 50% from offshore production. You can't just snap your fingers and create double the production out of these factories because they are essentially already running about as tight as they possibly can. And so what you have to do is you have to build new factories. And building new factories is not something that you do at the snap of a finger. It's something that takes, it could take five years to build a factory, and then it takes decades to actually get the payback from those. And so if you're sitting in the shoes of the CEO of Ford or GM and you're saying, should I build another factory or not, you've got to be thinking, you're thinking 30 years into the future. The economics have to look good on a 30 year time frame, not on a six week time frame.
- [43:21]
Paula Pant
Right. And given the fact that any given presidential administration happens in four year increments, how would it even be possible for tariffs to be in place long enough for the CEO of a major company to make that type of choice?
- [43:37]
Bob Elliot
I mean, it's possible. For instance, we saw some of the 2018 tariffs that were placed on China were persisted into the Biden administration, now obviously have increased substantially in the second Trump administration. You know, it's possible that there could be continuity around tariff policy between different administrations. But I hear you, it's very ambiguous. I think that's why in a lot of ways if you're building productive capacity domestically today, you're doing it in one of two different ways. Either it's so compelling in terms of automation and efficiency that you know, under a wide variety of circumstances you're going to be competitive, that's certain areas of production in the US economy, or what you're doing is you're basically just building domestic capacity to meet domestic demand in that particular good. That way, you know, you don't have to deal with there could be tariffs, there could not be tariffs. But my factory is in the us I'm producing for a US audience. And therefore what happens with international trade policy isn't going to matter that much. And that's why what you see is you see companies like BMW or Toyota, et cetera, building domestic US domestic production capacity in part in order to insulate themselves from these sort of cross border conflicts. But still the US imports hundreds of billions of dollars of automobiles as a simple example. So it's not like all of the US demand for cars is being met by US production.
- [45:10]
Paula Pant
What Bob just shared about the manufacturing sector highlights a disconnect between economic policy announcements and actual decision making in business. Because companies need long term certainty to be able to make multi decade investment decisions that involve major capital expenditures. But these tariffs are being implemented in an environment where businesses have already been experiencing policy whiplash. If the goal is to reshore jobs and bring manufacturing back to the US then what businesses will need is long term policy stability in order to justify those multi decade investments in domestic production capacity. Because the fact of the matter is it takes years to build a factory and it takes decades to get a return on that investment. And so the question is, let's say these tariffs do remain in place, are businesses going to be confident enough in their permanence in the permanence of the tariffs to be able to break ground on that factory and make those types of long term capex commitments. That raises a broader question about how tariffs fit into the overall economic landscape. Because when we look at the economy, there are multiple policy levers that are at work simultaneously. And what we really need to understand are not tariffs in isolation, but rather how tariffs interact with tax policy, with monetary policy, with government spending, with all of these levers. Here's Bob's perspective on how tariffs connect with other major economic forces. When I think about the overall economy, it strikes me that there are four levers. There's the lever of tariffs, there's the lever of taxes, tax policy, there's the lever that comes from the Fed when it comes to monetary policy, and there's the lever of government spending. Oftentimes when we talk about any one of these factors, it's common to have that conversation in isolation. How can we have a framework to think about the way in which all four of these levers work in concert with each other?
- [47:23]
Bob Elliot
Yeah, it's a good question. And I think having spent most of my career developing systematic and quantitative understanding of how the macro economy is going to work, I think that sort of question you want to think about first, each one of those pieces individually and how they will have their own discrete effects and then think about how they intersect with each other to then create maybe compounded effects in one direction or another. So if we just to your framework here, and I think this connects well with the wrecking ball environment that I was discussing at the top, which is we have tariffs, which are likely sort of unambiguously a negative growth policy. You have fiscal spending, which is, while the magnitudes are a bit ambiguous, is clearly moving in one direction, which is that spending is getting cut. Combination of doge efforts, sort of, let's call it internal administration efforts, combined with Congress who is taking steps to cut back on spending, particularly to a variety of different programs for lower income folks like SNAP and Medicaid. You take that together, that's a pretty negative environment. You mentioned tax policy. Tax policy. There's a lot of talk about sort of a big tax cut, right? Particularly when it comes to the extension of what's called the tcja, which.
- [48:48]
Paula Pant
The Tax Cuts and Jobs Act.
- [48:49]
Bob Elliot
Right, the Tax Cuts and Jobs act, which sort of more commonly is known as the Trump tax cuts. Back when he was in his first administration. One of the things that's important to recognize there is that those tax cuts are already current. Law. So if they get extended, they'll have no effect. Essentially, by extending the tax cuts, all you're doing is ensuring that there wouldn't be a tax hike occurring, but you actually are not getting any meaningful tax relief, which is important. So there's a zero effect of the tax cut extension. And then finally, so that's sort of like, let's put it on the board as tariffs, meaningful drag, spending cuts, somewhere between a modest to moderate drag tax cuts, zero. And then you have a Fed which is slow moving in an environment of elevated inflation, where they're going to be behind the curve, let's just say that. So it's going to take a lot of pain before they start to really move to ease. That combination of things is pretty bad. I hate to be the bearer of bad news here, but if you just sort of clinic like, don't think about it as a partisan. Don't think about it as what you prefer to have happen in terms of the economy. Just think about the macroeconomic mechanics and what the effects are of each one of those different pieces. And when you look at each one of those different pieces in the same way, with the sort of eye that a doctor would look at, at a patient's blood work or something like that, you see basically that that's netting out to something that's pretty negative in the short term.
- [50:15]
Paula Pant
Right.
- [50:17]
Bob Elliot
Real downer. I know.
- [50:20]
Paula Pant
You mentioned that maintaining the Tax Cuts and Jobs act, maintaining those same tax cuts would have a neutral effect. My assumption is that the reason that that would go through, if it goes through, is, is that the alternative would be further drag. So if those tax cuts were to expire, then we would functionally have a tax hike which would create even more drag.
- [50:43]
Bob Elliot
That's exactly right. And I think pretty much everyone in Washington is on board with not letting the Trump tax cuts roll off. It would be a pretty significant tax hike across the board and one that would be certainly undesirable in the context of all these other things that are going on. And in some ways, you know, if you look at the commentary from more fiscally conservative elements, particularly of the Republican Party, they see that there's a package here which is that we'll extend the tax cuts out, but in order to make sure that that doesn't continue to have the sort of elevated deficits that we've had for a while now, we need to essentially get what's called pay fors. So something's got to pay for those tax cuts to get extended. And so the revenue raised from the Tariffs, which, you know, the most recent policy, that could be four or five hundred billion dollars a year, that's actually pretty significant. It's about a quarter of the deficit just in terms of orders of magnitude, combined with the spending cuts which the budget process proposed, something like 2 or 300 billion a year in budgetary cuts. That kind of is enough to pay for most of the cost, essentially the implicit cost of continuing the tax cuts that exist so that we have something that's starting to bring the budget into balance, which is not the top goal of the new administration and the Republican Party, but it is certainly an important goal that they're pursuing through their work right now.
- [52:18]
Paula Pant
We saw in the February jobs report that even though jobs at the federal level had a slight reduction, as of the February report, we saw that government jobs at the state and local level actually had a gain. And so as of the February jobs report, which is as of the time that we're recording this, that's the most recent data that's out. The March jobs report is coming out tomorrow morning. So we're recording this on the first Thursday of April. And so tomorrow morning, which is the first Friday, we're going to get the March jobs report, but we don't have it yet. So we're going to use February's data. As of February's data, government jobs, when you include state and local, actually had a slight net gain. How does that factor into this? Or does it, or is that just too small to matter?
- [53:04]
Bob Elliot
Well, when you think about the labor market, government jobs are about 10ish percent of the aggregate labor market, and federal government jobs are Only a few percent of overall of the overall workers, about 2.5 million folks who work for the federal government, excluding postal services and the military, which are not necessarily discretionary efforts, they're kind of independent of the sort of normal discretionary budget. So 2.5 million, it's actually been flat basically for 50 or 60 years, which is kind of incredible when you think about how much they the economy has grown those jobs. One of the things that's kind of interesting is the new administration is going through a process of thinking about whether there's efficiency that can be gained from cutting back on those jobs. And there's been some documentation that's being circulated internally around cutting about a third of those jobs. So that would be 800,000 workers, give or take. 800,000 workers in today's labor market is actually about six months of labor force group. That's a pretty big set of cuts were they to happen over a six or 12 month period, they could essentially erase all the other job gains that would happen in the economy. Because we're an aging workforce, the demographics are such that the number of prime age workers is starting to fade meaningfully and we don't have nearly as much immigration as we had the last couple of years. And so that would be a big shock to the system laying off 800,000 folks. You're right that some of those are being picked up by state and local governments. Although state and local government employment, it has risen in recent years. But a lot of what we're seeing is it's mostly recovering from the COVID related drop and is now recovering from that. And so the level of, for instance, state and local employees today, relative to where we were pre Covid, it's only up a few hundred thousand jobs. And so the big picture story is the vast majority of, of the labor market dynamics and gains have been consolidated in the private sector. The vast, vast majority, about 90%, has been in the private sector. And nonetheless, these sorts of cuts that are being discussed could be a meaningful drag on the labor market in the next six to 12 months.
- [55:26]
Paula Pant
So that is kind of a bummer analysis of our current economic situation. Bob just walked us through how these four major economic levers, tariffs, government spending, tax policy and monetary policy, how these four levers are all currently pointing in worrying directions, at least in the short term. But as you'll hear in the interview, and we're going to play the full interview next week. As you'll hear in the interview, Bob is actually incredibly optimistic for the long term. He is short term bear, long term bull, short term pessimist, long term optimist. We'll unpack that in much greater depth in the full interview which we're going to release next week. Again, we recorded this Thursday, April 3rd, which is why I wanted to share these clips with you because this is as fresh as it gets in terms of getting a leading expert to sit down for a deep long form interview. Not just some quick soundbites that you see on the news, but an actual hour and a half discussion about what's going on right now. So we're going to play that next week, but I wanted to share those clips with you so that you can get a sense of where the economy and the markets are at this moment. That is our first Friday economic update. Thank you so much for tuning in. And as a final reminder, today is the final day to enroll in the final beta cohort, the dress rehearsal cohort of our course on how to ask your boss for a raise. It's called you'd Next Raise. It is in beta, it is in development, but we are looking for beta testers who will give us feedback. And if you are interested in this, you will get not only to shape the course so you'll get to see the dress rehearsal version, but you'll also get a deep discount, a 37% discount off the regular price of the course when we release it in full readiness mode. Come join the Dress Rehearsal Cohort, the Pioneers Cohort, where you will learn the tactics and most importantly, get the practice around how to ask your boss to pay you more money for the same job that you're doing right now. And these skills can apply to anything. We emphasize getting a raise at work, but you can apply the same skills to negotiating for a car because you're probably going to buy a used car after listening to today's episode. You could apply it to negotiating for a home, to buying a used couch off a Facebook marketplace to any transaction, whether it's simple, single issue, single counterparty, or whether it's complex, 3D chess, multi issue, multi party. You can access the course by going to affordanything.com yournextraise that's affordanything.com/yournextrays today, the first Friday of April is the deadline. We close our doors at midnight. Affordanything.com yournextraise thank you so much for tuning in. This is the Afford Anything podcast. I'm Paula Pant. If you enjoyed today's episode, please share this with the people in your life. Your friends, your colleagues, your neighbors, your co workers, your spouse, your kids. Share this with everyone in your life so that we all have a better understanding of the economic forces at play around us. And if you enjoyed it. Also, please, if I may ask, open up your favorite podcast playing app where you can leave us up to a five star review. Write a few words, explain what you like about the show, why you listen, what you learned. These reviews are so helpful and I read every single one of them. Thank you. Thank you so much to every single person who has left us a review. Have an amazing April. I will see you next week. This is the Afford Anything podcast. I'm Paula Pant and I will meet you in the next episode.