Easing > Tariffs

I am in Croatia but watching. A few thoughts.

1. Easy monetary policy matters more than erratic tariff policy. While US tariffs are at about 18%, most central banks have either already eased (US, Canada, Europe, Australia) or are expected to ease more imminently (US and Australia), as Covid-related inflation gradually seeps out of the system and labor markets soften due to past tightening. In response to this easing, global stocks are up about 12% and bond yields outside of Japan and Germany are lower. Five-year US bond yields are 56 basis points lower this year and 28 basis points lower in the UK, two places with supposedly intractable fiscal problems.

2. The NASDAQ is also up 12% this year and it looks like the Fed is going to ease policy next month. The last time I saw an easing with fervent tech excitement was 1998. The stock market experienced a bubble for the ages. Below I show the NASDAQ (white) and Fed Funds (blue). The Fed hiked numerous times before the bubble popped.

   

3. In 1999, no one living had experienced a bubble like that. The last one was in 1929. This time, a lot of people vividly remember the massive decline that followed and, as a result, are reluctant to buy. Each time the market climbs higher, it drags more people in.

4. The dollar is about 10% lower versus European currencies and about 5% lower versus Asian currencies, despite a solid rally in US assets. This is the only, muted, evidence of a global risk premium being priced for owning US assets.

   This is my second trip to Europe this year. On both, the people I speak with are alarmed, even aghast, at what is going on in the US, but the impact of this sentiment seems limited to the currency market.

I will take next week off from writing, unless something very unusual happens.