Lots More on a Massive, Historical, Stagflationary Shock

Summary

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

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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.”

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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.

Transcript

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Bloomberg Audio Studios.

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Podcasts Radio News what a day, huh, Tracy?

[Tracy]

What a day. Another day, another crazy day. I don't know. I'm.

[Tom Orlich]

I'm.

[Tracy]

I'm getting a little tired. Is tired the word?

[Joe]

I'm not. I'm exhilarated. I'm. I am not getting tired. I think this is why we get up in the morning. But as we are talking right now, which is April 3rd, Nasdaq's on 4.8%.

[Tracy]

Yeah, obviously this is all because of Liberation Day and 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.

[Joe]

Yeah, the market's just totally taken aback. Tom Orlich, how surprised were you by yesterday?

[Tom Orlich]

We took him seriously.

[Joe]

Not seriously enough. I did a dead list.

[Tracy]

I am both the most popular trader and most successful trader at Citadel.

[Joe]

Fed is going viral. Barges this is an After School special.

[Tracy]

Except I've decided I'm gonna base my entire personality going forward on campaigning for a strategic pork reserve in the US Black Gold. These are the important Is it robots taking over the world?

[Joe]

No, I think that like in a couple years the AI will do a really good job of making the Odd Lots podcast. One day that person will have the mandate of heaven.

[Tracy]

How do I get more popular and successful?

[Joe]

We do have the perfect guest.

[Tracy]

You're listening to lots more where we catch up with friends about what's going on right now.

[Joe]

Because even when the odd lots is over, there's always lots more.

[Tracy]

And we really do have the perfect guest.

[Tom Orlich]

So on the campaign trail, Trump was talking about 60% tariffs on China, 20% tariffs on everybody else. And I think the reaction from Wall street and the reaction from most in the economics profession was this is red meat for the campaign trail. This is not a serious proposal. The US Economy, the global economy, the global trade system wouldn't be able to survive tariffs at this level. And now here we are on April 3, one day after liberation Day, and we've got tariffs at that level for China. If you add it up, tariffs may even be a bit higher than 60%. So it's a huge shock. And I think the question people are going to be asking is, what's being liberated from what? Is the US Being liberated from unfair trade practices from China and Europe, or are U.S. workers about to be liberated from their jobs and U.S. investors liberated from their returns?

[Tracy]

Yeah, kind of two different outcomes there. Tom, you were at our Washington, D.C. event, you think? By the way, thank you. You gave this great presentation showing some of your favorite charts at the moment. And you kind of made the point that when it comes to trade, the US has some legitimate grievances. Can you kind of walk us through that, especially in relation to China? And then also if you think these tariffs are actually going to start alleviating some of those grievances.

[Tom Orlich]

So I think it's interesting, Tracy, if we go back to the 1990s, it was a kind of unipolar moment for the United States, right? The Soviet Union had collapsed. China was still an early stage of its development. Its GDP was a kind of tiny fraction of that of the United States. And so the argument for free markets really made a lot of sense. Let's have low tariff barriers. US Firms are the most competitive firms in the world. They're going to be the biggest winners from low trade barriers. And guess what? Additional bonus if we trade with China, that's going to be a force for market reform in China and maybe even whisper it quietly. A force for democratic reform in China. That's not how things played out over the years that followed. China developed really quickly up to the point where it became a rival to the United States for that biggest economy in the world, biggest geopolitical power spot. And China didn't reform its economy. It didn't become more market based, and it certainly didn't reform its political system. And the US Had a huge trade deficit, and a lot of that trade deficit was with China. So jobs were being Lost opportunities were being lost, and even worse, they were being lost to America's biggest geopolitical rival. And that just doesn't make a huge amount of sense. And I think the Trump team and Trump himself deserve a bunch of credit for calling that out back in 2016 and saying, this isn't the deal we signed up for in the 1990s. This isn't the deal we signed up for when we invited China into the wto. Something has to change. The big question is, well, now we've got these sweeping tariffs. Is this going to deliver the realignment which Trump wants, or could there be a sort of significant adverse consequence for the United States? Could the United States end up just cutting itself off from the rest of the world and actually accelerating its own decline, its own fading as a global power, rather than restoring American greatness as President Trump intends?

[Joe]

Well, right now, if you look at the market, it's clearly the latter. And the tariffs are not just on China. They're on countries that many people would say are friends or allies or countries that have not risen in industrial might at the expense of the United States.

[Tracy]

Nehru.

[Joe]

Nehru, yeah.

[Tracy]

A tiny island in the South Pacific.

[Joe]

You know, you started your answer by saying when this was thrown out on the campaign trail, it was perceived that the global trading system could never survive something like this. We don't know. Maybe there'll be renegotiations that the White House is not giving that indication. As of the time we're talking about this. They're not indicating that they're going to backtrack because of the market. They're not saying this is the start of deal talks. Can the global trading system survive the level of tariffs that we see, assuming this is what's set?

[Tom Orlich]

So it's a difficult question to answer because we just haven't seen such big tariffs introduced in recent history. So we don't have much data we can use to estimate the impact. That said, we're making best efforts. What we've done is we've taken a computable general equilibrium model of the global economy. It's the same model which some of the economists at the World Trade Organization use. And we've used it to estimate the impact of this tariff shock. And if we focus for a moment on the China piece of it, well, if you put 60% US China tariffs into the model, it tells you that that pretty much wipes out US China trade. And that's pretty consequential. Right? The world's two biggest economies, a Chinese economy which is the home to major US Supply chains for, for Apple and others. If those two economies just stop trading with each other, that's a huge, huge shock to the system. Thinking about the rest of the world, well, most places haven't been hit by such high tariffs, but still a pretty significant shock. Europe, for example, now facing 20% tariffs when they sell to the United States. If you plug that into the big model, well, that tells you Europe exports to the United States dropped by around 50%. So these are huge consequential negative shocks.

[Tracy]

To the global trade system when it comes to inflation. I mean, lots of economists right now are ratcheting up their inflation forecasts and ratcheting down their GDP forecasts. To your point on inflation, how much of the ultimate result, the increase in prices of imports into America, how much does that depend on companies absorbing the costs? And how do you go about trying to analyze that? Because it seems kind of, you know, a bit of a wild card.

[Tom Orlich]

Yeah, I think it's a huge uncertainty. So if we think about Trump won and the trade war with China back then, a couple of things happened. So firstly, we had dollar appreciation and that offset some of the impact of the tariffs. Secondly, we had transshipment. So China carried on selling to the United States, but the goods went through Vietnam or they went through Mexico, and that meant they dodged the tariffs. And thirdly, we had retailers absorbing some of the shock in lower margins rather than passing them on to consumers. So all of these things meant tariffs on China went up 25%, but the US consumer didn't really feel the shock. And I think that's maybe how the Trump administration are thinking about it this time around. This time around, though, I think there's going to be some pretty significant differences. So the first difference is, well, the economic textbooks tell us when you apply tariffs, the dollar should appreciate, but guess what? 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. Secondly, this time around, it's not just China, it's everybody. Everybody's hit, being hit with the shock at the same time. And that means that that transshipment strategy, sending goods via Mexico or Vietnam, that's not going to work. You're still going to get hit with tariffs. And then thirdly, well, 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? So the experience in The Trump term. Trump's first term was tariff shock. No impact on consumer prices in the United States this time round? Well, it's difficult to say, there's a lot of variables at work. But I think this is going to be a stagflationary shock. Pretty significant hit to US growth, pretty significant boost to US Inflation. And that's why we're seeing this fierce stock market sell off today and the US Coming out worse than pretty much anybody else.

[Joe]

So crazy. Yeah, especially when you look at us versus every other stock market and how much everyone, how much more optimistic people are about the rest of the world. You know, there's this vision, right, that on the other side that there's pain now that we get to the other side and that there's this re industrialization and Trump talked about it yesterday, we're going to make great cars with us, the state of the art manufacturing, we're going to build chips again, all this.

[Tracy]

Stuff, the sunlit uplands of manufacturing.

[Joe]

What would have to happen for these tariffs to actually translate into or cause like I'm fine with taking some short term pain to be like one of the most advanced, technologically prosperous countries in the world. I see all those propaganda videos out of China with the drones and the cars. I'm like, yeah, I want that here. I'm susceptible to that too. I want like all that stuff produced here. What would have to happen to go from today to that vision?

[Tom Orlich]

Well, it's a tough one, Joe. So I think Trump will point to the pledges from Apple and TSMC and Nvidia and Hyundai and others to make massive investments in the United States and say, look, it's working. I made the tariff threat. Everyone's bringing their jobs and their factories back to the United States. I think it's probably a bit more complicated than that. Wages in the US Are much higher than wages in China or Vietnam or Mexico. Infrastructure in the United States. Well, there's not been a lot of investment in manufacturing infrastructure here over recent decades. Supply chains stretch across borders. If you're going to impose massive tariffs actually makes it harder to manufacture in the United States because factories are going to have to pay that tariff to get crucial inputs. And of course, the uncertainty which Trump has introduced into the system and which he sees as crucial to get deals done. Well, that uncertainty makes it harder to plan, makes it harder to make long term investment decisions and that makes it harder to reshore manufacturing as well. So it's striking to me if you look at all of those companies which said we're making massive investments in the United States. Apple $500 billion TSMC $100 billion. If you look at what happened to the share price of those companies on the day after the announcement, basically didn't move, right? Basically didn't move. And I think what that tells us is that markets investors are pretty skeptical. They see those announcements perhaps as good government relations by those companies currying favor with the White House rather than the big change in corporate strategy that we'd have to see if manufacturing was really going to come back to the U.S. yeah.

[Tracy]

And on the topic of investment, there's no fiscal offset either. I mean the administration is extending the tax cuts. That's basically the existing status quo. So it's not like the government is going to be funding a sudden rollout of investment to try to boost these industries. You mentioned stagflation earlier, Tom. What does the Fed do in response to stagflation?

[Tom Orlich]

So it's a tough one, Tracy.

[Tracy]

The Fed, you keep saying that.

[Joe]

Just thinking how do we get through? It's going to be tough anyway. Keep going. A lot of tough ones in our future.

[Tom Orlich]

You know, this is the biggest tariff hike that we've seen in the United States going back over the course of a hundred years and it takes tariff to their highest level in 100 years. So this is an absolutely enormous shock to the system. So I feel like somewhat justified in.

[Joe]

You are, you are, you are, you are.

[Tom Orlich]

So it's a tough one. And so 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. So what's the impulse? What's the kind of the major impulse? Which one do you follow? Well, some of the messaging which we've been hearing from Chair Powell is that the tariff impact on inflation, well, it could be transitory. If I was Chair Powell personally, I wouldn't be using the term transitory anymore. I think he kind of used that one up in the post Covid shock. But there we are. There's the idea that the tariff impact on inflation is going to be transitory. And so what you have to respond to is the impact on growth. And so that would suggest the impulse for the Fed is going to be more rate cuts. That said, there's a bunch of uncertainty out there. We don't know how big the growth shock is going to be. We don't know how big the inflation shock is going to be. We don't know if inflation expectations are going to move. 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.

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[Tracy]

Approach to Professional hiring so we've established that it's tough. At a minimum, what are you looking out for in terms of economic indicators or, I don't know, even corporate anecdotes to see which way things are going to go.

[Tom Orlich]

So I think there's a few things we're going to be looking for in the days ahead. So the first one is going to be the retaliate or kowtow choice for other countries, right? Do we see China and Europe and Japan saying okay, we don't want these tariffs, tell us what you want and we'll give it to you and you can take the tariffs away, or do we see them saying, you give us tariffs, we're going to give you tariffs right back. And if it's that retaliation path, that's going to amplify the impact. Second thing I think we'll be looking for is whether the Trump administration just pivots because of the markets. Right. We've got the Nasdaq down more than 4% today. If that slide continues into the end of the week, into next week, if we see a very significant and sustained market fall, it's possible that we'll see that Trump put come into play. And then in terms of indicators, we're going to be looking at, well, of course we're going to be tracking the import and export numbers. Another important one to look at is going to be the import price data that's going to tell us how much of this cost is being absorbed by foreign factories and how much of it is being passed through to U.S. retailers and potentially the U.S. consumer, who, by the way, is also the U.S. voter. And midterms. Well, 2026, not that far away.

[Joe]

Tracy, can I just say two things that struck me yesterday? One is they knew this was going to slam the market.

[Tom Orlich]

Oh, yeah.

[Tracy]

And they did it anyway.

[Joe]

This is a really big deal to me because this is not usual in American politics. Some might even look at that and say, I'm impressed. Right. Because you're like, well, for once we have a president who is not so obsessed with the market. I don't know. I'm just saying. I think that's noteworthy.

[Tracy]

In his speech, he also talked about how much stock prices went up during his first term. First term. Which is, you can't have it both ways.

[Joe]

I thought that, too. And then I just think it's, man, we had this multiple years of really high inflation, and the first thing that the new president does is push up the price of anything. It's really funny.

[Tracy]

Tom, I have one more question for you. This is a very important one. It's a bit of a loaded question, but here goes. How much fun did you have at our Washington, D.C. event?

[Tom Orlich]

Just an absolutely enormous amount of fun, Tracy. And my message to Odd Lots listeners is if Joe and Tracy come to your town, snap up a ticket immediately.

[Joe]

We didn't plan that. That was amazing. That was a perfect answer.

[Tracy]

Foreign.

[Joe]

Lots More is produced by Carmen Rodriguez and Dashiell Bennett, with help from Moses Andam and Kale Brooks.

[Tracy]

Our sound engineer is Blake Maples. Sage Bauman is the head of Bloomberg Podcasts.

[Joe]

Please rate review and subscribe to odd lots and lots more on your favorite podcast platforms.

[Tracy]

And remember that Bloomberg subscribers can listen to all our podcasts ad free by connecting through Apple Podcasts. Thanks for listening.

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