Ed Smith
Appearances
WSJ What’s News
China Hits U.S. Goods With 125% Tariff
Boardrooms are dumbstruck by what's just happened and they yearn for clarity. This reprieve doesn't really give that much clarity. So I think business investment spending and hiring is going to be on ice.
WSJ What’s News
China Hits U.S. Goods With 125% Tariff
Well, over the last few weeks, we've seen this really tight relationship between the level of the S&P and a daily measure of trade policy uncertainty that's drawn from news flow. And when we had the reprieve, the 90-day reprieve announced from the White House, you obviously saw this huge rally in markets. But actually, that trade policy uncertainty index only came back a little bit.
WSJ What’s News
China Hits U.S. Goods With 125% Tariff
And so we're not surprised that actually yesterday, the market gave back some of those gains. And I think the next 90 days are still going to be full of uncertainty. And I think that's going to put a ceiling on how far markets can climb back.
WSJ What’s News
China Hits U.S. Goods With 125% Tariff
If you think pre-liberation day, Estimates of the effective tariff rates on US imports going into that seem to stop out at around 15%, whereas with the 10% tariffs on everything, the tariff now on China, and some of the 25% sectoral tariffs. We're actually still beyond that upper bound of those previous estimates.
WSJ What’s News
China Hits U.S. Goods With 125% Tariff
It's a little difficult to exactly figure out what the effective tariff rate is, but we think it's somewhere between 16% and 21%. And that's going to hurt. The Fed's targeted measure of inflation by around about 1%.
WSJ What’s News
China Hits U.S. Goods With 125% Tariff
Yeah, I think that's right. So on the morning after Liberation Day, we raised our recession odds to 45%. Then we had escalation, probably taking it higher. We're now back to, I think, around 40% recession odds. And whilst there are definite upside risks that could get us to decent growth this year if we get a lot of fiscal stimulus, assuming bond yields then don't spiral,
WSJ What’s News
China Hits U.S. Goods With 125% Tariff
But our base case, our most likely case is that growth is still going to slow meaningfully this year, that the next couple of quarters are going to be hard, in particular, as business investment probably goes on hiatus. And so we're looking at probably sub 1% growth in the US this year.
WSJ What’s News
China Hits U.S. Goods With 125% Tariff
Yeah, consumer sentiment indices used to have a really good relationship with consumer spending. They were pretty good at forecasting the next quarter ahead's spending. But since 2016, actually, and particularly since 2020, there's been no statistically significant relationship between consumer sentiment or consumer confidence and actual consumption in the US.
WSJ What’s News
China Hits U.S. Goods With 125% Tariff
More and more of the spending is being done by the very wealthiest households. particularly as they've become so much wealthier in the US. Stock markets have boomed, properties boomed, and the richest quintile now own a record 73% of household wealth.
WSJ What’s News
China Hits U.S. Goods With 125% Tariff
So consumer spending could slow down if we get more stock market losses, but you're probably talking about you need a sort of 30% peak to trough fall before that negative wealth effect really kicks in. The key towns for us to watch is business investment and those confidence surveys, which have retained a bit better of a relationship still.
WSJ What’s News
China Hits U.S. Goods With 125% Tariff
Our network intelligence from corporate boardrooms is that boardrooms are dumbstruck by what's just happened and they yearn for clarity. This reprieve doesn't really give that much clarity. So I think business investment spending and hiring is going to be on ice.
WSJ What’s News
China Hits U.S. Goods With 125% Tariff
Yeah, I mean, we're certainly not bullish, but we have got room to go further underweight than we are. It is important to remember that we've had bigger peak to trough falls than this in 2018, 2020, 2022. And the global equity market shows a lot of resilience. In over 80% of rolling three-year periods, equity market returns are positive.
WSJ What’s News
China Hits U.S. Goods With 125% Tariff
The median bounce back over the 12 months following a 10% correction is 15%. I'm saying these statistics because the base case should always be empty markets are going to do quite well.
WSJ What’s News
China Hits U.S. Goods With 125% Tariff
I think definitely, yeah. I mean, we find that our clients are pretty well trained over the last few years. They've seen a lot of major corrections. But more broadly in the market, there is going to be this whipsawing. Volatility is likely to stay very high. It's on a hair trigger whenever there's a truth posted on truth social, right? And I think you are going to see a lot of bad decision making.
WSJ What’s News
China Hits U.S. Goods With 125% Tariff
So it's really important to have a framework that means that you don't make emotive decisions. You only make sort of rational, cool headed ones.