Delayed Pain

Might Be What We Are Seeing With Tariffs

Keynesian and Classical economists who only work in theory have egg on their face. So do Democrats. They all predicted that Trump’s tariffs were going to be inflationary.

Based on the data we are seeing, they aren’t.

If you read this blog regularly, you know I am not a huge fan of tariffs, but I also pointed out that tariffs acted like a tax, so they weren’t inflationary; they were deflationary. Why? Because when you tax something, you get less of it.

Anecdotal evidence coming up.

Yesterday, on all the business channels, numerous featured commentators were saying we need to “wait and see.” Fed Chair Jerome Powell didn’t lower rates due to concerns about inflation caused by tariffs. MAGA pounced.

One of the things about a social media society is that there is no room for nuance, and there is an urge to say and form an opinion about something immediately. MAGA is doing that on tariffs saying, “I told you so.”

But, they might be wrong. Here is why.

When the Fed moves interest rates, the market reacts immediately because it prices in all available information. However, that move in rates takes a while to work its way through the economy. People have to adjust their behavior, and so do businesses.

Tariffs are the same.

The world looked one way, a tariff was imposed, and now it looks a new way. People adjusted. Initially, many people purchased goods as soon as the announcement was made, so sales of items increased. Businesses sold out of inventory. That is why you haven’t seen much in the way of rising prices.

Of course, we have had some herky-jerky pronouncements on tariffs. They were on, then delayed, then off for certain things, then on. Negotiations were taking place, and no one knew the outcome of them. They still do not. It is unclear what the actual result will be.

Hence, businesses do not know how to plan for future sales because they don’t know the price they will charge. They know there is a tariff, so production slows down.

Of course, we had the announcement that the US collected $100B in tariffs, but since we were already collecting tariffs prior to the Trump administration, what would be interesting is the marginal growth of tariff revenue compared to before, not the gross number. The administration doesn’t want pesky questions like that, and frankly, the press isn’t smart enough to ask them.

We haven’t had a recession, though a lot of economists and Democrats predicted it. Again, MAGA is screaming, “I told you so.”

I agree with anyone who says, “Let’s wait and see.” However, if I ran the Fed, I’d be cutting rates today based on the data that is coming in and knowing tariffs won’t be inflationary, but deflationary.

Watch how the “regular rich” behave. I think it will give you a clue as to whether a recession is happening or not. Are they going to be buying luxury goods or not? The uber-wealthy aren’t affected. They buy Ferraris. They are price-insensitive. The regular rich who buy Land Rovers and Porsches are not. Watch boat sales. Watch higher-end clothing retailers’ sales data. Watch wine and higher-end liquor sales.

I am hearing anecdotally that sales in a lot of these categories are almost at a halt.

Sure, there are characteristics in each market category that are unique only to that category. Detractors will point to those unique characteristics as having more influence over demand than tariffs.

But, at the macro level, I think the data will be telling. I suspect there is one more leg up in the stock market because I think Powell will cut rates, and the market will go up on the news. But, I’d sell that rally.

How about you?