I think it was a big mistake, this Chinese escalation, because they’re playing with a pair of twos.  What do we lose by the Chinese raising tariffs on us? We export one-fifth to them of what they export to us, so that is a losing hand for them.

~Commerce Secretary Scott Bessent

If nothing else, everyone in the Trump administration from the top down is all in when it comes to poker analogies.  Just months after Donald suggested that Ukraine did not hold the cards needed to continue its resistance to the Russian invasion, we have a former hedge fund manager telling the Chinese they have a weak hand when it comes to Trump’s trade war.  The last time I sat around a card table, a pair of twos looked pretty good compared to $36 trillion worth of IOUs.  More importantly, Bessent once again proved that these supposed Wizards of Wall Street often do not know squat about business.  Let me explain with the following example.

Trade wars have a lot in common with price wars except in price wars the goal is to undercut the competition by offering similar goods and services for LESS money.  In a trade war, the prime directive is to INCREASE the cost to your consumers of the competition’s goods and services.  In both situations, the winner is always the entity that has the resources to take a short term hit to achieve its long term objectives.  This is exactly what happened during the 1980’s energy crisis.

I will start with a brief history of oil prices during this volatile period.  In December 1979, the price of a barrel of oil peaked at just under $40 ($158 in 2025 dollars) due to three primary factors: (a) increased demand driven in large part by economic growth in China and India; (b) OPEC’s restructuring of the global production and distribution system; and (c) uncertainty in the Middle East (Islamic Revolution in Iran).  The historic oligopoly of American and British firms (known as the “Seven Sisters”) responded in hopes of retaining their market share. First, the higher per barrel price made it profitable to invest in infrastructure to increase exploration, drilling and production.  Second, oil companies began investing in non-traditional means of extracting oil.

Perhaps the most infamous example was the Colony Shale Oil Project in the Piceance Basin of Colorado.  It began in 1964 as a pilot project between Standard Oil of Ohio and Tosco, which had developed technology to extract and refine the oil embedded in shale rock.  Atlantic Richfield joined the partnership in 1969, followed by Ashland Oil and Shell Oil in 1974.  In 1980, Exxon bought a majority share in the venture for $300 million and began construction of a commercial scale shale oil plant with a capacity to produce 46,000 barrels of shale oil per day.

In the mid 1980s, when I held the position of deputy director of the Texas Economic Development Commission, I was invited to attend a roundtable sponsored by the Hunt Oil and Petroleum Company, owned by the Hunt family then headed by the Lamar Hunt, son of the founder H. L. Hunt.  I wish I had a transcript of Lamar Hunt’s opening comments.  However, I never forgot three things he told us that day.

• All the sheiks who oversaw oil operations in OPEC member nations were educated at the finest American universities including Harvard Business School, University of Chicago and Wharton.
• OPEC members built huge cash reserves while the per barrel price between 1980 and 1986 doubled and even tripled the margin per barrel.
• If and when OPEC believed substitution of alternative sources (e.g. shale oil) would threaten their market share, OPEC would drop the price per barrel of their oil to make any alternative economically unfeasible.

And that is EXACTLY what they did.  In July 1986, the price of oil fell to $9.25 a barrel when OPEC flooded the market.  Over the next four years, U.S. oil fields were abandoned, and the Colony Shale Oil Project was shuttered.  And the price of oil eventually returned to its pre-1980 levels, peaking at $30.86 in October 1990.  FOOTNOTE: In addition to the $5.5 billion dollars of sunk costs Exxon put into the Colony project, they also had to compensate Tosco to the tune of $380 million.

Exxon was not the only loser.  Interest rates, especially for mortgages, rose to 19 percent.  Inflation reached a high of 14 percent.  Unemployment averaged 11.1 precent in 1982 and 12 percent in 1983.  The housing market collapsed with many homeowners holding outstanding mortgages higher than the total value of their real property.

Surviving a trade war depends on the following:  sufficient resources to minimize the negative impact, patience and public support.  Already faced with massive debt, does the Trump administrative really think it can afford to write checks to farmers and companies to compensate them for lost markets?  Or juice the economy with tax cuts?  Both could have dramatic effects on inflation and interest rates.  Will the American public tolerate a new round of inflation and higher consumer prices before taking to the streets?  (Oh, they already have.)  And finally, even if there is a light at the end of this tunnel, business leaders and financial analysts agree it is years in the offing.  Will Americans wait that long for some uncertain payoff?

China’s retaliation is unhampered by any of these three concerns.  They have the reserves.  They can play the long game.  And they can suppress public opposition.  Which is why Secretary Bessent’s assessment in the opening quote is wrong.  China’s hand, at a minimum, holds THREE twos, not just a pair.  And the U.S. still has a stack of IOUs that is likely to grow dramatically in the near future.  Trump may think his on-again, off-again tariff chaos is akin to holding his cards close to the vest.  Does he not realize most of it is public information?  And what is not being reported by the media is probably available on a Signal chat or Gmail.

For what it’s worth.
Dr. ESP

Former Daily Show host Trevor Noah often reminded viewers, “Two things can be true at the same time.”  One of his most famous examples concerned the dichotomous responses to George Lloyd’s death in May 2020 at the hands of Minneapolis policeman Derek Chauvin.  As a Black man who grew up in South Africa during apartheid, Noah said he did not consider it an oxymoron to be supportive of Black Lives Matter and opposed to defunding the police.  Taking both sides of an issue is possible when we are focused on interpretation of the facts, not the facts themselves.

Which brings me to the topic du jour, Donald Trump’s designating April 2, 2025 “Liberation Day.” There has never been a better example of the difference between opinion and fact. At the heart of Trump’s performative White House celebration is a new round of global tariffs.  Commerce Secretary Howard Lutnick (the billionaire who wants us to believe his mother-in-law lives hand to month but would not complain if she did not get her monthly Social Security check) “… promised Americans that grocery prices would start coming down in early April but warned that there would be price increases on foreign goods as a result of the Trump administration’s anticipated reciprocal tariffs.”  (Source: NBC News)  In contrast, “One model constructed by the Federal Reserve Bank of Boston suggests that in an extreme scenario, heightened taxes on U.S. imports could result in a 1.4 percentage point to 2.2 percentage point increase to core inflation.”  (Source: CNBC)

Proponents say reciprocal tariffs will encourage America consumers to purchase goods and services produced by domestic manufacturers leading to sustained job growth and lower unemployment.  Critics suggest tariffs on raw materials and parts needed to produce those goods and services will result in a rash of business closures and/or downsizing leading to supply-chain disruptions, long-term inflation and higher unemployment.  Prior to implementation of the tariffs and analysis of the ensuing data, it is impossible to determine who is right and who is wrong.

Not so with one aspect of the tariff regime which Trump has touted on numerous occasions.  As reported by the non-partisan Tax Foundation:

Last week, former President Trump took his affinity for tariffs much further, floating the possibility of entirely replacing the federal income tax with new tariffs.  (June 18, 2024)

The Tax Foundation went on to put this proposal in historical perspective.  Using the most recent available date (FY2021) as a benchmark, they report Americans paid $2.2 trillion tax on $15 trillion of individual income.  That same year, tariffs on a total of $3.4 trillion in imports generated revenue of $80 billion (not quite tit for tat).  Extrapolating these figures to determine the tariffs required to achieve Trump’s policy objective, the Tax Foundation found, “To replace the roughly $2 trillion of revenue raised by the individual income tax with tariffs would require astronomically high tariff rates.”  They project fully replacing the individual income tax would require a 69.9 percent tariff on ALL imported goods and services. 

What does that mean for the average consumer?  A Hyundai Tucson which sells for $38,000 today, according to their model, would now cost $64,562.  Which explains why Trump’s proposal makes even less sense.  Trump claims the tariffs will encourage Americans to buy domestically produced automobiles.  Let’s assume he is correct.  In which case, the $3.4 trillion total value of imports would decline significantly, requiring an even higher tariff to reach the tariff/income tax break-even point.

In other words, two things can be true at the same time when it comes to opinions.  But not when it comes to facts. Just one more example how the stable genius sitting behind the Resolute Desk can turn an oxymoron into something just simply moronic.

For what it’s worth.
Dr. ESP

In his platform for reelection in 2024, President Donald Trump promised to “build the Greatest Economy in History.” But in his first 60 days as president, the stock markets have dropped like a rock: The S&P 500 is down 7%, the Dow Jones has dropped 6%, and the Nasdaq has plummeted 10%.

~Fortune Magazine

If you are one of those people who took pride in the return on investment (ROI) of your 401(k) or IRA during the Biden administration, congratulations.  But do not consider yourself a financial wizard.  The scope of broad-based gains across most investment instruments assured that whatever choice you or your advisor made would have produced more than satisfactory results.  Of course some ROIs were better than others, a good indicator being whether your ROI was above or below the ROI if you had only held shares in an S&P 500 mutual fund.

As noted in the above quote, the situation in the opening months of Trump 2.0 suggests one metric of financial acuity would be whether your portfolio decreased percentage-wise less than the S&P 500.  Though “I only lost five percent compared to seven percent” is not very satisfying.  Here is where yesterday’s post “Telegraph” comes into play.

Donald Trump does not play by the old rules.  Maybe you should not either.  For example, financial advisors have historically said that you are better off letting your investments “ride” during stock market booms and busts.  That axiom is based on the assumption that it is hard to predict the top of a bull market or the bottom of a bear one.  However, you do not have to be an unintentionally invited member of a policy chat on Signal to know exactly what Donald Trump is going to do to roil the markets and when he is going to do it. His “attack plan” against the world economic order is so clear even a political scientist can figure out the impact on stock prices.

I call it the “penny saved is a penny earned” approach to survival in the Trump economy.  Here’s how it has worked so far.  Despite promises of new global tariffs, it was clear financial pundits at the Wall Street Journal, CNBC and Fox Business (another cohort of oligarchs’ useful idiots) believed this was more Trump bluster.  And as lemmings do, investors heralded the second coming of Trump with optimism resulting in a rise in the S&P index by almost two percent in the first 30 days since January 20th.  So for the very short term it made sense to let your investments ride.

But even the dumbest investors realized that Trump had convinced himself (again, his one man game of telephone) that tariffs were the answer to all the country’s ills. So on day 31, all you had to do was put all your IRA or 401(k) assets in non-equities (e.g. money market accounts, CDs or bonds), resulting in the following payoff.

Assume you had a portfolio valued at one million dollars.  On February 20, you put it all in a money market account at the current interest rate of 4.05 percent.  We are not talking about a “penny” saved.  By March 20, you would have saved $70,000.  Additionally, on March 31 you would receive $3,375 in interest.  If and when the Trump administration concedes “no mas” and takes off its tariff gloves, which he will surely telegraph in time for you to buy back into the market, you will have saved tens of thousands of dollars in the interim.  And if he does not, the savings will keep accumulating.

No need to stop there.  There are already opportunities to increase total savings.  For example, you plan to buy a new car this summer.  Yesterday, CNBC.COM reported if you make that purchase before April 2, you will save an average of $8,000 on the transaction.  Another “penny,” or in this case 800,000 pennies, saved.

Bottom line.  What Trump, et. al., are doing to America is not normal.  Neither should a creative response to Trumponomics follow norms.  The new metric of choice should be savings, not ROI, at least until the point in time ROI stands for “rejection of insanity.”

For what it’s worth.
Dr. ESP

You can’t have everything.  Where would you put it?

~Comedian Steven Wright

The new economy still plays by the old economy rules.

~Nobel Laureate Economist Paul Romer

Wright was half-right, half wrong. Case in point?  At the height of post-COVID inflation, every economist west of the Atlantic coastline predicted the Biden administration faced an inevitable recession and higher unemployment if the Federal Reserve Bank raised interest rates to tamp down inflation.  However, unlike Wright’s warning, the American economy got everything it wanted–no recession, lower inflation, unprecedented job growth, record low unemployment, increase in wages, a stock market at all-time highs and rising consumer confidence.

How was the Biden administration able to do this?  Two very simple reasons.  Policy makers did not get drawn into the false choice between fiscal and monetary methods of juicing the economy.  And they had decades of historic data which provided guidance about the purpose and timing of these competing economic theories.

Remember, before Joe Biden took his oath of office, the unemployment rate peaked at 14.8 percent in April 2020.  In March 2021, Biden signed the American Rescue Act which provided $1.9 trillion in fiscal stimulus.  By the first anniversary of the law’s passage (March 2022), the unemployment rate fell to a historic low of 3.7 percent. 

That same month, the Federal Reserve Bank (The Fed) raised interest rates on “federal funds” (the short-term interest rate at which banks lend money to each other overnight to ensure liquidity) from 0.25 to 0.50 percent, the first increase since the beginning of the pandemic in March 2020.  The Fed would continue to raise the federal funds rate for the next 16 months to fight the inflationary impact of the stimulus package and disruptions in the supply chain for goods and services, until it reached a high of 5.50 percent in July 2023.

Where did Steven Wright miss the boat?  American voters did find a place to put this surprisingly ideal economic environment.  OUT OF SIGHT, OUT OF MIND.  Thanks in part to poor messaging by the Biden administration.  But mostly due to the “glass totally empty” fairy tale shared with sleepwalking Americans nightly on Trump state media.  Could the government have brought down inflation more quickly through even higher increases in interest rates or less fiscal stimulus?  Of course, but at what cost?  That is the point at which we need to heed Paul Romer.  The old economic rules would still apply.  Such drastic actions would probably have made the economists’ prediction of a recession a self-fulfilling prophecy.  Would the MAGA-verse and its media echo chamber be any less critical with a lower inflation rate but more Americans without jobs and income to take advantage of the more stable pricing?  I think you know the answer.

So now we have an administration that is on the path of applying both fiscal and monetary policy for the wrong reasons and at the wrong time.  John Maynard Keynes, the father of fiscal economic policy, would tell us economic stimulus is most effective during downturns, not when the U.S. economy has experienced four years of sustained growth despite the odds of a recession.  To make matters worse, Donald Trump wants to eliminate The Fed’s independence to set interest rates, making that function more susceptible to political whims rather than impartial analysis.

SPOILER ALERT.  The regional Fed bank in Atlanta is now predicting the U.S. economy will shrink 1.5 percent from January-through-March 2025.  This decline, which is attributable to uncertainty associated with Trump’s across-the-board tariffs and lower consumer confidence, will give Trump and the MAGA Congress a justification for a stimulus package made up largely of tax breaks for the wealthy and major corporations.  Seems like the only history the Trump economic team has been reading is the infamous quote by Vietnam War era Lt. Colonel John Paul Vann to justify napalm bombing as a counterinsurgency tactic.  “It became necessary to destroy the village in order to save it.”  And how did that turn out?

POSTSCRIPT

On last night’s edition of HBO’s “Last Week Tonight,” John Oliver honed in on Trump’s proposal to eliminate federal income tax on tips, a targeted gimmick to appeal primarily to hospitality industry workers.  Sadly, Kamala Harris chose to also endorse the change in tax policy.  Oliver gave a number of reasons why the no-tax-on-tips idea might not be a good one and why it would be extremely hard to implement.  But he left out what may the most obvious reason this tax break would be unfair.

Since Trump originally made his no-tax-on-tips pledge at a campaign rally in Las Vegas, I will use the hospitality industry there as an example.  According to the website GLASSDOOR.COM, “The estimated salary range for a food server at the Bellagio in Las Vegas is between $54,510 and $168,543per year, depending on seniority.”  In contrast, SALARY.COM reports:

As of March 01, 2025, the average annual salary for a Public School Teacher in Las Vegas, NV is $59,989. According to Salary.com, salaries can range from a low of $41,053 to a high of $85,207, with most professionals earning between $50,077 and $73,189.

No one should be surprised.  Oliver pointed out that most servers at many lower-end restaurants, even with tips, do not make enough money to have any income tax liability; so the proposal would be of no benefit to them.  However, those at establishments that cater to the most wealthy would be the primary beneficiaries, while school teachers would likely face a tax increase based on the “Big Beautiful Bill” working its way through the House of Representatives.  One more reason Trump says, “I love the uneducated.”  They cannot do the math.

For what it’s worth.
Dr. ESP