Odd Lots Episode Summary: Lots More on a Massive, Historical, Stagflationary Shock

Podcast Information:

• Title: Odd Lots
• Host/Author: Bloomberg
• Description: Bloomberg's Joe Weisenthal and Tracy Alloway explore the most interesting topics in finance, markets, and economics. Join the conversation every Monday and Thursday.
• Episode: Lots More on a Massive, Historical, Stagflationary Shock
• Release Date: April 4, 2025

Introduction: A Day of Surprises

In this episode of Odd Lots, hosts Joe Weisenthal and Tracy Alloway delve into the seismic economic developments triggered by President Donald Trump's unexpected announcement of sweeping reciprocal tariffs. Released on April 3rd, these tariffs have sent shockwaves through global markets, eliciting strong reactions from economists, investors, and policymakers alike.

Trump's Tariff Announcement and Immediate Market Reaction

The episode opens with a discussion on the unprecedented tariff announcements:

• Joe Weisenthal highlights the startling market response: “As we are talking right now, which is April 3rd, Nasdaq's on 4.8%” (01:29).

• Tracy Alloway attributes the market turmoil to Trump's tariff declarations: “...Donald Trump announcing his new reciprocal tariffs, which turned out to be a lot worse than a lot of professional analysts and economists had been expecting” (01:41).

The tariffs, set at 60% on China and 20% on other countries, have not only disrupted trade flows but also undermined investor confidence, leading to significant declines in stock markets globally.

Analyzing the Economic Impact of the Tariffs

Tom Orlich, an expert guest, provides a comprehensive analysis of the tariffs' implications:

• Historical Context: He contrasts the current scenario with the 1990s when low trade barriers were expected to benefit U.S. firms and encourage market reforms in China. “China developed really quickly up to the point where it became a rival to the United States for that biggest economy in the world... the US had a huge trade deficit” (04:29).

• Tariff Shock: Using a computable general equilibrium model, Orlich estimates that 60% tariffs on China could effectively eliminate U.S.-China trade, while 20% tariffs on Europe might halve U.S. exports to Europe. “If you put 60% US China tariffs into the model, it tells you that that pretty much wipes out US China trade” (07:29).

The Risk of Stagflation

The episode delves into the potential for the U.S. economy to experience stagflation—a combination of stagnant economic growth and rising inflation—as a result of these tariffs:

• Inflation Pressures: Orlich explains that unlike during Trump's first term, where the dollar appreciated and mitigated some tariff impacts, the current depreciation of the dollar exacerbates inflationary pressures. “This time around, it's depreciating. So that isn't going to offset tariff shock on inflation. It's going to amplify the tariff shock on inflation” (09:27).

• Supply Chain Disruptions: With tariffs imposed on multiple countries simultaneously, traditional methods like transshipment (routing goods through third countries) are less effective, leading to higher costs for U.S. consumers. “If you're hitting everybody at the same time, can a Walmart or a Target really absorb all of that in narrower margins, or is it just going to have to start passing it onto the consumer?” (09:27).

Corporate Responses and Market Skepticism

The hosts discuss the mixed reactions from major corporations and the skepticism from the markets:

• Investment Announcements: Despite pledges from companies like Apple, TSMC, Nvidia, and Hyundai to invest billions in the U.S., Orlich notes the market's indifference. “If you look at all of those companies which said we're making massive investments in the United States... the share price of those companies on the day after the announcement, basically didn't move” (12:27).

• Reshoring Challenges: High labor costs, underdeveloped manufacturing infrastructure, and pervasive supply chain integrations make reshoring a complex and costly endeavor. “Wages in the US are much higher than wages in China or Vietnam or Mexico... supply chains stretch across borders” (12:27).

The Federal Reserve's Dilemma

A significant portion of the discussion centers on the Federal Reserve's challenging position in addressing the dual pressures of inflation and economic slowdown:

• Policy Choices: Orlich outlines the Fed's predicament: “If you're the Fed, you see growth coming down, you see unemployment going up, you want to cut interest rates, but you see inflation rising because import prices are going up and so you want to raise interest rates” (15:13).

• Inflation Expectations: The uncertainty surrounding whether the inflationary impact of tariffs is transitory adds to the complexity. “If we see inflation expectations staying high, well, that would be a sign that the tariff shock and inflation isn't going to be transitory and the Fed's going to be tracking all of these things and weighing them in the balance” (15:13).

Future Outlook and Key Indicators

Looking ahead, Orlich identifies critical factors to monitor:

1. Retaliation from Other Nations: The potential for reciprocal tariffs from China, Europe, and other trading partners could further exacerbate economic tensions. “Do we see China and Europe and Japan saying... or do we see them saying, you give us tariffs, we're going to give you tariffs right back” (19:05).

2. Market Stability: Continued declines in major stock indices, particularly Nasdaq, could signal deeper economic distress and influence future policy decisions. “If that slide continues into the end of the week, into next week, if we see that very significant and sustained market fall” (19:05).

3. Import Price Data: Tracking the extent to which import costs are absorbed by foreign producers versus passed on to U.S. consumers will be crucial in assessing inflation trends.

Concluding Insights: Navigating Unprecedented Economic Turbulence

The episode wraps up with sharp observations on the intersection of politics and economics:

• President Trump's Strategy: The hosts critique Trump's approach, noting the alignment of tariff policies with electoral motives rather than economic prudence. “This is not usual in American politics... we have this multiple years of really high inflation, and the first thing that the new president does is push up the price of anything” (20:30).

• Listeners' Takeaway: With the imposition of the highest tariffs in a century, the U.S. economy stands at a crossroads, facing the risk of prolonged stagflation and diminished global standing. The strategic decisions made in the coming months will be pivotal in determining the nation's economic trajectory.

Notable Quotes

• Joe Weisenthal (01:29): “As we are talking right now, which is April 3rd, Nasdaq's on 4.8%.”

• Tom Orlich (07:29): “If you put 60% US China tariffs into the model, it tells you that that pretty much wipes out US China trade.”

• Tracy Alloway (09:27): “This is going to be a stagflationary shock. Pretty significant hit to US growth, pretty significant boost to US Inflation.”

• Tom Orlich (15:13): “If we see inflation expectations staying high, well, that would be a sign that the tariff shock and inflation isn't going to be transitory and the Fed's going to be tracking all of these things and weighing them in the balance.”

• Joe Weisenthal (20:30): “This is not usual in American politics... we have this multiple years of really high inflation, and the first thing that the new president does is push up the price of anything.”

This detailed summary captures the critical discussions and insights from the Odd Lots episode, providing a comprehensive overview for those who haven't listened to the full conversation.