Trump and his tweets – do we still call them that? – are back which is a fun ride for the market, the market that seems to be hanging on his every word. Let’s talk about how he jerked us around this week and what his tariff plans or threats would actually mean for the economy, American households and mortgage interest rates.
We got a really nice, substantial rally in mortgage bonds on Monday following Scott Bessent’s appointment to Treasury Secretary. I guess I spoke too soon last Friday about Warsh – whoops. Back to Bessent though, markets and mortgage bonds liked this move. The reason we saw mortgage rates improve on the news is that Bessent has said that Trump’s commentary on tariffs is just a threat – a negotiating tool if you will. It wouldn’t actually materialize.
The problem with naming a threat…
If you make your plans public but then say they aren’t your actual plans, they were just a threat to create the desired effect…. you wouldn’t actually do it….then you take away the power of the threat itself don’t you? So Trump immediately flew into action Monday and made a post on Truth Social that day one, these tariffs against Mexico and Canada are going into effect, make no mistake. All products coming into the US from these countries are to be subject to a 25% tariff as of January 20.
And with that, bonds gave back their gains.
Everyone will be talking about this at Thanksgiving.
So let’s get our facts straight, shall we?
Disclaimer: I know Trump speaks in hyperbole and many take solace in the fact that they know in their hearts he won’t do the things he says he will do. He has a greater plan for us. For example, since we are talking about tariff’s – it’s been argued his play with Mexico is, I will wreck your economy (and potentially ours) but only until you get control of the border. I’m not privy to that information inside his head and heart so for the purpose of this blog, we will accept what he says as what he wants to do. That way we can analyze the potential impact. Okay?
Mexico
There’s a new boss in town there. The former Mexican president who was in office during Trump’s first term, was more friendly with him than Claudia Sheinbaum. She promptly responded to Trump’s social media post by stating she’s not all that stoked about the guns crossing the border into her country – 70% of illegal weapons seized from criminals in Mexico come from the US. She pointed out that while the US imports $475 billion in goods from Mexico it also exports $323 billion so she has some ideas for retaliation. Did you know that last year Mexico overtook China as the top exporter of goods to the US? (I have an idea why, which I’ll explain later.)
I think an important export to analyze is car parts. Mexico’s main exports to the US are to General Motors, Stellantis, and Ford. Taxing them increases car prices. We also have to consider how much produce comes from Mexico – $44.1 billion worth in 2022 - and how the tariffs could increase grocery costs.
Canada
You may be aware that much of the supplies required to build homes come from Canada. So this of course caught my attention because we don’t need the cost of building homes to get any worse when we are already in such a severe inventory crisis. The media also talks a lot about energy costs. We import four million barrels of Canadian crude oil a day. It will take years of investment for us to be able to process a different oil, sourced in the US, at the same scale. So this tariff specifically would lead to an increase of 25 to 75 cents per gallon on gas. This singular fact was the reason Canada’s prime minister basically just responded “bet” with a smirk to Trump on Tuesday.
What’s interesting is that in Trump’s first term he negotiated the USMCA trade agreement with Mexico and Canada, where he himself created a rule that tariffs could not be slapped on products and trades from these countries. So he will need to get around his own work there, to proceed with these new plans. Currently all these goods cross these borders tax free because of his own agreement, and now they would face a 25% tariff...I wonder what that does to inflation?
You and Me.
Of course there’s an elephant in the room. I don’t have time to get into China right now and to be honest, that should probably be its own whole post. I will say President Biden kept most of the tariffs Trump imposed on China in place, he actually added some more. US Consumers have paid the price on goods important from China. Which is why I want to talk about how the proposed tariffs would impact ordinary people. As we know, this was an election where people voted on the economy as the number one issue. Historically, tariffs are not something that other countries end up paying for. It’s a cost that gets transferred to the consumer. So how will this play out?
Groceries, gas, alcohol, cars – get more expensive. But again, only if Trump does what he says he’s going to do. Many voted for him banking on the exact opposite. There is the hope that his tough stance with Mexico improves our own crime numbers further. I say further because the FBI’s data shows violent crime in the US over the past two years has declined in a very major way. Strange enough, 77% of Americans believe crime is still rising despite the fact that it is at a 50-year low – when we look at homicide, rape, robbery and aggravated assault. Mass shootings are a different story. I digress.
Interest Rates
Tariff talk was the main driver of bonds this week, but we should watch other policies as well. Trump’s proposed policies could lead to higher interest rates depending on how they affect inflation and economic growth. I’m putting together a complete interest rate forecast for 2025 and will be sharing it at the Smarter Hour event I’m hosting on December 18th. For those of you who enjoy these weekly vlogs from outside Reno, we are working on a virtual option for the event as well. So stay tuned!