We're sacrificing innovation for nostalgia—and it's costing you.
KEY TAKEAWAYS
MY HOT TAKES
It’s raining, it’s pouring. I suppose, you didn’t need me to tell you that because I am sure that you already heard. Oh, you didn’t? After Friday’s sharp market declines, the S&P 500 is pretty much back to where it was a year ago. That’s right, an entire year of gains have just vanished. Sadly, the losses have nothing to do with the companies in the S&P 500. There is no uncontrollable pandemic causing a global lockdown. Neither is there a meltdown in the global banking system. Nope. No, this is 100% a self-inflicted wound–a direct result of ill-informed politicians attempting to create a new world order using your savings and your future savings.
Do you own stock? Have you been saving for retirement? Thank you for your support! Are you saving money ardently whenever possible? Well, you will be saving less starting real soon as your monthly budget goes up. Thank you for your support! Are you struggling to make ends meet and you don’t own any stock? Well, you will be struggling more really soon as your monthly expenses increase. Your employer may even cut your hours to save money as its margins get squeezed by new tariffs and supply chain disruptions. Thank you for your support!
At a very young age we were taught the old adage “no pain, no gain.” Indeed, there is a cost to everything in life, and right now we are in the “pain” part of that relationship. But has anyone clearly explained what the “gain” is at the end of the day? So, here is the best-case endgame, the goal–I think.
Achieve more balanced trade relationships that reduce the trade deficit, bring manufacturing and jobs back to the U.S., and strengthen domestic industries by leveraging tariffs and renegotiate trade deals. The ultimate goal is to enhance American economic sovereignty, boost GDP growth through increased domestic production, and improve long-term competitiveness in key sectors.
That sounds great, and who would not be for that! Here is the thing, if we remove all the unnecessary words of that statement, we can reduce it down to: boost GDP growth, improve competitiveness, and more manufacturing jobs. First of all, let’s get this out of the way, there were 480,000 manufacturing job openings in the US as of February. With respect to GDP growth, it can indeed be boosted by bringing manufacturing back into the US. By how much? Well, by whatever goods imports are, which represent about 2.5 - 3% of GDP. So, if we were able to snap our fingers and completely reshore all US goods manufacturing and disincentive consumers to buy no foreign-made goods all in one fell swoop, GDP would increase by 2.5% to 3%. Now, I will take a play right out of Treasury Secretary Scott Bessent’s playbook and say that it would be a “one time” gain. That’s right.
Let’s look back in history to sea changes in the US economy. It is pretty simple actually–there were only two. The first and most well-known one was the Industrial Revolution that took place in the late 18th to 19th century. Because of electricity and modern infrastructure like railroads, the US experienced huge gains in productivity leading to an economic boom. In the post-World War II era, the US began to slowly lose its manufacturing edge as foreign, cheap labor began to take over, and by the late 1970s into the 1980s, the US had lost significant manufacturing ground to Japan, Germany, and China.
But it wasn’t over for the US, because that marked the beginning of a second sea change in US economic growth: the Technology Innovation era. This marked a major economic boom that still exists today. Technology enables not just a 1:1 GDP growth, but rather a 1:many GDP growth. This is linear versus exponential growth. In manufacturing, you double production by adding an additional worker with eventually diminishing marginal productivity (quadratic, concave). When you add technology and innovation, one worker can deliver endless greater output. The US has excelled at this and is the world leader. You see, simply throwing more cheap labor at production is unsustainable, which is why you saw Japan move away from industry and why we are witnessing China do the same right now. So why then would the US so desperately want to go back to that unsustainable, labor-based economy when it is still the undisputed global leader in innovation, all for a one-time increase in GDP?
Regardless of the answer to that question, I think that we can all agree that we would like to see more jobs available for everyone. I think that we can all agree that it would be nice to have more manufacturing in the US. Why? Well, there are certainly security reasons for that–something we learned the hard way during COVID. But what exactly are the other reasons? Still struggling to find an answer?
Let’s just say, why not, and agree that, well, more is good. But at what cost? Well, we are now learning the costs to achieve such a feat. Put aside the obvious painful decline in the markets for a moment. Prices are going up as a direct result of the tariffs–as if you haven’t already heard that. The administration is using tariffs to push buyers to seek local producers by raising prices of foreign goods. It is ACTUALLY RAISING PRICES by design. What am I missing? Tariffs only achieve their goals if there is inflation. If prices don’t go up, buyers will continue to buy from foreign makers. So, if it works and all US purchasers switch to local producers, it simply means that we will be paying more for everyday products, when there are cheaper alternatives.
So, is the reward at the end of the day that t-shirts and sneakers will now be manufactured here in the US, but they will cost significantly more money. Now, there are certainly some products that should absolutely, positively be manufactured in the US, specifically when it comes to those that are strategically important for national security, and in areas where the US should have a comparative advantage. Simply put, pharmaceuticals and semiconductors. We all want that.
So, where does that leave us? Last week’s announcement was about as extreme as one can expect. Draconian without any concern over the impacts. TS Scott Bessent did his best on the Sunday morning TV circuit to ‘splain that things are actually good in the economy; the best he could offer was last month’s employment figure, cheaper crude oil, and lower 10-year yields. The latter two are indeed good news for some consumers, but the former is likely to worsen as companies adjust to lower margins through layoffs and employment freezes, and that almost always leads to a recession. Bessent, further said that the US would not enter a recession. His positive outlook… er, spin should certainly make Main Street America sleep better at night. For those of us who know better, we are all wanting to know what economics textbooks are being used by the Administration, if any. We have been promised a “little pain” by the Administration, but with hopes of great gains in the future. Is that “little” pain a 17% drawdown in the S&P 500 and the increased likelihood of a recession? Bessent invoked the Reagan era in which he fought inflation aggressively to usher in a new era of growth and prosperity for the US. Indeed, Reagan did end inflation–with the most severe recession since World War II. And that period of prosperity that followed? Well, that certainly didn’t come as a result of reshoring manual labor-based manufacturing. No. That came from the Age of Innovation.
Sadly, but true, recessions do cure many economic maladies. They certainly can lower inflation because demand decreases when people lose jobs. After an economy contracts, growth always feels good–recoveries do wonders for sentiment. Unfortunately, recessions also set the economy back, so any hopes of a massive shift in supply chains will likely be dashed in the near term. Will we all be better off in the long run? Maybe, but in the words of the father of economics John Maynard Kaynes “in the long run, we are all dead.” True, but in the short run… well, in the short run, we can all expect some more pain, and it won’t be “a little,” and it won’t go away so fast.
One last word. The US should absolutely punish bad actors on the international economics stage. It is true that many countries have enjoyed great prosperity on the backs of the US workers. It is absolutely true that the US has suffered this. Perhaps there may be a way of achieving this without causing US workers more pain. That path has not yet been explored.
Eventually the tide will change, as it always does. So, I want to leave you with the most encouraging thing I can muster. Stay focused on your long-term goals. Long-term always wins–the numbers support that. We are in this together.
FRIDAY’S MARKETS
Stocks were trounced on raised fears over economic fallout from the Administration’s new wave of tariffs. The selling was exacerbated by China’s early-morning counter-tariff attack on US exports. Bond yields continued their tumble, a bright spot in the midst of a dense, dense fog. Employment numbers were more or less solid, showing no serious signs of weakness.
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