Sunday Scaries: There Will Be Blood (4.6.25)
Thoughts on dealing with the tariff turmoil for the week of April 7th....
Welcome to the inaugural post for the Accrued Interest Substack!
Apologies for the barebones website. This feels like moving into a new apartment but your furniture hasn’t arrived. Don't worry - we'll have plenty of time to get to know each other. But I believe in showing, rather than telling. So let’s dive into the work since we’re not getting any younger.
Markets began Monday in a nosedive, but quickly reversed into a brief “relief rally”. Unless we get a de-escalation in the tariffs, my recession case is basically 100%.
I won’t bury the lede. I am incredibly BEARISH on U.S. equities. Until there’s tangible evidence the Trump administration will roll-back tariffs, recession is inevitable.
A J.P. Morgan research report entitled “There Will Be Blood”, best captures my mood.
Here were the biggest 3 points:
Current tariffs would be the largest tax hike since 1968.
Expect retaliation from trade partners to exacerbate the current pain.
J.P. Morgan’s recession risk of 60% was, at the time, the most bearish forecast by any of the major U.S. Banks. This was notable because business leaders are still incredibly scared to publicly criticize the President’s economic policies.
The tariffs would be a tax to global economic activity. The estimated hit to U.S. GDP of 2.4% would be the worst tax hike since the 2.6% in 1968. Few would have ever imagined the U.S. setting off a once-in-60-year economic shock on purpose!
Next, China still has not paused 34% reciprocal tariffs vs. the U.S. While there are rumors of “many countries” reaching out to the U.S. to begin negotiations (allegedly!), there is no resolution to this crisis without cooperation with China.
JPM did an excellent job laying out 5 potential scenarios for the global economic outlook. When I was a Wharton undergrad many, many, crises ago…I LOVED taking probability and statistics courses for my concentration. (Who doesn't love a good decision tree?!?!) Decision trees are an elegant way for forecasters to quantitatively share their views that show the reader how they are dealing with uncertainty.
Lastly, we're going to get data points on inflation from the March CPI and PPI reports on Wed and Thursday, respectively. Any worse-than-expected inflation surprises will only add to investor pessimism. Any good news on inflation will be short-lived.
If you’ve made it this far - I hope you join me on this journey as we navigate the tariff turmoil! Feel free to send any feedback to simeon@accruedint.com.
Let’s goooooooooooo!