Weekly Commentary: In Defense Of The Constitution

2025-03-25 02:40:19 ET

Summary

• Tariffs are the centerpiece of a radical plan of U.S. reindustrialization and self-sufficiency - fundamental to MAGA.
• With already elevated inflation at risk of a tariff and trade-war acceleration, central bankers and their QE cure-all will confront much greater challenges than those previously faced.
• While contagion impacts were generally subtle, some key EM currencies reversed lower.
• The U.S. current account deficit contracted in the fourth quarter, but the improvement could be temporary as goods imports surged to a record.

Originally published on March 21, 2025

Somehow, it staged a remarkable comeback. "Transitory" was spoken five times during the post-meeting press conference, twice by Chair Powell: "As I've mentioned, it can be the case that it's appropriate sometimes to look through inflation if it's going to go away quickly without action by us, if it's transitory. And that can be the case in the case of tariff inflation. I think that would depend on the tariff inflation moving through fairly quickly and critically, as well on inflation expectations being well-anchored, longer-term inflation expectations being well-anchored."

We'll have more information to decipher on April 2nd, though it may take a few months to have a clear grasp of President Trump's intentions. Markets, the business community and American households still hold out hope that instability and economic weakening would force the administration to retreat from its aggressive tariff regime. But we've seen enough to make some baseline assumptions.

Tariffs are the centerpiece of a radical plan of U.S. reindustrialization and self-sufficiency - fundamental to MAGA. Such a strategy of transformative structural change would unfold over years, marking a momentous reversal of the forces of globalization that have been instrumental in containing consumer and producer prices in the face of historic monetary inflation. From this analytical perspective, the resurrection of "transitory" would seem optimistic, if not imprudent.

"Transitory," though, retains an outside shot at redemption. Evidence builds by the week that the world is transitioning between cycles. The multi-decade global super boom cycle is faltering, with historic Credit and speculative Bubbles hanging in the balance. Uncertainty is at its most extreme.

The current environment is characterized by an extraordinary interplay of highly complex systems. Acutely fragile global market Bubbles have turned highly unstable. The odds of panics, financial crashes, and crises are uncomfortably high. Bubble economies are increasingly vulnerable to shocks in confidence and disruptions in market-based finance. Wild unpredictability has engulfed politics and geopolitics. The nature of policy responses to market dislocations is highly uncertain.

With already elevated inflation at risk of a tariff and trade-war acceleration, central bankers and their QE cure-all will confront much greater challenges than those previously faced. Will central bankers be slower to respond, providing crisis dynamics a favorable window for strengthening? And are they prepared for the massive QE that would be necessary in the event of a major speculative deleveraging episode? Adding another important layer of complexity, how might today's weakened global bond markets respond to powerful reflationary QE in an environment prone to upside inflation surprises?...

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