Market Memo: Seeing the Stag
Exploring Policy-Driven Slowdown & Stagflation Risks
When tariff rhetoric began ramping up in earnest this year, I sent a text message to a friend detailing a very specific fear of something I would likely have to do in 2025…
And yet, as we stated in our piece “Tariff-ied”,
The Trade War is not an empty threat […] Motivated by a longer-term strategy of balancing trade deficits and spurring domestic industry, the short term effects will likely come with supply chain disruption, export weakness, and price pressure.
That’s been proven painfully true, as the Trump administration's tariff agenda represents the most comprehensive restructuring of U.S. trade policy in centuries – pushing levies beyond the level of the Smoot-Hawley Tariff Act of 1930. The proposed measures include:
Universal 10% tariff on all imports from all countries, effective April 5, 2025
Additional "reciprocal higher tariffs" on countries with which the US has the largest trade deficits, effective April 9, 2025
Exclusions for certain goods including copper, pharmaceuticals, semiconductors, lumber, and energy products
Special provisions for Canada and Mexico tied to USMCA compliance
Authority to increase tariffs if trading partners retaliate
The methodology used to calculate reciprocal rates is simply driven by the relative trade imbalance of the counterparty (Trade Deficit ÷ Total Imports x 100)– not their actual tariffs imposed on US goods. This means these tariffs are not simply a bargaining chip to reduce trade restrictions on the US, but rather a more sticky policy meant to shrink the trade deficit. In other words, they may be much more prolonged than the market hopes.
If you traded during 2022, the very concept of considering stagflation probably brings back memories of macroeconomic doom posts that kept you short way longer than you should have been. But the context today is different. Rising prices against negative growth is a real risk – one that cavalier trade policy may be underestimating. Restructuring the global trade order poses risks to both the economy and stable prices that the Fed simply may not be able to effectively combat.
We’ve spoken at length about the recessionary impulse that tariffs and policy uncertainty can bring about. But there’s another aspect that we haven’t fully explored.
Thus, to my great dismay, let’s explore how Trump’s proposed tariffs could lead to a slowdown and quantify the risk of stagflation.
Could it happen? Do tariffs make it more likely?
We’re determined to be prepared either way.
So far, our base case has been that tariffs are deflationary.
But we’re determined to be prepared either way and most “stagflation” baskets right now are simply “what worked in Q1 and Q2 2022 baskets”. This risk calls for a more nuanced approach.