How the Trump administration is using tariffs as a negotiating tool to weaken the U.S. dollar and increase the global competitiveness of U.S. manufacturers.
Topics covered include:
- Why U.S. stocks are falling, and recession risk is increasing
- How the U.S. dollar as the reserve currency is becoming a burden on the U.S.
- How the Trump administration aims to reduce its trade deficit and make it less attractive for foreign governments to own U.S. assets
- What are the risks of trying to weaken the U.S. dollar
Show Notes
A User’s Guide to Restructuring the Global Trading System by Stephen Miran—Hudson Bay Capital
Wonking Out: The Mysteries of the Almighty Dollar by Paul Krugman—The New York Times
On the Persistence of the China Shock by David Autor, David Dorn, and Gordon H. Hanson—NBER
Manufacturing, value added (% of GDP)—World Bank Data Group | Prosperity Data360
Two cheers for Germany’s fiscal reform by Neil Shearing—Capital Economics
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404: Why Is the U.S. Dollar So Strong? Will It Continue?
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Transcript
Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host David Stein. Today is episode 515. It’s titled “Tariffs and the Mar-a-Lago Accord. What Trump Really Wants.”
A Rough Start to the Year
It’s been a rough year for U.S. stocks. They’re down about 5% year-to-date, while global stocks ex-U.S. have gained almost 9%. Non-U.S. stocks have outperformed the U.S. market by 14 percentage points year-to-date.
Now, back in early February, when I was writing the monthly investment strategy report we do for Plus members and Asset Camp subscribers, I mentioned there was a lot of complacency in the markets. The VIX Volatility Index, which is a measure of fear—this is the implied volatility priced into U.S. S&P 500 stock options—in early February it was at 15.5. Today it’s up to 28.7.
The incremental yield or spread that investors demand on junk bonds, non-investment grade bonds in the U.S. in early February was 2.6%, near its all-time low. Now it’s a half a percent higher, spread of 3.1%.
This morning President Trump announced online that he would increase the planned 25% tariff rate on steel and aluminum coming from Canada to 50%. Trump said that was in retaliation to the export tax that Canada placed on electricity flowing into the U.S. There is more concern regarding a potential U.S. recession.
On Fox News on Sunday, President Trump was interviewed and they asked him whether there was a risk of a recession this year. And he replied, “I hate to predict things like that. There is a period of transition because what we’re doing is very big.” In his State of the Union address, he said that there would be an adjustment period.
Now, some of the major investment banks have increased their probabilities of a recession. JPMorgan Chase says a U.S. recession—40% probability in 2025. That’s up from a 30% probability at the beginning of the year. Economists at Goldman Sachs raised their 12-month recession probability to 20%, up from 15%. When we looked at leading economic indicators in our most recent investment strategy report, the risk of a recession is still low globally and in the U.S, but it is increasing and will increase if the U.S. stock market continues to sell off.
The new prime minister in Canada, Mark Carney, said in his victory speech, “America is not Canada, and Canada never, ever will be part of America in any way, shape or form. We didn’t ask for this fight, but Canadians are always ready when someone else drops the gloves. So Americans should make no mistake—in trade, as in hockey, Canada will win.”
There’s a lot going on in financial markets right now, so I spent some time this week researching what some of the Trump administration’s economic advisors have said to better understand what the game plan is. Is there an underlying economic philosophy that is driving what can at times seem like capricious decisions? “We’re going to levy tariffs. We’re going to take them off. We’re going to delay the tariffs a month”.
I’ve found two interesting pieces that I’ll link to in the show notes that shed some light on how Trump views tariffs, and their overall aim when it comes to trade, the U.S. dollar, and the global economic order.
The first is a fireside chat with U.S. Treasury Secretary Scott Bessent. This is from last October before the election, and it’s from Simplify’s Entering the Fall Thought Leadership Series. The second piece is a lengthy white paper by Stephen Miran. He’s President Trump’s nominee for chairman of the Council of Economic Advisors. The Council of Economic Advisors advises the president on macroeconomic matters. There’s a chair and there’s two other members.
The white paper is titled “A User’s Guide to Restructuring the Global Trading System.” What we have to keep in mind when it comes to trade and President Trump is he views tariffs as a negotiating tool to achieve both economic and national security aims.
Scott Miran wrote, “President Trump views tariffs as generating negotiating leverage for making deals.” Bessent alluded to a process of escalating tariffs in order to de-escalate them. The idea of putting tariffs on in order to get rid of all the tariffs.
And Bessent, in looking at how he views tariffs or considers the Trump administration viewing it—now he’s a part of the Trump administration, so presumably these are his views—is countries can be put into different boxes. The green box for those that have the most favorable treatment, and red, less favorable. What are they judging it on? He said shared values, shared economy, shared defense, shared currency goals. In other words, if a nation is more aligned with U.S. interests, tariffs could be lower.
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