Debt, Tariffs and Stocks

On Friday Donald “The Tariff Man” Trump struck again with his new 50% tariff on EU products scheduled to take effect on June 2^nd and a new 25% tariff on I-Phones.* (See: https://shulmaven.blogspot.com/2025/02/the-tariffman-strikes.html ) Earlier the House of Representatives passed its budget reconciliation bill that called for continuing the 2017 tax cuts plus further tax cuts along with spending cuts that would increase the national debt by about $3 trillion over the next ten years with the higher deficits front-loaded into the earlier years.

 

However, not counted in the budget calculations is the revenue coming from the tariffs. The current run rate is $250 billion/year, and a 10% universal tariff would yield in excess of $300 billion/year, which would totally offset the cumulative deficit of the reconciliation bill. Essentially Trump will be using tariffs to offset his tax cuts. Because there is little new stimulus in the tax bill and the drag from the tariffs is new, the economy will stall out. (See: https://shulmaven.blogspot.com/2025/03/the-recession-of-2025.html )

 

Nevertheless, the bond market evidenced its unhappiness by sending the yield on 30-year U.S Treasuries over 5% for the first time since 2007. The bond bear market is in full force. ( See: https://shulmaven.blogspot.com/2025/01/we-are-in-early-stages-of-bond-bear.html )                                                                                     Reflecting a run on U.S. assets, the dollar index declined 3% from just two weeks before and it stands 1% above its April low and down 11% from its January high.

 

Until last week stocks were enjoying a powerful 20% rally off the April lows. Even after last week’s decline, the S&P 500 was trading 22.3X the $260 earnings estimated for this year. That equates to an earnings yield of 4.48%, equal to the 4.51% yield on 10-year treasuries. Put simply, the equity risk premium has vanished.

 

A narrow equity premium might be justified if the economy were about to experience a growth spurt. On the contrary, we are now in the beginning of a stagflation era. Growth will be slow, and inflation will be higher than what we have been used to. (See: https://shulmaven.blogspot.com/2025/04/regime-change-end-of-economy-as-we-have.html ) Thus, if anything, we will soon be entering and era of high rather than low equity premiums and the S&P 500 will plumb new lows before the year it out. 

*- Subsequent to this post Trump announced the deadline for the new 50% tariff on EU products was postponed to July 9th.  I guess someone in the White House read this blog. HaHaHa

My Review of Shaun Walker's "The Illegals"

“The Americans” in Real Life

 “The Americans” was a hit TV show from 2013-2018 where it portrayed the daily life of two Soviet illegals and their two children as they worked their spy craft against America. Here Guardian reporter Shaun Walker delves into the history of Soviet illegals from Lenin to Putin. Indeed, before the revolution, Lenin himself was illegal in Britain. Because the in the early days Soviet Russia was a pariah state, there only way of obtaining intelligence on the West was through the use of illegals. As the Soviets obtained embassies, they integrated the work of the illegals with spies working under the cover of being embassy officials.

In this deeply researched book, which included interviews with former illegals in Russia and his use of the Mitrokhin files Walker puts together a history of Russia’s use of this method of espionage. He uses several case studies that would include Dmitry Bystrolyotov, Stalin’s Romeo and “Baron von Hohenstein.” To me the most fascinating spy was Iosif Grigulevich who was involved in a failed attempt to assassinate Trotsky and later as Teodoro Castro became a Costa Rican diplomat,

 Castro was ordered by Stalin, against the wishes of the KGB to assassinate Marshall Tito. Stalin’s death intervened and the order was never carried out. Who knows what the consequence would have been had he succeeded.

 Americans first learned of the Soviet illegal operation with the arrest of Rudolf Abel in 1957. Posing as an artist, Abel worked as a courier for other Russian spies operating in the country. In 1962 he was exchanged for the U-2 pilot, Francis Gary Powers. That is how high the Soviets valued him.

 In 2010 the American public learned of a roundup of 10 illegals in Boston and New York who ranged from being a high-end realtor to a Kennedy School graduate. It was their arrest that became the basis for the TV series. They were caught be- cause the CIA had an informant high in the SVR, the international intelligence service of Russia.

 In the 1970’s Putin watched the “Stierlitz” show on Russian television. That hit show featured the work of illegals in the West. Apparently, that made enough of an impression on him to become a KGB agent, and the rest is history. As president Putin stepped up the illegal program.

As depicted in the TV show, despite all of the training, the pressure on families was significant.  Many broke under the pressure of the job and the need to maintain there new identity. Indeed, there is a scene where an illegal in labor was fearful of blurting out Russian language expressions for pain.

 By 2016 it became apparent that through social media identities could be created in an instant Those social media identities have been used to great effect ever since to create discord in the West, especially during American elections. Thus, going forward the Russian need for illegals might be lessened.

 Shaun Walker has presented to us a very readable book on the underworld of the use of illegals in spy craft. He also demonstrates how asymmetrical the use of illegals is. It is much easier to create an illegal in America than it is in Russia. Given that asymmetry the Russians will continue to use them.

My Review of Kenneth Turan's "Louis B. Mayer and Irving Thalberg: The Whole Equation"

The Mogul and the Genius

Former Los Angeles Times film critic Kenneth Turan has written a dual biography of Louis B. Mayer and Irving Thalberg and how their partnership built the most profitable motion picture studio from the 1920’s into the early 1940’s. Mayer, the mogul, a Russian/Jewish immigrant from Russia and former scrap dealer in Canada became a theater owner in Boston and eventually ended up in Hollywood. He knew the business end of the business and he knew how to spot talent. Thalberg came from an upper-middle class Jewish family from Brooklyn who through his family connections became an assistant to Carl Laemmle, the boss of Universal studios.

Thalberg, through his genius and instinct, knew how to make great movies and by 1924 he was in charge of production at Metro Goldwyn Mayer (MGM) studios. Loew’s Theaters orchestrated the merger of Metro, Mayer and Goldwyn Studios thereby creating a vertically integrated behemoth that controlled production, distribution, and the exhibition of motion pictures. That model was rendered illegal as a violation of the antitrust laws by the famous 1948 case of United States v. Paramount. Interestingly, the model of production, distribution and exhibition has been successfully reincarnated by Netflix and its streaming competitors.

With stars like Greta Garbo, Clark Gable, Joan Crawford, Norma Shearer, Jean Harlow, Dick Powell, Myrna Loy, Judy Garland, the Marx Brothers and Mickey Rooney’ MGM couldn’t miss, especially under guidance of Irving Thalberg and his crew of directors and writers.

 

Despite his congenital heart condition, which would kill him at the age of 37, Thalberg was a workaholic. One scene in the book has him lying in hospital bed looking at the rushes from the 1925 production of Ben Hur on the ceiling. Along the way, Thalberg found love and married Norma Shearer, one of his stars, and had two children with her. Shearer converted to Judaism prior to the marriage.

 

Between Mayer’s business sense and Thalberg’s creative talents, MGM, in the words of Turan, had the whole equation. Although MGM prospered for awhile after Thalberg’s death, Mayer lost his touch, and the studio entered into a long- term decline and was recently acquired by Amazon. Nevertheless, for a dozen years MGM stood astride of Hollywood like no other. 

A Stock Market in Denial

Investors in the U.S. stock market are living in a state of denial. To be sure, the S&P 500 advanced nine days in row for the first time since 2004, and it has bounced 14% off the early April low, investors are wishing away the trade tsunami that is about to hit the economy. As I write this, the west coast ports are shutting down, bringing with it layoffs among dock workers and truckers. That malaise will soon spread eastward. 

Consumer confidence remains in the toilet. Thus, it is no surprise that year-over-year same store sales for McDonald’s, Chipotle, and Starbucks are down. Indeed, domestic airline travel is down, and foreign tourists are staying away from America in droves. On the business side, save for the Magnificent 7, capital spending plans are plummeting. Although the recent employment report for April was better than what I would have expected, my guess is that it will turn out to be the last good report we will see for quite some time. As a result, my March forecast calling for a recession starting in the current quarter still stands. (See: https://shulmaven.blogspot.com/2025/03/the-recession-of-2025.html ) 

Investors remain in denial that the postwar global architecture of the past 80 years is in ruins. (See: https://shulmaven.blogspot.com/2025/04/regime-change-end-of-economy-as-we-have.html ) To me this means that all of the old rules of thumb concerning the economy and the stock market are no longer valid. Simply put, we are entering a new world with unknown economic and geopolitical   consequences. In a nutshell, the world has become a much riskier place.

For those who believe that the U.S. will win the trade war with China, I have a few words of caution. According to the “Sinocism” newsletter, the domestic Chinese media are portraying the trade war as a “protracted war.” The members of the Chinese Communist Party know full well that the term “protracted war” harks back to Chairman Mao’s 1938 pamphlet calling for protracted guerilla warfare against the Japanese aggressors. That war lasted for seven years. Further, Thucydides taught us 2500 years ago that nations go to war for “honor, fear, and interest.” To China the trade war with the United States is a matter of honor.

The bottom line is that soon the denial phase of the current bear market will soon turn to anger as investors realize that the Trump tariff policy will bring with it higher prices and reduced output yielding a stagflationary recession. When that realization crystalizes, the S&P 500 will breach the April low before too long.