April 9, 2025

Macrofinancial Outlook for the Day

Releases

Wholesale Inventories

Context

According to the Census, Wholesalers continued to accumulate inventories faster than sales grew in February 2025, although that accumulation grew more slowly than it did following the lull that followed the election. The specific level is not alarming by historical standards, but wholesalers are not easily able to rapidly adjust the rate at which they accumulate inventories, with sales generally the more volitile component of this ratio. The February reading matches the assessment of the economy I made in Monday’s report.

Tariff Fallout

TS Lombard Note: “For The First Time In My Career, I’m Hearing Widespread Skepticism About The Competency Of US Policymakers.” According to the Financial Times, “The US is learning a lesson in market maleficence as post-”Liberation Day” shockwaves continue to ripple through global markets. Today’s pain point is US Treasuries, and if they go, nothing’s safe. Not even Games Workshop. So, is the surge in UST yields and dollar dip the arrival of America’s very own ‘moron risk premium’ — the double discount on bonds and currencies that Britain incurred following Liz Truss’s infamous mini-budget? No, says the guy who coined the term. In a note just published, TS Lombard’s Dario Perkins says the US is ‘a long way from a Liz Truss moment’, pointing to the relatively smaller move in yields since The Event: Sure, the vibes aren’t great, says Perkins:

For the first time in my career, I”m hearing widespread skepticism about the competency of US policymakers. This isn’t about politics. A lot of investors would welcome, for example, Scott Bessent’s vision for Rubinomics 2.0. And it isnt about ‘policy mistakes’. The Fed’s history is littered with straightforward errors. It is about recklessness. That is why many global investors are also making the comparison with the UK’s ‘Liz Truss moment’.

However, it’s the style and pace that really matters. Markets can often cope with things breaking slowly, but it’s a fast break that usually has knock-on effects, as the UK’s LDI crisis in 2022 showed. Here’s Perkins:

The scariest dynamic during the UK crisis was that bonds and sterling were selling off at the same time. That signaled a sudden loss of confidence among global investors. (Confirmed by my conversations with them at the time, and questions like ‘what the heck is going on in the UK?!’) Yields rose and the currency plunged. That was the dynamic at the heart of my MRP. Encouragingly this is not the dynamic we are seeing in the US. We did get a brief taste of it, but — so far — there is still global confidence in the dollar. Watch the situation closely, especially given the tone among international investors. Attacks on the Fed, talk of Mar-a-largo accords, threats to foreign UST holders, massive (arbitrary) tariffs . . . these are things that could trigger a nastier mkt dynamic. And that would be the path to a blowout in the term premium and a proper dollar crash.

So, less moronic than Liz Truss at least. Reassuring.” [Financial Times, 2025-04-09]

Specific Hits To The Economy

Multiple Companies Paused IPO Plans, Stopping That Capital From Being Raised. According to Bloomberg, “Fintech giant Klarna Group Plc and ticket platform StubHub Holdings Inc. are pausing plans for initial public offerings, people with knowledge of the matter said, after the US announced wide-ranging tariffs that sent the stock market into a tailspin. Klarna, a digital payments company founded in Stockholm, and New York-based StubHub had filed for IPOs with the US Securities and Exchange Commission in March and were gearing up to start marketing their shares to potential investors. The market turbulence has led to the companies holding off their IPO plans, said the people, who asked not to be identified as the information is private. Deliberations are ongoing and the companies could decide to resume their IPO work later, the people said. Representatives for Klarna and StubHub declined to comment.” [Bloomberg, 2025-04-04]

Amazon Canceled Orders For Some Products Made In China And Other Asian Countries. According to Bloomberg, “Amazon.com Inc. has canceled orders for multiple products made in China and other Asian countries, according to a document reviewed by Bloomberg and people familiar with the matter, suggesting the company is reducing its exposure to tariffs imposed by President Donald Trump. The orders for beach chairs, scooters, air conditioners and other merchandise from multiple Amazon vendors were halted after Trump’s April 2 announcement that he planned to levy tariffs on more than 180 countries and territories, including China, Vietnam and Thailand, the people said. The timing of the cancellations, which had no warning, led the vendors to suspect it was a response to tariffs. An Amazon spokesperson declined to comment. The company identified international trade disputes as a risk factor in its annual report released in February. “China-based suppliers provide significant portions of our components and finished goods,” the company said.” [Bloomberg, 2025-04-09]

Walmart Pulled Its Guidance To Shareholders, Citing Uncertainty About Tariffs And Their Impact. According to CNBC, “Walmart on Wednesday scrapped its outlook for operating income in the first quarter, citing uncertainty about the potential impact of sweeping tariffs on China, Vietnam and other key sources of goods across the globe. In a news release, the discounter said it wants to ‘maintain flexibility to invest in price as tariffs are implemented.’ It said it widened the operating income guidance for the fiscal first quarter, but did not provide a new range It had projected an increase of 0.5% to 2.0% in adjusted operating income in the fiscal first quarter.” [CNBC, 2025-04-09]

Uncertainty Delaying Manufacturing Investment

Following A 33 Percent Increase Last Year, Grid Scale Battery Projects Are Threatened By Tariffs That Could Cut “The Industry’s Torrid Growth.” According to Bloomberg, “President Donald Trump’s trade war threatens to slow down a fast-growing technology that’s key to the clean-power transition and preventing blackouts — big batteries. Energy storage devices large enough to feed the electric grid have been spreading across the US, with deployments surging 33% last year. Officials in California and Texas credit them with helping prevent blackouts during heat waves, when electricity demand soars, and integrating variable solar and wind power onto the grid. But despite efforts by former President Joe Biden to build a domestic supply chain, the US still relies heavily on imported lithium-ion batteries — with 69% of the imports made in China, according to the BloombergNEF research provider. Now, Trump’s tariffs are piling costs onto new battery projects. Analysts warn the increased costs will likely lead to cancellations and delays, cutting the industry’s torrid growth. ‘Many of the projects in the pipeline will be affected,’ said Isshu Kikuma, a senior associate at BNEF.” [Bloomberg, 2025-04-09]

• Trump’s Tariffs Would Switch The Expected 13 Percent To An Increase Of More Than 37 Percent. According to Bloomberg, “BNEF had forecast battery prices to fall about 13% this year, continuing the steep, long-term decline that has fueled the industry’s growth. Instead, Trump’s tariffs on Chinese imports will push prices up. Earlier this week, he planned 104% tariffs on Chinese imports, which BNEF estimates would have made large-scale batteries installed in the US 58% more expensive than without the new duties, with prices averaging $322 per kilowatt hour. Then on Wednesday, Trump boosted tariffs on Chinese products to 125%.” [Bloomberg, 2025-04-09]

• While Domestic Production Is Ramping Up, Many Components Are Still Imported. According to Bloomberg, “Even as US battery manufacturers ramp up production, they’ll still be impacted by tariffs. Domestic batteries rely on imported components, with US plants needing to import an estimated 83% of the cathodes and 67% of anodes they’ll use this year, according to BNEF. Suppliers are scaling up, but with the Inflation Reduction Act’s future now in question under Trump, some manufacturers may put their US plans on hold.” [Bloomberg, 2025-04-09]

• As The Trump Administration Threatens IRA Incentives For Production, Battery Makers Facing Tariffs Are More Incentivized Than Ever To Delay Expenses. According to Bloomberg, “Even as US battery manufacturers ramp up production, they’ll still be impacted by tariffs. Domestic batteries rely on imported components, with US plants needing to import an estimated 83% of the cathodes and 67% of anodes they’ll use this year, according to BNEF. Suppliers are scaling up, but with the Inflation Reduction Act’s future now in question under Trump, some manufacturers may put their US plans on hold.” [Bloomberg, 2025-04-09]

International Responses

Politico Obtained A Draft Of The Customs Codes Of Goods The EU Planned To Target In Response, With An Emphisis On Exports From States Won By Trump. According to Politico EU, “The EU’s response to U.S. President Donald Trump’s decision to impose so-called reciprocal tariffs on all of America’s trading partners may be less aggressive than expected, but it does show some creativity in its bid to hit the U.S. where it will hurt the most. According to an internal document seen by POLITICO, the Commission is considering slapping tariffs of up to 25 percent on a broad range of exports from the U.S. worth around €22.1 billion based on the EU’s 2024 imports. The list features run-of-the-mill agricultural and industrial commodities such as soybeans, meat, tobacco, iron, steel and aluminum — to hit the American sectors that rely most on transatlantic exports. Dig deeper, and it turns out the EU’s trade nerds have stirred some unaccustomed creativity into their expert knowledge of obscure customs codes, while channeling a helping of passive aggression to inflict pain on Trump’s base. EU countries are set to vote on the new duties on Wednesday, with no major opposition expected. Once they’ve approved the list (which is technically made up of multiple lists), the first set of tariffs on goods such as cranberries or orange juice, which the EU initially imposed in 2018 during the first Trump presidency but suspended in 2021, will take effect on April 15. A 25 percent duty will then kick in from May 16 on a second batch of imported items such as steel, meat, white chocolate and polyethylene. Finally, a 25 percent duty on almonds and soybeans will take effect Dec. 1. (Leave it to the Commission to build some suspense.) Overall, EU duties are set to hit up to $13.5 billion worth of exports from red states, according to POLITICO’s analysis of 2024 trade data. Let’s start with the EU’s No. 1 target — soybeans, the most valuable item on the bloc’s hit list, a product whose economic and symbolic significance for the Republican Party’s heartlands cannot be overstated. The U.S. is the world’s second-largest soybean producer and exporter, and the EU tariffs would hit a sector already battered by China’s retaliatory measures, rising global competition and falling prices. That’s not all: 82.5 percent of American soybean exports to the EU come from Louisiana, the home state of House Speaker Mike Johnson. […] The EU is also targeting beef from Kansas and Nebraska, poultry from Louisiana, car parts from Michigan, cigarettes from Florida, and wood products from North Carolina, Georgia and Alabama. While the Commission ended up dropping whiskey from the final draft after successful lobbying from France, Italy and Ireland, it did include other more niche items designed to cause the greatest pain to exporters in Republican states. These include (but are not limited to) ice cream from Arizona, handkerchiefs from South Carolina, electric blankets from Alabama, ties and bow ties from Florida (unless they’re made of silk, which Democratic California will be more than happy to provide), and washing machines from Wisconsin. Pasta from Florida and South Carolina will also face some tariff heat, though Italy will likely be delighted to fill the market gap. Finally, women’s negligées from Ohio and Kentucky, a fan favorite from the Commission’s first proposal, made the final cut; so did men’s undergarments, although they are mostly found in blue states.” [Politico EU, 2025-04-09]

Bloomberg: Trump Team Mulls Expoerter Tax Credit As Tariff Counterweight. [Bloomberg, 2025-04-07]

Interesting Research

Journal of Applied Economics: Partisan Conflict Over Trade And Immigration Policy Lead To Uncertainty Which Reduces The Return Of Travel And Leisure Stocks. [Gao, Zhang, Fan, and Yang in the Journal of Applied Economics, 2024-03-12]

Federal Budget

J.L. Partners: A Majority Of Republicans Would Raise Taxes On High Earners To Pay For A Cut In Taxes On Tips. According to Semafor, “Americans would support increasing taxes on high earners to pay for tax cuts on tipped income, according to new polling shared with Semafor. J.L. Partners surveyed 1,019 registered voters this spring and found strong support for that proposal. Overall, 52% of respondents said they would support cutting taxes on tips and increasing taxes on high earners, compared to just 26% of those who said they would prefer keeping taxes on high earners and tips where they are now. And a majority of Republicans backed that option as well, 54% to 26%. “If you needed any more proof that the Republican party has changed, this is it,” said James Johnson, a co-founder of J.L. Partners. “That voter realignment continues — and though it may frustrate some congressional Republicans, Trump’s grassroots strongly back his tax policy.”” [Semafor, 2025-04-09]

• Trump Told Senators Thune And Graham That He Would Be “Fine” With An Increase In Taxes On The Wealthy. According to Semafor, “President Donald Trump told Republican senators in private last week that he’s open to raising tax rates on some of the highest-earning Americans, according to three people familiar with the meeting. Trump’s comments came during a sitdown about his agenda with Senate Budget Committee Republicans and Majority Leader John Thune. After Sen. Lindsey Graham, R-S.C., asked Trump how he”d view a proposal to let taxes increase on the highest earners, the president replied that he”d be fine with that idea, the three people told Semafor. Trump’s remarks were not seen by attendees as full-throated support, but his willingness to entertain higher rates for upper-income taxpayers aligns with recent positive signals about the approach from some White House allies. Letting tax rates rise for higher earners could help inoculate Republicans against Democratic charges that Trump’s agenda breaks his promises to working-class voters who backed him in November.” [Semafor, 2025-04-08]

Following An Administration Led Push To Access IRS Immigration Data, The Acting Commissioner Of The IRS Resigned. She Is The Second Acting Head Of The IRS To Step Down In The Ministration’s First 80 Days. According to the Associated Press, “The acting commissioner of the Internal Revenue Service is resigning over a deal to share immigrants” tax data with Immigration and Customs Enforcement for the purpose of identifying and deporting people illegally in the U.S., according to two people familiar with the decision. Melanie Krause, who had served as acting head since February, will step down over the new data-sharing document signed Monday by Treasury Secretary Scott Bessent and Homeland Security Secretary Kristi Noem. The agreement will allow ICE to submit names and addresses of immigrants inside the U.S. illegally to the IRS for cross-verification against tax records. Two people familiar with the situation confirmed Krause was resigning and spoke to The Associated Press on condition of anonymity because they were not authorized to discuss it publicly. The IRS has been in upheaval over Trump administration decisions to share taxpayer data. Acting Commissioner Douglas O”Donnell announced his retirement from the agency after roughly 40 years of service in February as furor spread over Elon Musk’s Department of Government Efficiency gaining access to IRS taxpayer data. Krause replaced him.” [Associated Press, 2025-04-08]

• Yale Budget Lab: Declines In Voulnatary Compliance With Taxes By Undocumented Immigrants Could Cost 0.5 Percent Of Federal Revenue. [Yale Budget Lab, 2025-04-08]

Tax Models Of The Revenue Effects Of Trump’s Tariffs Projected Between $2.3 And $2.85 Trillion Over Ten Years, Less Than Half Of The $6 Trillion Projected By The Trump Administration. According to the Washington Post, ““We’re going to raise about $100 billion with the auto tariffs alone … In addition, the other tariffs are going to raise about $600 billion a year, about $6 trillion over a 10-year period.” As soon as Navarro made this bold statement, we contacted the White House for an explanation of his math. We were told to wait until after the president made his announcement of the tariff plan on April 2. During the speech, after Trump claimed the tariffs would raise “trillions and trillions of dollars to reduce our taxes and pay down our national debt,” we again asked for the numbers — and were told to wait until the speech was over. The Tax Foundation’s model concluded revenue would be $2.85 trillion over 10 years before dynamic effects. With dynamic effects, including the impact of retaliation from other countries, revenue would be reduced to just under $2.3 trillion. Both estimates are significantly lower than $6 trillion.” [Washington Post, 2025-04-09]

CRS Study Of Studies: The TCJA Had No Significant Effects On Macroeconomic Growth. According to the Congressional Research Service, “The 2017 tax cuts (P.L. 115-97), popularly referred to as the Tax Cuts and Jobs Act (TCJA), made significant changes to the federal tax system, including reducing taxes on corporations and—to a lesser extent—pass-through businesses. The act also reduced individual tax rates, nearly doubled the standard deduction, capped the state and local tax (SALT) deduction at $10,000, and introduced other significant changes. Governmental and private organizations estimated a range of increases in output as a result of this law, with conventional macroeconomic models projecting an increase in gross domestic product (GDP) of 0.3% to 0.7% over 10 years; other models sometimes estimated larger effects. Some studies have used data gathered after the TCJA’s enactment to estimate its economic effects, particularly on investment. This report reviews these empirical studies of the TCJA and finds that as a whole, they do not demonstrate significant effects of the TCJA on the economy.” [Congressional Research Service, 2025-04-07]

Context

The CBO’s budget outlook was written with the assumption that the TCJA would expire and that tax compliance would remain the same, and its projections are relatively dire. With a triple whammy of TCJA extension (unlikely to stimulate the economy if the past is any guide), reduced tax compliance, and a tariff induced slowdown could dramatically worsen the debt situation. Net interest was already forecast to become the second largest individual expenditure over the next 30 years.

Outlook

When the market is driven by events, the appearance of insider trading on a massive scale is especially damaging. The plot below shows the following, while not conclusive of anything, shows something that could easily be misinterpreted as evidence of widespread insider trading. In order to understand it, it is necessary to explain the idea of a zero day to expiration (0DTE) option.

A 0DTE option is an option that expires on the same day it is purchased. The option of interest is a call option on the SPY ETF, which, when held by whoever purchased the option allows them to (so long as they act by market close) purchase 100 shares of SPY at a price of $504 (called the strike price). These options are generally very volatile, but can be extremely profitable.

What the plot below shows is that today, in the minutes before Trump announced that he was pausing some of his tariffs, there was a surge in the number of these options that were purchased. This coincided with the S&P 500 briefly touching the strike price, and because of the dynamic risk-management practices of market makers, it is impossible to tell whether that drove the increase in options volume, or whether the increase in options purchases caused the option sellers to hedge their risk by buying the market.

That is the perfectly innocent explanation for that plot, and it may even be true. What is also true, however, is that it is very easy to use that plot to tell a different story. A story in which cronies of the administration were given a heads up to the pause announcement, and traded on that information. If that’s true, it would have been a very profitable trade. That option returned 631 percent today.

From a macrofinancial perspective, that is a huge problem. As a rule, people make decisions based on what they believe about the future. While it is more mathematically convenient to model these beliefs as mathematical functions of the past, for most people, a better model would be to see them as stories about how the world works. For generations, a popular (but by no means universally accepted) story about the stock market has been that it is a responsible place to put your money. By buying and holding shares of companies, you provide them with capital to invest, and in the process gain a piece of the returns on those investments.

In both his presidential terms, and especially in the days following his “Liberation Day” Tariff announcements, Donald Trump has been able to dramatically move the stock market. While that is a problem in itself, it becomes an even bigger one if he is seen to be moving the market for the benefit of his associates.

Then the market is not a bet on the future profitability of investments made by today’s companies. It is a casino in which you bet on his behavior.

Casinos are fun, and humanity could easily gamble as much as a trillion dollars every year, but they are not a source of capital formation. So, if the stock market starts to be seen as a casino, it is less a place to put your retirement savings. And if its less a place to put your retirement savings, it becomes a place to pull your retirement savings from.

That is a problem, because wealth is a bit more illusory than it seems. Noah Smith had a piece about this idea during the Crypto pop in 2022, but the general idea is that when people decide a financial asset isn’t a good place to keep money (and therefore try to sell it), the price goes down. Falling stock prices have historically been something of a vicious cycle, and if the primary method by which they are valued changes from the present value of future cash flows to the decisions of a famously volatile 78 year old man, there isn’t a clear definition of when assets will be cheap to anchor them. In the last two centuries, there have been around nine bear markets that took more than a decade to return to their real peaks. Three of those were longer than two decades.

None of those began during the working life of any American adult under the age of 72. As a result, almost everyone working has operated with the understanding that when they retired, the money that they (or that was saved for them) would be there, and worth more than it was when they put it in. Yesterday I wrote about how the lack of reliability due to DOGE’s changed to Social Security could be devastating in a downturn that materially degraded the economic experience of people who were eligible for it, but not currently receiving it. That was written with a more rosy assumption of the general story of the stock market than I can confidently claim after today.