Tariff Derangement Syndrome
Treasury Secretary Scott Bessent has referenced “Tariff Derangement Syndrome” in media interviews, a variant of the more widespread “Trump Derangement Syndrome.”
Today’s CPI report is important, because it further erodes the widely believed narrative, which Fed Chair Jerome Powell has himself articulated, that Trump’s tariffs will spark an inflationary spiral.
Inflation rates for certain categories that one might consider vulnerable to tariff pressures actually came in quite light—including appliances, electronics and apparel.
Despite the good news, we are seeing quotes from many Wall Street prognosticators who insist that the inflation pressure is still en route. A Goldman Sachs strategist, for example, said today that “[t]ariffs have yet to drive substantial price increases…”
When it comes to investing, the problem with TDS (either kind) is that it clouds one’s judgments. Any Trump policy position is automatically harmful, and the degree of harm it will bring tends to get exaggerated.
Dislike and/or distrust of Trump has a tendency to channel one’s thoughts towards negative outcomes. When you are surrounded by people who share the same attitude, the problem only compounds.
Even though the administration has either cut deals or is in the final stages of negotiation with almost all major trading partners, many voices in the professional investment community and financial media continue to pound the table on tariffs.
As we noted back in April, extremely high tariffs that disrupt global trade and cause supply chain chaos would indeed be harmful to growth and potentially inflationary.
But we are now well past the point of tariff worst case scenarios and have a much clearer view of the administration’s philosophy on tariffs and trade.
In May, a Financial Times columnist coined the derisive catchphrase Trump Always Chickens Out (TACO) to describe Trump’s tendency to pause or reduce tariff rates.
Rather than characterizing Trump’s flexibility as weakness, we view it as smart strategy.
Panicked investors dumped shares in April because they feared massive across the board tariffs. We now see that the administration is using tariffs in a relatively careful, almost surgical, manner to achieve multiple goals.
A key point that many investors have missed is that if a certain type of tariff or tariff rate is going to be particularly problematic, the administration is prepared to make necessary adjustments.
The gold bar kerfuffle
A recent example is confusion over whether imported gold bars would be subject to tariffs in light of the current 39% tariff rate applicable to Switzerland, a country that has not yet reached a deal with the U.S.
Switzerland happens to be the world’s largest gold refining hub and accounts for a majority of global gold bar production. Applying high tariffs to gold bars made in Switzerland would have been potentially very disruptive to the gold market.
On Monday, August 11, Trump clarified in a Truth social post that “Gold will not be Tariffed!”
After rising a few percentage points at the end of last week on concerns of supply shortages, the gold price has retreated to levels that prevailed before the issue surfaced.
The episode is instructive in that it shows the administration’s willingness to pivot when its tariff policies have unintended consequences.
Stagflation?
Notwithstanding all the trade deals and demonstrations of flexibility when specific tariffs threaten to cause unique market disruptions, a lot of the negativity out there continues to hinge on tariff impacts.
The concern is that tariffs will hurt economic growth and at the same time create inflationary pressure, which will prevent the Fed from cutting interest rates.
