The New Math

Clawback: The Madness to the Method

Investors are bothered by the fact that the arithmetic behind the tariff announcement seems absurd. However, as we see it, the problem is not the calculation itself, but the logic that produced the calculation. The reciprocal tariff calculation takes the trade deficit and divides it by the amount that we import for 60 countries that have been classified as engaging in unfair trade. The tariff each country is charged is equal to half that trade deficit/import value ratio.

We understand those who are confused about the ratio. The reasoning behind the arithmetic becomes clear when U.S. Trade Advisor Peter Navarro explains that the “Tariff rates are half of the sum of all cheating.” If you think of trade as not involving goods but just swapping cash flows, the tariff calculation cuts the net cash flow that we send to these offending nations in half. That implies that the trade deficit is something that is owed to us, and we are clawing back half the amount that we have paid to our trading partners once we net out what they have paid for our exports.

Take China for example. Their $439 billion in exports, less our $143 billion in exports, results in a $300 million trade deficit. Navarro’s “sophisticated analysis” generates a 34% tariff, and when applied to their $439 in exports, yields about $150 billion in tariff revenue, cutting the deficit in half.

Imposing tariffs that define the trade deficit as a stolen good that we want back is not the prudent path toward good faith negotiations. This rough-handed approach obscures any actual unfair trade practices that have occurred that do need to be addressed. 

That fundamental disconnect will work at counter purposes to Washington’s objectives and is what has scared markets this week. We are not surprised by China’s retaliatory action this morning because the tariffs are so large, and more importantly, what is driving Washington’s approach to them as a trading partner invited pushback. The administration’s trade misperceptions must change before companies and investors can become optimistic again. 

Powell Not Being Influenced by Either Market

The market was hoping for a lifeline from Chair Powell when he spoke today as equity markets recently pushed the limit to the downside. Ten-year Treasury yields have dropped sharply this week and have fallen almost a full percentage point since their January highs, driven lower by plummeting real yields as growth expectations crater. Despite Federal Reserve forecasts of two rate cuts this year, the fed funds futures market is considering the potential for a rate cut as early as May and as many as four more cuts before the end of the year. Equity investors are even more impatient; the sharp equity drop has given rise to the hope for an emergency rate cut before the May 6-7 meeting. Investors were hoping Powell would be moved to cut rates because of the heightened uncertainty, but he was steadfast in saying that the Fed would not cut rates soon.

Powell did admit that the tariff increases were larger than expected and importantly, discussed a stagflationary scenario, “which is difficult for a central bank”. He acknowledged that “progress toward the 2% inflation goal has slowed.” When markets get into crisis mode, market tone is important to watch. His comments about lower growth and potentially persistent higher inflation could have created sharp new equity lows as he spoke. The fact that those lows did not occur is an initial sign that selling is becoming exhausted. We will need to observe many more negative headlines that do not move the market lower to even consider that a sign of a bottom, but we took note. We could easily close today at far lower levels, but the fact that Powell did not support markets through easier monetary policy and the result was a limited market drop during his comments is one positive aspect.

Cheese Puffs

Companies and investors may have reason to celebrate nationally, thanks to what happened in Wisconsin. A critical election win in Wisconsin Tuesday has been lost in the smoke surrounding the tariff chaos. Its significance could be far reaching. Susan Crawford’s victory swings the court to the Democrats, and aside from the optics of Elon Musk generating a backlash turnout for Crawford, the more important implication is that the state’s redistricting could favor Wisconsin Democrats running for the House at the midterm elections. The current seven-seat Republican majority could be cut just by the Wisconsin Supreme Court changing the congressional maps in the state. The Republican majority State Legislature drew the district lines for the 2024 election, which resulted in a six-to-two Republican House majority coming from Wisconsin. The expectation is that there will be a swing of four seats in the House just from this alone in 2026.

Given the growing concern among Republicans over losing the House at the midterms, we have seen Republicans starting to push back on President Trump. Iowa Republican Chuck Grassley co-sponsored a bill Thursday with Democratic Senator Maria Cantwell to re-establish Congressional power in setting trade policy. If passed, the bill allows Congress to pass a joint resolution approving any new tariff, or else it would expire in 60 days.

The broad implication is that if the Trade Review Act of 2025 is passed, this bill could force the administration to adopt an easier stance to the tariff negotiations. The sooner stability is introduced, the less likely businesses worry about a protracted trade war. The longer tariff uncertainty lasts, the higher the probability of firms cutting staff and starting a recessionary cycle. The markets would definitely cheer the passage of the bill.

What to Look for This Week

(All times D.S.T.)

1.    Thursday April 10, at 8:30 a.m. the March Consumer Price Index is released. Core CPI for February fell to 3.1%, its lowest reading since April 2021, and the consensus forecast for March is 3.0%. PPI is slated for Friday April 11 at  8:30 a.m. Core PPI has fallen for the last three months but is expected to tick up higher to 3.4%.

2.    Tuesday April 8 at 6:00 a.m. National Federation of Independent Business Optimism Survey for March. Look at the net percentage of owners raising selling prices; February saw an increase of 10 points, the highest in almost 4 years. Approximately 50% of CPI is not measured directly, so we like this data series, along with price plans 3 months ahead. Another survey, the University of Michigan Survey of Consumers, is on Friday at 10:00 a.m. That is when we will get the preliminary results for April’s 5-year inflation expectations.

3.    Monday April 7 at midnight Manhiem releases its estimate of Used Car prices for the last half of March. Our contacts have been reporting that dealers are actively buying cars at auctions nationwide and there are already signs of scarcity in anticipation of tariffs, even though new car prices should not rise until the existing inventory is depleted. 

FOMC Voters Speaking:  Wednesday April 9 at 2:00 p.m. the FOMC minutes for the March 18-19 meeting are released. Given how the risks skewed to stagflation, we will be reading the minutes closely.  Thin weak, but the highlight should be when Chicago Fed President Goolsbee appears at the Economic Club of New York on Thursday April 10 at noon. Friday April 11 at 11:00 a.m. NY Fed President Williams speaks about monetary policy and the economic outlook.

Note: We begin to tiptoe into Earnings Season starting Wednesday April 9 with Delta Airlines and Friday April 11 with Blackrock, JP Morgan and Wells Fargo. The major focus will be on earnings guidance in an uncertain environment.