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