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First Quarter 2024 Client Newsletter

Published 4/12/2024

Battle Lines are Drawn 

Instead of waiting for the 3rd quarter to jump into election coverage, we figured you might want it now, in all its miserable glory. We’ll be skipping contentious social issues, so if you want to review anything other than the economic/market angles, please tune into your preferred political echo chamber.

Let’s get the big disclaimer out of the way—this note is nationally distributed to clients and advisors of all political inclinations, which means we’re playing the center. If you see something you like, then that line was written for you. If you see something you don’t like, well, you guessed it—that one was written for the other people.

We’ll mainly focus on outlining a few of the most important thematic categories. If one of our prospective Fearless Leaders has a noteworthy (and concrete) policy preference, we’ll discuss it. But we’re primarily aiming to inform about the status quo.

Let us know your thoughts; we’d love to hear your perspective!

International Trade Policy – Tariff Party III

The past 30 years have seen significant shifts in international trade relations. The U.S./Japan relationship was upended in the late 1980s after the adoption of NAFTA—a preference for fewer restrictions between the U.S./ Canada and Mexico. China's inclusion in the WTO in 2000 spurred its rise. And most recently, trade wars and the global pandemic sparked a wholesale shift away from China, at least on a relative basis.

Check out the share of U.S. imports by origin below. 


Interestingly, you'll note that the detrimental shift in China's exports to the U.S. has been fully offset by an equally positive shift for our friends —Asian trading partners excluding China, Canada, and Mexico. Many trade policy cheerleaders call this phenomenon 'friend shoring and nearshoring.' Why not encourage restriction-free trade with friendly partners, especially if they're geographically nearby? It makes good sense.

Naysayers tend to point out that Chinese businesses are clever. If your widget has a 25% tariff when sent directly to the U.S.A., you can change your widget to avoid the tariff or simply find an intermediate step in the trade route. So, instead of shipping your widget directly from Guangdong to the port of Los Angeles, you could opt for a brief stopover in Saigon to adapt the shipping manifest. Maybe you'd go one step further – set up shop in Saigon, ship intermediate goods to your new Vietnamese facility, complete your finished goods, and then ship directly to the port of Los Angeles. It's a bit involved, but it's probably happening to some degree. Capitalism finds a way! 

Here's some potentially dubious statistical work from The Economist. In their article they relate the increase of Chinese exports to Vietnam with Vietnamese exports to the U.S. Their conclusion is that much of the progress in the U.S. import origin story is from businesses skirting tariffs by employing the tactics described above.


The tweets about international trade stopped, but the tariffs never did. The implementation of the tariff policy was absolute chaos. However, since 2020, there has been near radio silence from both the U.S. and China.

The Chinese likely don’t want to stir the pot since they are well behind on their adherence to quotas set in the so-called Phase One Deal of 2019. The White House has hidden behind an ever-expanding Trade Representative’s Review. It’s especially interesting that not even the surge of inflation in 2021 was enough to entice policymakers to lower trade restrictions.

The chart below from the Peterson Institute outlines the tit-for-tat tariffs between China/U.S. They both ended their significant adjustments in 2019. For context, the tariff rates each country places on the rest of the world (RoW) is included. China tariffs on U.S. products is in red, and the U.S. tariffs on Chinese products is in blue. 

That blended rate is comprised of multiple lists that classify imports and apply a specific tariff rate. If you’re interested, we’ve added a link at the bottom that details the items covered by each list. As you’d expect, items with the most onerous tariffs have seen the most significant decline in trade. Also, note that all classifications other than the China List 1,2,3, and 4A have set dramatic new highs in import values since 2019.

Where do we go from here?

The Biden camp has been very quiet on its trade plans if it wins another term. It’s opted for a more targeted expansion of the trade war with China by selectively restricting semiconductor and sensitive business access. It’s tried to engage other countries, such as the Netherlands (ASML headquarters), to join in on a technology embargo with some limited success. If the inflation surge of 2021 wasn’t enough to convince Biden to implement tariff relief, I’m not sure what will be.

Trump has been more explicit about his desires. He has indicated that he’d like to impose 10% tariffs on all trading partners, though maybe that just means the countries he dislikes at any given moment. He’d also like to impose 60% tariffs on all Chinese goods. His opening remarks on the topic indicate a continuation of the style used in the last bout of trade tension.

As unpleasant as that style is for markets to digest, the potential inflation impact is most concerning—Bloomberg Economics expects his new policy would increase consumer prices by as much as 0.7% over two years. If markets in 2025 have the same angst about inflation as they do now, any upward pressure on prices could spur volatility, especially if rates on long-term borrowing haven’t eased.

Fiscal Policy – A Debate of Increasing Consequence 

Serious issues require serious people. Unfortunately, we have a serious problem regarding the United States’ budget balance, but serious people trying to address it are hard to find. It’s essentially a fake debate—both sides admit there’s a problem, but both quickly move to their corners and put forth policies that make things worse. It’s the one uniting principle in Washington.

Here’s a look at the 2023 budget from the Congressional Budget Office. The most impactful categories are along the outside of the circle—take note of those before moving your focus slowly inward.

The revenue situation is very straightforward - about $3.8 trillion, or 86% of all taxes collected, come from Individual Income and Payroll taxes. Raising corporate taxes gets a lot of press as a popular and ‘easy’ solution, but it’s not likely to ever be a needle mover. We have a spending problem, not a revenue problem.

The spending side is a bleak and clean-cut story—Mandatory (Social Security, Medicare, etc. being by far the largest) and Defense Spending, along with Interest on the national debt, account for about $5.2 trillion, or 86% of all spending.

Decades of careless or self-serving politicians have designed a spending apparatus that leaves very little to debate. Truly discretionary spending only accounts for 20% of the government’s annual revenues. The only programs that could meaningfully cut the deficit would result in prematurely curtailed political careers.

You probably noticed that the revenue circle only totals $4.4 trillion, while the expense circle totals $6.1 trillion. Of course, that shortfall is borrowed every year. We were apprehensive when discussing the debt in a newsletter last year, and we’re uneasy about it again this year. And it’s only getting uglier.

High interest rates on an ever-growing debt pile lead to a non-linear rise in interest expense. Many young adults learn this lesson in the opening years of credit card ownership, and we’re now collectively learning it as a country.

The blue line represents our government’s current interest expense. The effective rate we pay is just under 3%. But every day, the U.S. Treasury issues new debt to both retire maturating issues and to finance the budget deficit. Over time, that will cause our effective interest rate to converge with market rates; unfortunately, market rates are closer to 5% (top red line). Put another way – if we keep issuing debt at the current pace and rates stay high, the blue line will be approaching the top red line by this time next year. At that point, the interest burden would exceed $1.2 trillion – more than our current allotment for discretionary spending!

So, what's the plan? Trump hasn’t laid out much of note on fiscal policy ambitions, and Biden’s 2024 budget proposal to Congress was littered with wants that are unlikely to be granted. Neither is very compelling.

But no matter who our prospective president may be, they’ll have an organic opportunity to jump into the policy debate in their opening year as the Tax Cuts and Jobs Act of 2017 expires.

Here’s a highly summarized and filtered list of the TCJA provisions that will expire at the end of 2025 (accelerated depreciation provisions expire at the end of 2026). A link to the complete list of expirations can be found at the end of this note.

If you’re interested in how you’ll be specifically impacted, the Tax Foundation has a calculator that allows you to personalize your situation to see how your tax burden may change. Broadly speaking, though, if the entire swath of provisions expire, tax rates will go up. The breakdown below shows income groups and their pre/post effective tax rates.


In the last two administrations, each president’s party momentarily held majorities in both chambers of Congress. That afforded each party the opportunity to pass landmark fiscal policy—the TCJA in 2017 for the Republicans and the Inflation Reduction and Chips Acts for the Democrats.  

Most polling has the Presidential race and each chamber of Congress in a dead heat. It’d be remarkable if the next administration could again affect party-line changes to dramatically alter the U.S. government’s financial situation.

If that happens, let’s hope the policies enacted address the sustainability of our government’s finances.

Immigration – Demographic Decline Deferred?

Immigration is a scary topic in a widely distributed publication like this. There is so much anger. But, there may be enough anger to render the topic unifying. The asylum system, the citizenship process for legal immigrants, and the impossibly dumb exercise of sending home newly educated foreigners are all signs of an immigration system that's entirely broken.

And that's a shame. Because from an economic perspective, an intentional system that allows for immigration is an undeniably good thing. To grow an economy, you either add more people or make people more productive—simple as that.

The United States owes much of its success over the past 248 years to attracting immigrants and encouraging them to become productive citizens. Immigration becomes even more critical when your country is no longer naturally expanding.

The U.S. hasn't reached outright demographic decline like much of developed Europe or Japan. However, the natural level of population growth has become stagnant.

Again, this is not a judgment about the way these immigrants got here or the policies that may change as a result of the coming election. The undeniable truth is that our population is growing because of it, and economists have taken note. At a recent Q&A, Fed Chair Powell noted his surprise that the surge in net migration is putting downward pressure on inflation:

“How does inflation come down? It’s because [the] potential capacity of the economy has actually moved up, perhaps more than the actual output. So it’s a bigger economy but not a tighter one,” Powell said last week, adding this was “really an unexpected and unusual thing.”

And there’s no doubt that our country has a shortage of workers. The demographic wave of early retirements has left companies with more job openings than available workers in the labor force – interpret the chart below as 1.3 job openings per available unemployed worker. 

The situation is easing, but the labor market remains abnormally tight by any measure of normal. Maybe immigration is the key to matching up the skills and willingness needed to fill these jobs. A less tight labor market should be beneficial in the fight against inflation and for sustainable economic growth.

Ideally, our immigration system will be overhauled, and we can start doing things more intentionally.

Biden’s Inflation Problem – All About That Base

Despite record-low unemployment and rising wages, consumer sentiment has been notably lousy for years. We’ve dubbed it the “I’m fine, but the world is terrible” economy. Economists generally point to inflation as the root cause of the disconnect. And it makes sense; inflation is a cruel and regressive tax.

Let’s check in on the annual consumer inflation rate – remember, core excludes food and energy prices.

Policymakers are concerned that inflation might be 'stuck' advancing at around a 3.5% annual pace. That's a problem, given their target is 2%. But there's no debate that 3.5% per year is much more typical than the torrid 9% annual pace of inflation in 2022. 

So why are people still so upset?

I think about it like this: My grandma liked to say, "I used to get a cup of coffee for a quarter." This line was absolute comic gold when delivered in her thick Philly accent.

But that was her reference point, her anchor - one cup of coffee should cost $0.25. If some years later, the price for a cup went from $2.50 to $2.75, she wouldn't see that as an incremental 10% increase, she would see it as another 100% increase relative to her anchor.

That example is admittedly a bit absurd. Over the decades, the $0.25 anchor price would have become less and less meaningful. In all parts of life, our anchors drive our satisfaction or, in this case, our anger.  

So, zoom back to today's inflationary predicament. Psychologists are still trying to explain why many people describe the pandemic period as a blur. Personally, I cannot believe the lockdowns were four years ago. It seems like just yesterday. So, the theory is that based on that fast-forward effect, many people still view 2019 prices as a highly relevant anchor. 

 For example, the additional incremental cost for eggs resulting from a 3.5% increase today would equate to 6.4% based on our 2019 anchor! The more an item surged over the past four years, the more dramatic the effect—here's a look at some of the worst offenders. No wonder people are so mad!

You’ll note that many of the most aggrieved items on the list are food and energy, which is especially rage-inducing since we purchase from both categories frequently. Worse still, even when not buying them, we’re informed of the price by driving down the road or walking through a store!

Calming the public about inflation is extremely high on the White House's list of talking points. Unfortunately for Team Biden, as long as we’re collectively anchored to much lower prices, it will be nearly impossible to sway consumers into believing that things are getting more affordable.

Monetary Policy

Could the longest period of philosophical continuity in FOMC history be coming to a close? Since 2006, three people have held the title of FOMC Chair. Ben Bernanke, Janet Yellen, and now Jerome Powell were each elevated from their role as a Governor or Vice-Chair on the FOMC. Their transitions were generally unnoteworthy – each was already a known entity and seemingly cut from the cloth of their predecessor. Promoting internal successors would seem to be a promising approach for a staid institution such as the Fed that prizes its public reputation for reliability.

Before the reign of these three Chairs, the Fed was a spooky, shrouded entity that spoke in riddles. Now, monetary policy is at the forefront of economic and political discourse. Was it better the other way? Maybe. But the communication cat is probably out of the bag. Unless, of course, an outsider is soon due to hold the post.

When Jay Powell’s term ends in May of 2026, our next President will have the opportunity to determine who helms the Fed through 2030. It’s possible Mr. Powell will opt for retirement – by 2026 we should be well informed as to how successful his fight against inflation was. He’d have nearly 15 years of public service under his belt. And that personal fortune won in private equity would surely be begging to be spent down. But who knows, maybe he likes his job, torturous as it may be. Though it might not be up to him.

Despite initially being a Trump appointee, the former President has made no secret of his newfound distaste for Mr. Powell. Earlier this year, trusted advisors of the former President flew to Florida with a slate of candidates, all well-known entities. However, none of them currently serve in the Federal Reserve system. Let’s review:

Art Laffer—This supply-side idol served on Ronald Reagan’s economic policy board and has spawned a cultish following. He has never served in any monetary policy capacity, though his thoughts are made well-known through business news networks and editorials. He’d be a natural candidate from an ideological standpoint, though he’d be nearly 90 years old by the end of his term in 2030. He seems to be an unlikely nominee, but he’s done proud by being listed as a candidate.

Kevin Hassett—Another well-known face in the media, Kevin has chaired the economic policy department at the American Enterprise Institute and Trump’s Council of Economic Advisors. He has never served in a monetary policymaking position. It’s unclear to me whether he could gain Senate confirmation.

Kevin Warsh—He had a brief career at Morgan Stanley before going to work for and eventually being nominated by George W. Bush as a Governor of the Federal Reserve system. He resigned from the board in 2011, much to the disappointment of Mr. Larry Kudlow, a prominent advisor to Trump. While he may not be aligned perfectly with how the Fed does business right now, financial markets generally understand his perspective.

Biden hasn’t spoken about how he’d handle a Fed Chair vacancy. His feelings about Mr. Powell are likely to be colored over the next couple of quarters. If inflation surges higher again or unemployment spikes, Biden will need a head to feed the mob. Likewise, if inflation recedes but Powell doesn’t cut rates to provide a pre-election boost, Biden could get annoyed.

If Powell fails to walk that narrow path successfully, it might be Lael Brainard’s turn at the helm of the FOMC. She served as an FOMC Governor for nearly a decade before being tapped by Biden as his National Economic Council Chair (NEC) in 2022. The NEC position has only existed since Bob Rubin first served under Clinton in 1995; the role has never produced a Federal Reserve Chair. NEC Chair is inherently political, which could make Brainard’s path to Senate confirmation difficult. She would undoubtedly be a status-quo type nominee and the 4th consecutive to have served as Vice Chair under their predecessor. Markets would probably be just fine with that.

We hope this note has helped round out some of the data and narratives present in markets today. Want to discuss our outlook in greater detail? Give us a call.