“The great pilot sails even with torn sheet and—even if unrigged—nonetheless adapts what’s left of his ship to the journey ahead.”

-Seneca, Epistulae Morales XXX.3

“Nobody, I Tell You, Has Not Yet Escaped Destruction”

And just like that, the markets received partial deliverance from the unlawful trade tax increase the current US administration declared. Announced tariffs on the US’ trading partners, friend and foe alike, burned off like the fog at dawn—except those, critically, imposed on Chinese goods.

The US implemented a cumulative 104% levy on Chinese imports. In response, China announced an additional 50% retaliatory tariff, bringing the total levy to 84%, while the EU approved tariffs to hit around €21 billion of US goods. The renewed tariff escalation has intensified fears of a potential US recession and persistent inflation, which could constrain the Fed’s ability to ease monetary policy. Despite daily announced carve-outs and exemptions and newly imposed trade taxes, the markets continue to trade on as if the United States won’t arrive at the end of the road down which it has so foolishly already embarked.

When the administration claims that it fielded calls requesting negotiation from 70 countries, that means that zero countries called to negotiate. Why negotiate with someone you know doesn’t negotiate in good faith and who will abandon their agreements as soon as they are no longer convenient? The administration may have persisted in its incredible folly, as none of the King’s men dared controvert his peculiar theory of international trade with unpalatable Truth: he had to hear it from the bond markets, which saw yields on the ten and 30 year government bond spike; as well as from Jamie Dimon, chair of the world’s largest bank, that recession was likely drawing nigh.

US Treasury yields jumped on Wednesday, with the yield on the benchmark 10-year Treasury rising to 4.5% before alighting at 4.37%. The 30-year yield similarly took flight to 4.9%, heights it last crested three months past. It is not the levels of yields that was concerning, but rather the speed with which it achieved them. The sell-off reflected the unwillingness of investors to hold the debt of a country so likely to worsen its fiscal position through slower growth as well as subsidies to favored low-value-added industries (agriculture, simple manufacturing and minerals and mining). The United States continues to pursue its “Make America an Emerging Market Again” program through sacrifice of its future generations’ wealth.

We will have to wait to see what international capital flows look like to determine whether the sellers were largely foreign, domestic, or a complex of the two. There were reports of foreign selling and signs of a broader flight to cash, as some investors appeared to be liquidating positions. This added to concerns that US bonds may be losing their traditional safe-haven appeal.

In the Odyssey, having escaped the clutches of Poseidon’s cyclopic son Polyphemus, Odysseus can’t resist the urge to look back on the giant he has just blinded and barely escaped to mock him, his fury and his pain. It is in part for this act of hubris that Odysseus’ voyage home is first prolonged and then imperiled. Investors who haven’t yet adjusted their portfolios to reflect the heightened risk of investing in America, Inc. have been granted a reprieve. Hopefully they won’t spurn it.

Markets

The auction for new 10 Year Treasuries was completed on Wednesday at a yield of 4.35%—better than the morning’s yield, but reflective of reduced demand for the world’s benchmark security. The US dollar and its debt are typically considered safe haven investments during periods of market stress. However, this position is not a deus vult, and the market can change its mind as to how risk-free the riskless security truly is. The repricing of government bond yields has cascaded throughout broader bond markets, blowing out spreads on sovereign, corporate and high yield debt alike.

In this way, bonds are not diversifying losses in equities, a truly troubling development. During these periods, investors do well to allocate to long volatility, which is truly diversifying when correlations between equity and fixed income are high and rising.

Retail and Consumption

Total US consumer credit declined in its first fall since November. Consumer Credit was revised downward the prior month, so this downward movement continues the trend the revisions started. Credit expansion is well below market expectations by about a half. Ordinarily this wouldn’t be alarming, but when coupled with the growth in the savings rate, deterioration in consumer sentiment, rising inflation expectations and employment concerns, one has to wonder how big the hit to consumer spending will prove to be.

Surveys

The National Federation of Independent Businesses’ Small Business Optimism Index declined in March to 97.4, just below the 51-year average of 98, only three months after reaching a near record high of 105.1. Since last October, the Index component “Expected Business Conditions” has moved from net negative 5 percent to net 52 percent in December, and now back down to net 21 percent—or, as the NFIB puts it, “expectational whiplash!”

Consumer Sentiment continues to find a way, even in the flawed University of Michigan survey, to express bad feelings about the economy. Despite the Greatness we’re now witnessing, it managed to post the second worst reading on record. So much winning! The survey recorded the second-lowest reading ever—even worse than during the high-interest rate, high-inflation, low growth days of Ronald Reagan’s first term as President, and even worse that June 2022 when consumers were angered over rampant inflation. This measure incorporates a host of dissatisfactions employment-, financial-, and price-related.

Manufacturing

The last week was a poor one for macro data, but we can see that Wholesaler Inventories are up on a three-month moving average basis. These are running well below their average. Why would businesses not be stocking up on things to sell to other businesses?

The New York State Empire Manufacturing Index rebounded a bit from its spelunking trip last month but remains in contraction territory.

Prices

The Producer Price Index, a measure of pipeline inflation, posted a surprise drop, mainly due to the price of gasoline falling 11%. While this could be a sign of demand contraction, it could also be a sign of what the economy used to be like in the B.T. (Before Tariffs) era.

The best economic news of the past week was on inflation. The not-fatally-flawed Consumer Price Index (CPI), came in at 2.4% on a year-over-year basis. Ordinarily you would expect to hear a lot about falling inflation. I guess people have other things on their mind, like John C. Williams of the New York Fed guiding inflation at 4% due to tariffs.

In Sum

The equity and bond market continue to trade with high volatility as investors attempt to discount the impacts of future trade, fiscal, and industrial policy. Lower prices are a consequence of greater uncertainty, and because there is no plan nor strategy behind the administration’s hastily-announced-and-retracted decisions, they will continue to stalk US assets. Some of this uncertainty has and will manifest itself in broader, risk-off market action where all risky assets fall. As risk-on sentiment has incrementally returned, international assets have outperformed as investors shift toward more predictable equity and fixed income regimes. Expect this pattern to recur.