Odd Lots - Lots More on a Massive, Historical, Stagflationary Shock

Episode Date: April 4, 2025

On Wednesday, President Trump unveiled sweeping tariffs against almost every country in the world. The size and scope was far beyond what anyone was anticipating, causing markets to subsequently plunge. But what's next? Could it work out for the US? Will we see a spike in inflation? Will the global trading system continue to operate? On this episode, we speak with Tom Orlik, the chief economist for Bloomberg Economics, on the historical nature of this stagflationary shock, and what happens to the US and global economies if these numbers remain in place.Read More:Economists Slash US Growth, Boost Inflation Forecasts on TariffsGermany and France Push for More Aggressive Tariff Response Only Bloomberg.com subscribers can get the Odd Lots newsletter in their inbox — now delivered every weekday — plus unlimited access to the site and app. Subscribe at bloomberg.com/subscriptions/oddlotsSee omnystudio.com/listener for privacy information.

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Podcasts Radio News. What a day, huh Tracy? What a day. Another day. Another crazy day. I don't know. I'm getting a little tired. Is tired the word?

I'm not. I'm exhilarated. I am not getting tired. I think this is why we get up in the morning. But as we are talking right now, which is April 3rd, Nasdax on 4.8%. Yeah. Obviously, this is all because of Liberation Day. Yes.

Donald Trump announcing his new reciprocal tariffs, which turned out to be a lot worse than a lot of professional analysts and economists had been expecting. Yeah, the market's just totally taken aback. Tom Orlik, how surprised were you by yesterday? We took him seriously. But not seriously enough. I did a dead list. I'm both the most popular trader and most successful trader at Citadel.

Fed is going va. viral. Uh, barges. This is an after school special, except... I've decided I'm going to base my entire personality going forward on campaigning for a strategic pork reserve in the U.S. Black gold! These are the important questions. Is it robots taking over the world?

No, I think that, like, in a couple of years, the AI will do a really good job of making the odd lots podcast. One day, that person will have the mandate of heaven. How do I get more popular and successful? We do have... The perfect guest. You're listening to Lots More. where we catch up with friends about what's going on right now. Because even when the odd lots is over, there's always a lot more.

And we really do have the perfect best. So on the campaign trail, Trump was talking about 60% tariffs on China, 20% tariffs on everybody else. And I think the reaction from Wall Street and the reaction from most in the economics profession was, this is red meat for the campaign trail, this is not a serious proposal. the US economy, the global economy, the global trade system wouldn't be able to survive tariffs at this level. And now here we are on April 3rd, one day after Liberation Day, and we've got tariffs at that level.

For China, if you add it up, tariffs may even be a bit higher than 60%. So it's a huge shock, and I think the question people are going to be asking is, what's being liberated from what? Is the U.S. being liberated from unfair trade practices from China and Europe? Or are U.S. workers about to be liberated from their jobs and U.S. investors liberated from their returns? Yeah, kind of two different outcomes there. Tom, you were at our Washington, D.C. event. Thank you, by the way.

Thank you. You gave this great presentation showing some of your favorite charts at the moment. And you kind of made the point that when it comes to trade, the U.S. has some legitimate grievances. Can you kind of walk us through that, especially in relation to China? And then also, if you think these tariffs are actually going to start alleviating some of those grievances. So I think it's interesting, Tracy. If we go back to the 1990s, it was a kind of unipolar moment for the United States, right? The Soviet Union had collapsed. China was still an early stage of its development.

Its GDP was a kind of tiny fraction of that of the United States. And so the argument for free markets really made a lot of sense. Let's have low tariff barriers. US firms are the most competitive firms in the world. They're going to be the biggest winners from low trade barriers. And guess what? Additional bonus, if we trade with China, that's going to be a force for market reforming. China and maybe even whisper it quietly, a force for democratic reform in China.

That's not how things played out over the years that followed. China developed really quickly up to the point where it became a rival to the United States for that biggest economy in the world, biggest geopolitical power spot. And China didn't reform its economy. It didn't become more market-based. And it certainly didn't reform its political system. and the US had a huge trade deficit and a lot of that trade deficit was with China.

So jobs were being lost, opportunities were being lost, and even worse, they were being lost to America's biggest geopolitical rival. And that just doesn't make a huge amount of sense. And I think the Trump team and Trump himself deserve a bunch of credit for calling that out back in 2016 and saying, this isn't the deal we signed up for in the 1990s.

This isn't the deal we signed up for when we invited China into the WTO. Something has to change. The big question is, well, now we've got these sweeping tariffs. Is this going to deliver the realignment which Trump wants? Or could there be a sort of significant adverse consequence for the United States? Could the United States end up just cutting itself off from the rest of the world and actually accelerating its own decline, its own fading as a global power, rather than restoring American greatness as President Trump intends.

Well, right now, if you look at the market, it's clearly the latter. And the tariffs are not just on China. They're on countries that many people would say are friends or allies or countries that have not risen in industrial might at the expense of the United States. Nauru. Neeru, yeah. A tiny island in the South Pacific. You know, you started your answer by saying,

when this was thrown out on the campaign trail, it was perceived that the global trading system could never survive something like this. We don't know. Maybe there will be renegotiations. The White House is not giving that indication as of the time we're talking about this. They're not indicating that they're going to backtrack because of the market. They're not saying this is the start of deal talks. Can the global trading system survive the level of tariffs that we see, assuming this is what's set?

So it's a difficult question to answer because we just haven't seen such big tariffs. introduced in recent history. So we don't have much data we can use to estimate the impact. That said, we're making best efforts. What we've done is we've taken a computable general equilibrium model of the global economy, is the same model which some of the economists at the World Trade Organization use, and we've used it to estimate the impact of this tariff shock. And if we focus for a moment on the China piece of it, well, if you put 60% U.S. China tariffs into the model, it tells you that that pretty much wipes out US China trade. And that's pretty consequential, right?

The world's two biggest economies, a Chinese economy, which is the home to major U.S. supply chains for Apple and others, if those two economies just stop trading with each other, that's a huge, huge shock to the system. Thinking about the rest of the world, well, most places haven't been hit by such high tariffs, but still a pretty significant shock. Europe, for example, now facing 20% tariffs when they sell to the United States. If you plug that into the big model, well, that tells you Europe exports to the United States dropped by around 50%.

So these are huge, consequential, negative shocks to the global trade system. When it comes to inflation, I mean, lots of economists right now are ratcheting up. their inflation forecasts and ratcheting down their GDP forecast, to your point. On inflation, how much of the ultimate result, the increase in prices of imports into America, how much does that depend on companies absorbing the costs? And how do you go about trying to analyze that? Because it seems kind of, you know, a bit of a wild card. Yeah, I think it's a huge uncertainty.

So if we think about Trump One and the trade war with China back, then, a couple of things happened. So firstly, we had dollar appreciation and that offset some of the impact of the tariffs. Secondly, we had transshipment. So China carried on selling to the United States, but the goods went through Vietnam or they went through Mexico and that meant they dodged the tariffs. And thirdly, we had retailers absorbing some of the shock in lower margins rather than passing them on to consumers. So all of these things meant tariffs on China went up 25%. But the US consumer didn't really feel the shock.

And I think that's maybe how the Trump administration are thinking about it this time around. This time around, though, I think there's going to be some pretty significant differences. So the first difference is, well, the economic textbooks tell us when you apply tariffs, the dollar should appreciate. But guess what? This time around it's depreciation.

So that isn't going to offset the tariff shock on inflation. It's going to amplify the tariff shock on inflation. Secondly, this time round is not just China. It's everybody. Everybody's being hit with the shock at the same time. And that means that that transshipment strategy, sending goods via Mexico or Vietnam, that's not going to work. You're still going to get hit with tariffs.

And then thirdly, well, if you're hitting everybody at the same time, can a Walmart or a target really absorb? all of that in narrower margins, or is it just going to have to start passing it onto the consumer? So the experience in the Trump term, Trump's first term, was tariff shock, no impact on consumer prices in the United States. This time round, well, it's difficult to say

there's a lot of variables at work, but I think this is going to be a stagflationary shock, pretty significant hit to US growth, pretty significant boost to US inflation, and that's why we're seeing this fierce stock market. market sell off today and the U.S. coming out worse than pretty much anybody else. So crazy. Yeah, especially when you look at U.S. versus every other stock market and how much everyone, how much more optimistic people are about the rest of the world. You know, there's this

vision, right, that on the other side, that there's pain now, that we get to the other side and that there's this reindustrialization and Trump talked about it yesterday. We're going to make great cars with us, the state of the art manufacturing. We're going to build chips again, all this stuff. The sunlight uplands of manufacturing. What would have to happen for these tariffs to actually translate into or, because like, I'm fine with taking some short-term pain to be like one of the most advanced, technologically prosperous countries in the world. I see all those propaganda videos out of China with the drones and the cars.

I'm like, yeah, I want that here. I'm susceptible to that too. I want like all that stuff produced here. What would have to happen to go from today to that vision? Well, it's a tough one, Joe. So I think Trump will point to the pledge. from Apple and TSM and Nvidia and Hyundai and others to make massive investments in the United States and say, look, it's working. I made the tariff threat. Everyone's bringing their jobs and their factories

back to the United States. I think it's probably a bit more complicated than that. Wages in the US are much higher than wages in China or Vietnam or Mexico. Infrastructure in the United States, well, there's not been a lot of investment in manufacturing infrastructure here over recent decades. Supply chains stretch across borders. If you're going to impose massive tariffs actually makes it harder to manufacture in the United States because factories are going to have to pay that tariff to get crucial inputs. And of course, the uncertainty which Trump has introduced into the system and which he sees as crucial to get deals done, well, that uncertainty makes it.

it harder to plan, makes it harder to make long-term investment decisions, and that makes it harder to reshore manufacturing as well. So it's striking to me, if you look at all of those companies which said we're making massive investments in the United States, Apple, $500 billion, TSM, $100 billion. If you look at what happened to the share price of those companies on the day after the announcement, basically didn't move, right? Basically didn't move. And I think what that tells us is, that markets, investors are pretty skeptical. They see those announcements, perhaps as good government relations by those companies carrying favor with the White House rather than the big changing corporate strategy that we'd have to see if manufacturing was really going to come back to the US.

Yeah, and on the topic of investment, there's no fiscal offset either. I mean, the administration is extending the tax cuts. That's basically the existing status quo. So it's not like the government is going to be funding a sudden rollout of investment to try to boost these industries. You mentioned stagflation earlier, Tom. What does the Fed do in response to stagflation? So it's a tough one, Tracy. You keep saying that. I was just thinking, how do we get the...

It's going to be tough. Anyway, keep going. A lot of tough ones in our future. You know, this is the biggest tariff hike that we've seen in the United States. going back over the course of 100 years, and it takes tariff to their highest level in 100 years. So this is an absolutely enormous shock to the system. So I feel like somewhat justified in Starland.

You are. You are. You are tough one. And so if you're the Fed, you see growth coming down, you see unemployment going up, you want to cut interest rates. But you see inflation rising because import prices are going up. and so you want to raise interest rates. So what's the impulse? What's the kind of the major impulse? Which one do you follow? Well, some of the messaging which we've been hearing from Chair Powell is that the tariff impact on inflation, well, it could be transitory. If I was Chair Powell, personally, I wouldn't be

using the turb transitory anymore. I think he kind of used that one up in the post-COVID shock. But there we are. There's the idea that the tariff impact on inflation is going to be transitory. And so what you have to respond to is the impact on growth. And so that would suggest the impulse for the Fed is going to be more rate cuts. That said, there's a bunch of uncertainty out there. We don't know how big the growth shock's going to be. We don't know how big the inflation shock's going to be. We don't know if inflation expectations are going to move. If we see inflation expectations staying high, well, that will be a sign that the tariff shock on inflation isn't going to be transitory. And the Fed's going to be tracking all of these things and weighing them in the balance.

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Watch us on Bloomberg Television. Listen on Bloomberg Radio, stream the show live on the Bloomberg business app, or listen to the podcast. That's Bloomberg this weekend. Saturdays and Sundays starting at 7. AM Eastern. Make us part of your weekend routine on Bloomberg television, radio, and wherever you get your podcasts. So we've established that it's tough at a minimum. What are you looking out for in terms of economic indicators or, I don't know, even corporate anecdotes to see which way things are going to go?

So I think there's a few things we're going to be looking for in the days ahead. So the first one is going to be the retaliate or cowtow choice for other countries, right? Do we see China and Europe and Japan saying, okay, we don't want these tariffs, tell us what you want and we'll give it to you and you can take the tariffs away? Or do we see them saying,

you give us tariffs? We're going to give you tariffs right back. And if it's that retaliation path, that's going to amplify the impact. Second thing I think we'll be looking for is whether the Trump administration just pivots because of the markets, right? We've got the NASDAQ down more than 4% today. If that slide continues into the end of the week, into next week, if we see a very

significant and sustained market fall, it's possible that we'll see that Trump put come into play. And then in terms of indicators we're going to be looking at, well, of course, we're going to be tracking the import and export numbers. Another important one to look at is going to be the import price data. That's going to tell us how much of this cost is being absorbed by foreign factories and how much of it is being passed through to U.S. retailers and potentially the U.S. consumer, who, by the way, is also the U.S. voter and midterms, well, 2026, not that far away. Tracy, can I just say two things that stuck me yesterday. One is they knew this was going to slam the market. Oh, yeah, and they did it anyway. This is a really big deal to me.

because this is not usual in his American politics. Some might even look at that and say, I'm impressed, right? Because you're like, well, for once, we have a president who is not so obsessed with the market. I don't know. I'm just saying I think that's noteworthy. Well, in his speech, he also talked about how much stock prices went up in his first term, which is kind of, you can't have it both ways. I thought that too. And then I just think it's, man, we had this multiple years of really high inflation.

And the first thing that the new president does is push up the price of anything. It's really funny. Tom, I have one more question for you. This is a very important one. It's a bit of a loaded question, but here goes. How much fun did you have at our Washington, D.C. event? Just an absolutely enormous amount of fun, Tracy. And my message to Odd Lots listeners is,

if Joe and Tracy come to your town, snap up a ticket immediately. We didn't plan that. That was amazing. That was a perfect answer. Lots more is produced by Carmen Rodriguez and Dashel Bennett. with help from Moses Andam and Kail Brooks. Our sound engineer is Blake Maples. Sage Bauman is the head of Bloomberg podcasts.

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