Market Lab Report / Dr. K's Crypto-Corner
by Dr. Chris Kacher
The Evolution Will Not Be Centralized™
Trump's tariffs
The tariffs hit hard since many were above the 10% baseline. It appears that many countries will respond with retaliatory tariffs. This will create more broad-based stagflation. Analysts say a permanent implementation of Trump's tariffs would result in inflation rising to 5%. This would be a result of prices rising to adjust to the higher costs of imports. Trump's strategy is that if you want your tariff rate to be zero, then you build your product right here in America. While this can work in the long run, the odds of recession just jumped.
Like Smoot-Hawley, the tariffs as they currently stand are broad and aggressive, targeting major trading partners, and Trump has framed them as a tool to protect American jobs and boost revenue, echoing the ill-fated protectionist logic of 1930. Canada and China have already signaled counter-measures as of early April 2025. This could shrink global trade, raise consumer prices, and disrupt supply chains, much like Smoot-Hawley did. In 1930, imports were just a few percent of US GDP. Today, they account for ~15%, making tariffs far more disruptive to interconnected industries like semiconductors and autos. Higher tariffs disrupt global supply chains, increasing production costs for companies reliant on imported components (e.g., semiconductors). This could indirectly raise prices worldwide as manufacturers adjust to costlier inputs.
Further, economists warn that Trump’s plan could cut US economic output by 0.4% and cost households via higher prices, with poorer families hit hardest, a dynamic also seen in the 1930s. The 1930 tariffs turned a recession into a deeper crisis partly because they hit during a fragile moment; today’s economy, while showing low unemployment and steady growth, could still falter if trade wars escalate and confidence tanks. Despite claims that exporting countries bear the cost, tariffs are taxes paid by US companies importing goods. These businesses typically pass these costs onto consumers in the form of higher prices. Likewise, if the EU or UK retaliates with tariffs on US goods, this could raise prices for domestic consumers in those regions.
But there are differences. The US economy in 2025 is far more resilient and diversified than in 1930 and backed by modern fiscal tools like QE. Smoot-Hawley amplified an ongoing collapse; Trump’s tariffs start from a healthier baseline.
Some argue the tariffs could just mean short-term price hikes, offset by tax cuts Trump’s pushing, though that assumes no runaway retaliation or supply chain chaos. Escalating trade wars would likely trigger a recession, especially if global growth stalls. Europe and the UK are already shaky. Some economists see a manageable hit, while others see a perfect recipe for stagflation. It hinges on execution, the level of retaliation, and whether Trump stands firm. Trump’s tariffs threaten to unwind global supply chains that were decades in the making. Treasury Secretary Bessent said in a Bloomberg interview that the announced tariffs are the ‘high end of the number’ and that countries could take steps to bring tariffs down. Since Trump took office, the administration’s record on economic policy has been anything but linear as decisions have been walked back or reworked within days. Opening with an aggressive stance on tariffs is textbook Art of the Deal.
Troubling indicators
The Philadelphia Fed Services index tumbled 19.4 points in March, to -32.5, the lowest since the 2020 pandemic. Excluding 2020, this is the worst reading in 14 years. The new orders index declined 18.2 points, to -19.5, the lowest since April 2023. Prices paid jumped 12.6 points, to 36.0, the highest in ~18 months. The 6-month outlook from services firms dropped a whopping 36.0 points, to -16.3, the second-lowest level on record. To put this into perspective, the 2020 pandemic low was roughly -19.5 points. Stagflation is here.
Leading PMI indicators point to a further inflation rise. The US manufacturing input price index (green line) jumped to ~65 points in March, the highest in 31 months. The last time we saw the index this high was in 2022 when CPI inflation stood at 8.5%. At the same time, the services input prices index (purple line) rose to 60 points, the highest level in 18 months. Input costs across both goods and services sectors surged at their fastest pace in 23 months suggesting inflation is back on the rise.
With the Fed adopting an easier money approach with QT (quantitative tightening) being lowered from QT $25 bil to $5 bil/mo as well as more rate cuts on the way, global liquidity has been getting another boost. We also have ISM manufacturing as a leading indicator which global liquidity tends to follow though it came in weak in contraction territory at 49% on Tuesday. The Fed noted that any inflation due to Trump's tariffs would be transitory thus disregarded in terms of monetary policy.
That said, Trump's tariffs are creating a big jolt to markets. Will markets stabilize then move higher once again should the tariffs soften after negotiations? Will easier money policies further help markets along? Potentially yes, if future GDP and unemployment data hold up. But inflation as measured by the PMI and the recent PCE which came in 0.1% above expectations including core PCE are troublesome which suggests the Fed may be forced to eventually raise rates, quashing the hopes of more rate cuts. Inflation would have to continue to moderate outside of inflation caused by tariffs if we are to see more rate cuts this year. With the tariff announcement, odds just increased of more rate cuts out of the Bank of England and the European Central Bank. Odds also shifted on CME FedWatch to 4 more rate cuts this year as markets start to price in a recession.