Wrecking Ball

The days were rough and it's all quite dim
But my mind cuts through it all
Like a wrecking ball
--Gillian Welch (2003)

Economic Reverberations: Tariffs, Markets, and the Balance of Power

“Jobs and factories will come roaring back into our country…And ultimately, more production at home will mean stronger competition and lower prices for consumers.”
—President trump, 4/3/2025

Financial markets reacted swiftly—and negatively—to the sweeping tariffs announced by the president last week. While the stated goal of revitalizing American manufacturing resonates with many, markets took a more skeptical view. Tariffs are taxes on imported goods, and historically, they have been inflationary. Inflation typically leads to tighter financial conditions and, ultimately, slower economic growth.

In the two days following the tariff announcement, the stock market lost over $5 trillion in value—marking the worst two-day drop since the COVID crash in 2020. This intense sell-off prompted the administration to partially reverse course, announcing a 90-day pause on the tariff rollout (with China being the exception).

“Tariffs are a tax cut for the American people.”
—White House Press Secretary Karoline Leavitt, 3/11/2025

However, the revised stance may not be enough to calm markets. The policy volatility has been unsettling, and according to Bespoke Research, the net effect of the most recent changes has actually increased the overall U.S. tariff rate, not reduced it:

“We’re going to say that again for emphasis: relative to a week ago, announced tariff rates have risen, not fallen.”
—Bespoke Research, 4/10/2025

Why the Bond Market Matters—A Lot

While equity markets grabbed headlines, the bond market sent perhaps the most critical warning signal. Typically, when stock prices fall sharply, bonds rally as investors seek safety. But this time was different. Instead of acting as a hedge, Treasury bonds were also sold off, driving interest rates higher at the fastest pace since 1982!

Why? Because tariffs stoke inflation, and bonds are particularly vulnerable to inflation risk. Rising yields in this context signaled a deeper fear: that the U.S. economy could be headed for stagflation—or worse, a recession driven by a policy misstep.

The bond market is often called the “smart money” for a reason. It tends to reflect fundamental risks with more precision than equity markets, which can be prone to short-term emotion and speculation. According to Barron's, the bond market “has an outsized impact on equity valuations, currency moves, and the overall cost of capital in the economy” (Barron's, 2024). In short, when bonds flash red, it’s not something to ignore. The financial markets have spoken.

Manufacturing, Myth, and Misplaced Blame

“Our country has been looted, pillaged, raped and plundered by other nations…”
—President trump, 4/3/2025

While strong rhetoric around manufacturing job losses is politically effective, the reality is far more complex. China is not without fault and is clearly a strategic competitor. However, the idea that foreign countries “stole” U.S. manufacturing jobs overlooks a hard truth: American corporations chose to offshore production to access lower labor costs and lighter regulatory burdens. This wasn’t forced upon them by foreign nations—it was a strategic, profit-driven decision.

Major U.S. brands—from Apple to Nike to Ford—relocated production overseas in response to shareholder pressure and the global race to the bottom on costs. The result? Widespread deindustrialization at home, but also decades of cheap consumer goods that helped mask stagnant wages.

The blame doesn't rest abroad. It lies in boardrooms and policy chambers that prioritized short-term gains over long-term national resilience.

The Trade Imbalance Fallacy

Trump has repeatedly cited trade imbalances as justification for tariffs. But trade deficits are not inherently bad—they often reflect the economic dynamics of a wealthy, consumption-driven nation.

Consider GDP per capita, a proxy for national wealth and purchasing power:

Country

GDP per Capita (USD)

USA $82,769

China $12,416

EU $42,130

Canada $53,431

Mexico $13,790

Vietnam $4,282

source: World Bank Data – GDP per capita (current US$)

We buy more because we can. The real fix for trade imbalances lies not in tariffs, but in narrowing the global income gap—either by reducing U.S. consumption (unlikely) or boosting economic growth in developing countries.

How We Got Here

In my 2019 letter Revolution, Taxes or War (3/22/2019), I argued that America's deepening political polarization stems from widening income inequality—exacerbated by policies that favor corporations over people. Citizens United cemented the influence of corporate dollars in elections, and in return, policymakers allowed the offshoring of entire industries while reassuring voters with cheap goods at Walmart and Amazon.

The erosion of America’s middle class didn’t come from immigrants or trade partners—it came from decisions made in C-suites and legislative halls in America. When shareholder value is the only north star, stakeholder priorities—like job stability, community health, and environmental stewardship—fall by the wayside. The result? Political instability, economic fragility, and a nation vulnerable to simplistic and false narratives.

Like economic crisis of the past, this self-inflicted tariff debacle, will present patient, long-term investors with opportunities. In the meantime, we’ve rebalanced portfolios to be more defensive, more diversified globally, and more liquid. Rather than spending too much time watching this fiasco unfold on a screen, I suggest you pursue joy, connect with friends and family, and get outside and enjoy nature.

I look forward to discussing further with you.

Thank you!

-randy

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