Good morning, everybody, and welcome to the April Eye on the Market podcast. This one’s called Redacted: Straight talk on the decline in business confidence. I’ll explain what that means in a minute. First, let me apologize for my terrible voice this time. Recovering from a medical procedure last week. I hope to be better in a few days. And apologies to Rachel for having to take care over the last 72 hours.
I am a terrible patient. Okay, so if you remember, the cover of the Outlook this year was a picture of a guy in a mini lab, with a little red hat. And he was doing all sorts of experiments, and he was an alchemist in terms of trying to do all sorts of unique and unorthodox things to the global economy in addition to the, the medical, the scientific experiments he was doing. And we probably should have included a guy with a sledgehammer. If anything, I underestimated the speed and ferocity with which the administration would be trying to change the status quo. I assumed that they would break something that would cause a 10 to 15% market decline.
We did touch that at one point. I still think there are some additional shoes to drop, depending upon the outcome of some of the reciprocal tariff responses by other countries. So, you know, wait and see. In terms of what Redacted is all about, let me get into the details. So our favorite leading indicator, which is ISM new orders, less inventories, that’s rolled over.
It’s not plummeting. It’s not in recessionary territory. But it’s certainly rolled over pretty hard at the end of February. And growth estimates for the first quarter have come down pretty sharply. There’s this new Atlanta Fed GDP Now thing, which is a high-frequency indicator where they use high-frequency data to forecast the components of GDP. There was some weird, strange surge in gold imports in the first quarter.
If you want to strip that out of their model, you get to about a half a percent growth forecast for the first quarter. And we’re starting to see a lot of the consensus GDP forecast for the first quarter and future quarters come down. Starting to see a lot of full-year growth forecasts in the 1% range. Not a big surprise.
Most, but not all, economists view tariffs as both mildly inflationary and mildly growth dampening. So no surprises there. in terms of where we are on tariffs, it’s, it’s hard to pin down exactly. We’ll have to wait and see how the patchwork quilt of reciprocal tariffs might work when the full details are finally released. Based on the tariffs that have already been imposed, based on the calculations that we’ve done, we’re already at the highest tariff rate as a share of GDP in 100 years.
So you don’t need reciprocal tariffs to get you there. That would just simply push the rates even higher. And so clearly there’s an attempt here to restructure the global trading system, at least temporarily, in order to achieve certain objectives. Now, one of the things the administration has mentioned is not just tariff rates, but non-tariff barriers.
And there was this table chart in Bloomberg a couple of days ago that I thought was interesting. We created a stacked bar chart version because it shows how non-tariff barriers can dwarf actual tariff rate differentials. You take non-tariff barriers, and economists figures out figure out ways to convert them into tariff rate equivalent. So just to use an example from this page, of let’s say Vietnam, which is the has the third largest, largest trade deficit with the U.S. on a bilateral basis.
The tariff rate differentials 5%. But when you take into account Vietnam’s non-tariff barriers, it’s another 20% on top of that. So there’s a lot of discussion about non-tariff barriers. The administration’s also talked about that taxes. But I can’t find anybody to explain to me why that taxes should be on the list of administration’s grievances with respect to other countries that taxes apply to companies that are domestic in those countries.
And so, yeah, they apply to United States exporters, but they apply to everybody. So that does make sense. But non-tariff barriers are definitely something to focus on. And we have a chart, the piece this week that shows that the number of new non-tariff policy measures has been growing over time. There’s two major components. One’s called technical barriers to trade, and the other one is called sanitary and phytosanitary sanitary measures, which mostly refers to plants and agriculture.
And the bottom line is that when countries want to restrict trade, they got a lot of tools and a toolbox other than tariff rates, quotas, export subsidies, minimum import prices, import licenses, eligibility determination, certificates of origin. You know, you just imagine a room full of bureaucrats that are told to figure out ways of protecting the domestic industry and that you’ll pay them to do it.
They’ll come up with a lot of ideas. So a lot of these non-tariff barriers are part of the discussion as well. But the, the thing I want to focus on most this week is the decline in business confidence and capital spending plans. So we, we pulled this chart together. Other people have done something similar where we look at the various forecasts for business optimism by CEOs and also their capital spending plans more specifically.
And that’s rolled over pretty hard. And I anticipate that it will continue to decline. And so the real question here is, is this just tariffs or is this something else? And, or is it tariffs and something else? And I obviously think, I think it’s the tariffs and something else. Now what might those something else is, be, is where it gets complicated, because I would love to be able in an Eye on the Market to walk through the reasons other than tariffs.
White House policies that may decline may explain the decline in business confidence. At this point in time, it may not be the most prudent thing to do that. So I wrote the whole thing out and then voluntarily redacted all of the things that could potentially be upsetting to people if, depending on where they are and what they read and what it says about them.
And so whether it’s the impact of executive orders, DOJ’s policies, energy policies, idiosyncratic policies with no other explanation, they, they impact corporate law firms, large media companies, the biggest tech companies in the country, the auto sector, home building, agriculture, farm, biotech, energy, the pace of M&A, how the judiciary functions, how the IRS functions. I wrote it all out.
But I redacted it because I don’t think now is the right time for the unredacted version to appear in print. And I’m not going to go into any more of an explanation than that. So anyway, where do we go next? As I mentioned, I think that the tariffs are just part of the decline in business optimism.
The next phase of where this all goes obviously involves either the trading partners of the United States making sufficient concessions to the White House or the tariffs or temporary. I’m not saying that they will. I’m not saying that they should. I’m just saying that, you know, either other countries figure out ways of deferring or postponing or canceling those tariffs, maybe making for pledges of foreign direct investment.
The United States, increased defense spending. You know, when you, when you look at what’s going on in Germany, and the unprecedented increases in defense and infrastructure spending that the Germans have pledged, some people will argue that the White House policies are already working, or we end up in an escalating tariff conflict that could cause a lot more damage to the global economy.
I for one, I think it’s a hard call to make, a very hard call to make right now as to whether or not you get A or B. In other words, the concession outcome and tariffs are temporary and everything feels normal in a few months, or B, where you get escalating tariff conflicts that that, that at some point in the future have to be unwound.
That’s a tough call. So either way, I will say this, we’re already down from peak to trough 9% or so. Let’s assume that we have another leg down, which is what I think people should be on guard for. Once you get to the point where the market’s down 15% peak to trough, that’s been a pretty good—whoops, hit my computer.
That’s been a pretty good point at which to invest. These are kind of technical exercises, and don’t read more into it then it implies. But if you mechanically went back and invested in the market on every single day when there had been a peak-to-trough decline already of 15%, you would have done pretty well. This chart we have in the Eye on the Market shows what your one future one-year returns would turn out to be.
You know, a year later and the average return I think is somewhere around 12%. So if we do get that kind of correction, that wouldn’t be a bad time to start thinking about reinvesting. I think we’re also near policy, peak policy uncertainty. And as a reminder, tariffs are one-time hits to growth and inflation rather than perpetual ones.
And things like infrastructure permitting reform and banking deregulation, well, should eventually provide some kind of offsetting boost as one example. One of the things that may happen is the large banks are subject to these supplementary leverage ratios for purposes of capital allocation. U.S. Treasuries are included in that calculation. If you took U.S. Treasuries out of the supplementary leverage ratio, the large bank capital ratios would improve by more than half a point.
And the imputed leverage would go down by about $2 trillion, part of which the banks could recycle into, into more growth-related lending. By the way, the Boston Fed also found independently on their own that relaxing some of these constraints would improve market depth and liquidity. But, you know, the big picture right now is this is a very unorthodox environment.
I’ve never had to redact a piece before, other than two of them. One I wrote in 2021 on COVID, and it was about the likelihood of a lab leak. That piece was fully redacted and never published. I’ll write about that one day. And then the second one was a piece I write, I wanted to write last week. Fully drafted, but didn’t send. Again, a story for another day.
So thank you very much for listening. We will continue to be following some of the tariff developments very closely and be back to, to the update if anything radical changes. Thank you for listening. Bye.
Good morning, everybody, and welcome to the April Eye on the Market podcast. This one’s called Redacted: Straight talk on the decline in business confidence. I’ll explain what that means in a minute. First, let me apologize for my terrible voice this time. Recovering from a medical procedure last week. I hope to be better in a few days. And apologies to Rachel for having to take care over the last 72 hours.
I am a terrible patient. Okay, so if you remember, the cover of the Outlook this year was a picture of a guy in a mini lab, with a little red hat. And he was doing all sorts of experiments, and he was an alchemist in terms of trying to do all sorts of unique and unorthodox things to the global economy in addition to the, the medical, the scientific experiments he was doing. And we probably should have included a guy with a sledgehammer. If anything, I underestimated the speed and ferocity with which the administration would be trying to change the status quo. I assumed that they would break something that would cause a 10 to 15% market decline.
We did touch that at one point. I still think there are some additional shoes to drop, depending upon the outcome of some of the reciprocal tariff responses by other countries. So, you know, wait and see. In terms of what Redacted is all about, let me get into the details. So our favorite leading indicator, which is ISM new orders, less inventories, that’s rolled over.
It’s not plummeting. It’s not in recessionary territory. But it’s certainly rolled over pretty hard at the end of February. And growth estimates for the first quarter have come down pretty sharply. There’s this new Atlanta Fed GDP Now thing, which is a high-frequency indicator where they use high-frequency data to forecast the components of GDP. There was some weird, strange surge in gold imports in the first quarter.
If you want to strip that out of their model, you get to about a half a percent growth forecast for the first quarter. And we’re starting to see a lot of the consensus GDP forecast for the first quarter and future quarters come down. Starting to see a lot of full-year growth forecasts in the 1% range. Not a big surprise.
Most, but not all, economists view tariffs as both mildly inflationary and mildly growth dampening. So no surprises there. in terms of where we are on tariffs, it’s, it’s hard to pin down exactly. We’ll have to wait and see how the patchwork quilt of reciprocal tariffs might work when the full details are finally released. Based on the tariffs that have already been imposed, based on the calculations that we’ve done, we’re already at the highest tariff rate as a share of GDP in 100 years.
So you don’t need reciprocal tariffs to get you there. That would just simply push the rates even higher. And so clearly there’s an attempt here to restructure the global trading system, at least temporarily, in order to achieve certain objectives. Now, one of the things the administration has mentioned is not just tariff rates, but non-tariff barriers.
And there was this table chart in Bloomberg a couple of days ago that I thought was interesting. We created a stacked bar chart version because it shows how non-tariff barriers can dwarf actual tariff rate differentials. You take non-tariff barriers, and economists figures out figure out ways to convert them into tariff rate equivalent. So just to use an example from this page, of let’s say Vietnam, which is the has the third largest, largest trade deficit with the U.S. on a bilateral basis.
The tariff rate differentials 5%. But when you take into account Vietnam’s non-tariff barriers, it’s another 20% on top of that. So there’s a lot of discussion about non-tariff barriers. The administration’s also talked about that taxes. But I can’t find anybody to explain to me why that taxes should be on the list of administration’s grievances with respect to other countries that taxes apply to companies that are domestic in those countries.
And so, yeah, they apply to United States exporters, but they apply to everybody. So that does make sense. But non-tariff barriers are definitely something to focus on. And we have a chart, the piece this week that shows that the number of new non-tariff policy measures has been growing over time. There’s two major components. One’s called technical barriers to trade, and the other one is called sanitary and phytosanitary sanitary measures, which mostly refers to plants and agriculture.
And the bottom line is that when countries want to restrict trade, they got a lot of tools and a toolbox other than tariff rates, quotas, export subsidies, minimum import prices, import licenses, eligibility determination, certificates of origin. You know, you just imagine a room full of bureaucrats that are told to figure out ways of protecting the domestic industry and that you’ll pay them to do it.
They’ll come up with a lot of ideas. So a lot of these non-tariff barriers are part of the discussion as well. But the, the thing I want to focus on most this week is the decline in business confidence and capital spending plans. So we, we pulled this chart together. Other people have done something similar where we look at the various forecasts for business optimism by CEOs and also their capital spending plans more specifically.
And that’s rolled over pretty hard. And I anticipate that it will continue to decline. And so the real question here is, is this just tariffs or is this something else? And, or is it tariffs and something else? And I obviously think, I think it’s the tariffs and something else. Now what might those something else is, be, is where it gets complicated, because I would love to be able in an Eye on the Market to walk through the reasons other than tariffs.
White House policies that may decline may explain the decline in business confidence. At this point in time, it may not be the most prudent thing to do that. So I wrote the whole thing out and then voluntarily redacted all of the things that could potentially be upsetting to people if, depending on where they are and what they read and what it says about them.
And so whether it’s the impact of executive orders, DOJ’s policies, energy policies, idiosyncratic policies with no other explanation, they, they impact corporate law firms, large media companies, the biggest tech companies in the country, the auto sector, home building, agriculture, farm, biotech, energy, the pace of M&A, how the judiciary functions, how the IRS functions. I wrote it all out.
But I redacted it because I don’t think now is the right time for the unredacted version to appear in print. And I’m not going to go into any more of an explanation than that. So anyway, where do we go next? As I mentioned, I think that the tariffs are just part of the decline in business optimism.
The next phase of where this all goes obviously involves either the trading partners of the United States making sufficient concessions to the White House or the tariffs or temporary. I’m not saying that they will. I’m not saying that they should. I’m just saying that, you know, either other countries figure out ways of deferring or postponing or canceling those tariffs, maybe making for pledges of foreign direct investment.
The United States, increased defense spending. You know, when you, when you look at what’s going on in Germany, and the unprecedented increases in defense and infrastructure spending that the Germans have pledged, some people will argue that the White House policies are already working, or we end up in an escalating tariff conflict that could cause a lot more damage to the global economy.
I for one, I think it’s a hard call to make, a very hard call to make right now as to whether or not you get A or B. In other words, the concession outcome and tariffs are temporary and everything feels normal in a few months, or B, where you get escalating tariff conflicts that that, that at some point in the future have to be unwound.
That’s a tough call. So either way, I will say this, we’re already down from peak to trough 9% or so. Let’s assume that we have another leg down, which is what I think people should be on guard for. Once you get to the point where the market’s down 15% peak to trough, that’s been a pretty good—whoops, hit my computer.
That’s been a pretty good point at which to invest. These are kind of technical exercises, and don’t read more into it then it implies. But if you mechanically went back and invested in the market on every single day when there had been a peak-to-trough decline already of 15%, you would have done pretty well. This chart we have in the Eye on the Market shows what your one future one-year returns would turn out to be.
You know, a year later and the average return I think is somewhere around 12%. So if we do get that kind of correction, that wouldn’t be a bad time to start thinking about reinvesting. I think we’re also near policy, peak policy uncertainty. And as a reminder, tariffs are one-time hits to growth and inflation rather than perpetual ones.
And things like infrastructure permitting reform and banking deregulation, well, should eventually provide some kind of offsetting boost as one example. One of the things that may happen is the large banks are subject to these supplementary leverage ratios for purposes of capital allocation. U.S. Treasuries are included in that calculation. If you took U.S. Treasuries out of the supplementary leverage ratio, the large bank capital ratios would improve by more than half a point.
And the imputed leverage would go down by about $2 trillion, part of which the banks could recycle into, into more growth-related lending. By the way, the Boston Fed also found independently on their own that relaxing some of these constraints would improve market depth and liquidity. But, you know, the big picture right now is this is a very unorthodox environment.
I’ve never had to redact a piece before, other than two of them. One I wrote in 2021 on COVID, and it was about the likelihood of a lab leak. That piece was fully redacted and never published. I’ll write about that one day. And then the second one was a piece I write, I wanted to write last week. Fully drafted, but didn’t send. Again, a story for another day.
So thank you very much for listening. We will continue to be following some of the tariff developments very closely and be back to, to the update if anything radical changes. Thank you for listening. Bye.
