Jacob Shapiro: I don’t know if you’ve prepared microgeopolitics, but for my favorite new segment, I’m doing a little microgeopolitics.
Maybe you could find some similarities or something you want to tell us about where you are in Brittany. But I am in. Eden Prairie, Minnesota. It is a suburb of Minneapolis. Eden Prairie itself for most of its history was a slow growing pastoral village on the fringes of Both Minneapolis and Saint Paul.
One of the interesting things about it between roughly 1880 and 1960, the population, it doubles over that time period, but relatively flat in 1880. According to a census, the census at the time, there were 744 people in this little area. By 1950, 1960, you’re at. 1950, I should say, you’re at 1, 384.
So a doubling over 60, 70 years, not huge. And then the population doubles in the 1950s and the 1960s and the 1970s and the 1980s and the 1990s and flats out at around 64, 000, which is where it is right now. It gets its name from a writer named Elizabeth Allette, who came here at some point and thought it was a beautiful prairie.
She wrote a book about. Women and their participation in the American Revolution. Before it was cool to be talking about women and their participation in anything besides the home. A little claim to fame there. I was also looking up, she had some scandalous encounter with Edgar Allan Poe.
She had written him some letters or something, and someone found them, and they were just a little bit suggestive, and she asked for them back, and then this whole thing about all these writers and her and Edgar Allan Poe going back and forth. Eden Prairie itself was a big, Was an area where there was a lot of fighting between the Dakota nation and the Ojibwe nation or the Chippewa nation The Dakotas were probably here first were here for a long time But what happened was during the Iroquois wars where the Iroquois were fighting against, French aligned tribes like the Huron and things like that the Ojibwe got pushed west and as the Ojibwe got pushed west They encountered the Dakota and the Ojibwe would fight and for a while The U.
S. government was trying to get the two tribes to stop fighting. There was even a fort built in 1825 at Fort Snelling where the United States was trying to intervene between these two sides and it really didn’t work. But eventually they signed a treaty in 1851 or at least the U. S. government does with with the Dakota the Treaty of Traverse de Sioux.
Two bands of the Dakota. And it’s at that point that most of southeastern Minnesota gets transferred to the U. S. government, over 24 million acres of land. And it’s at that point that settlers start coming west of the Mississippi. And Eden Prairie is west of the Mississippi. It’s on the Minnesota River, which is a tributary of the Mississippi.
And that’s when you start getting people that are actually interested to be here. So that’s just a small thing about Eden Prairie. The other thing that I wanted to talk about and I don’t want to get too far down into Minneapolis because like I said, I think we could talk about Minneapolis for an entire episode if not multiple episodes by itself.
But the last couple of places that I’ve been, the story has been relatively the same. It’s been manufacturing went away because of Japan or China or globalization and some of these towns have done well in coming back from that and some of these towns have not done so well. Eden Prairie and Minneapolis in general, that’s really not the story.
So Minneapolis itself was a big flour milling and a big lumber milling town. That was how it comes of age and gets rich. But it stays rich. For instance, I didn’t know this, but in the 1950s, some of the world’s biggest computing companies were based in Minnesota. And after World War II, a lot of the computers that were being built to break Soviet codes, especially by the Navy were in Minnesota.
So you have this huge early computer industry in Minnesota that really sticks around until the 1970s and 80s. And there’s still a little bit of heritage from there. you also have precision manufacturing. So Medtronic, for example, gets its start in Minneapolis.
So there’s a whole, business around precise manufacture of medical instruments and things like that. And then it’s also a big place for shipping and logisticsSome of the top 2023 publicly traded companies that are based in Minneapolis, you’ll recognize Target.
U. S. Bank Corp, XL Energy, Thrivent Ameriprise Financial. It’s just it’s a really thriving place And then last but not least, Robmarkets with the most fortune 500 headquarters in 2022, here’s some trivia for you.
Can you guess what the top three are for that markets with the most fortune 500 headquarters in 2022 in the United States?
Rob: Fortune 500 headquarters. I had to guess, I would have to find something that was not the obvious because I would imagine most of these are kind of companies that wanted to not be in the major urban centers.
Jacob Shapiro: Oh boy, why don’t you give a hint or just tell us? Because I don’t want to make a guess. Wild. Yes, sir. Your hint is, you’re being too clever.
Rob: All right, Fortune 500 headquarters, I’m going to go with Chicago.
Jacob Shapiro: Number two.
Rob: Number two. New York. Number one. And number three. Chicago’s number two, New York’s number one, number three, I think you have to go somewhere Midwest, maybe? It’s not Los Angeles. I think San Francisco’s too small of a city.
Jacob Shapiro: It’s always lurking in the background there, Houston coming in at number three, and Houston and Dallas together are three and four, and mushed together, they have just about as much as New York. San Jose has a big bunch. So New York, Chicago, Houston, one, two, three.
Then Dallas at four. San Jose five Atlanta number six, which that makes sense. Coca Cola, Home Depot, Delta, blah, blah, blah, Washington, D. C. Minneapolis, Minnesota, after which you get Boston and Philly and San Francisco. So really a pretty wealthy part of the country that I think flies a little bit under the radar.
Rob: Jacob, just on the computing in the 19 fifties, was there a specific reason? Was there some, pioneering company that set up in Minneapolis that created an ecosystem around it? Or why did that happen there then? Do you know?
Jacob Shapiro: I don’t exactly know. I think it’s just because, so the main company that moves its research from Washington to St.
Paul after the war is called Engineering Research Associates. And, some of these things move all around, but I’m not exactly sure why it was Minnesota itself. And I tried to do a little bit of research on this. There were, like, the University of Minnesota was training a lot of, young minds.
There were industry leaders like Honeywell and things like that. As a result of that, there were technical workers that were around and available. I read one book from a guy named Thomas Misa, who’s the author of Digital State, and he talked about how the decline of the streetcar might have coincided with high tech digital manufacturing.
And there were lots of streetcar workers in Minnesota. It’s also interesting. One of the reasons I think we don’t hear about Minnesota from this point of view is that what they did was they built big mainframes and supercomputers. They built the really early supercomputers and things like that. And eventually that does start to get globalized.
You do move away from that. And the only reason that The industry didn’t collapse in upon itself was because they created an original equipment manufacturer business around peripheral storage equipment. So as even their supercomputing edge goes away and as silicon valley and all these other places become the centers of tech investment, they do have these small areas where they still Manage to maintain Their edge, but no I cannot I don’t know exactly why beyond some of the guys that were working on this code breaking in Washington and things like that moved to Minnesota to found Engineering Research Associates.
Rob: Interesting. Open call to listeners.
Jacob Shapiro: to listeners. And I, God, the more I learn about Minnesota, you might find me living in Minnesota one day.
Rob: What happened to Wisconsin? They’re going to be fighting over you pretty soon.
Jacob Shapiro: I feel like every single place that I go to, I fall in love with it.
Because that’s just the way I am. I have to be enthusiastic about the place that I am. If I ever come away from a place and I’m like, this place really sucked, you know it really sucked. Because I have a bias into actually really liking and believing, like, all the good stuff from the locals.
But no, Wisconsin would be just fine too. But here I have proximity. I can go across the border, get my cheese, come back. It’s all wonderful. Anyway, so that’s our micro geopolitics.
Rob: The problem is the Midwest, you can go back 150 years and tell the whole story. Here, I’m sitting here in the car looking out at a tower of an old city wall that’s been here since, I think, the 900s. We don’t have enough time in the day to get into the, what’s been going on here, but No, I’m in Comper, which is a little city near the coast in Brittany.
And beautiful cathedral, gothic, 1200s mostly a tourist place now. Not too much to, not too much to say beyond that. A typical smallish French city that thrives on tourism and small services. and that’s, at least in this specific place, the lifeblood of things.
Jacob Shapiro: Mostly a tourist city.
I’m afraid that’s how it usually goes. And that is something Emmanuel Macron wants to change. But before we get to Macron’s ambitions or delusions of grandeur, depending on your politics Nikki Haley’s out of the race. I’ve been avoiding talking about the U. S. election for obvious reasons. But it seems like we are pretty well locked in to Biden versus Trump.
Amazing to me that this is where we are, considering literally everyone I talk to hates both of them. I remember four years ago, you still had some card carrying Trump, and maybe I’m just not hanging out with the Trump guys and gals, but I’ve been surprised on the road at people, conservative audiences that I thought would be very pro Trump.
They’re just anti everything, and they hate Biden more, that’s to be sure, but it’s not like they’re jumping in their seats for Trump at all. It seems just as a, As a collective, none of us seem to like this, but this is where we are. Because What Trump is threatening in terms of economic policy is pretty out there. So he’s threatening a 10 percent blanket tariff on all imports to the United States. Full stop. Doesn’t matter if you’re Mexico, Canada, NATO country, doesn’t matter. 10%. Full stop. And then the number on China seems to vary a little bit, but somewhere between 10 and 60 percent for all imports from China.
Now I can hear cousin Marco in the back of my head talking about constraints based geopolitical analysis and how this is all part of the campaign trail. And there’s no way that he could actually do this because the economic impact would be so terrible and all of these U. S. businesses and industry and lobbying groups would be against him.
I put this on the knowledge platform last week. One of Trump’s former trade officials came out and gave an interview to Nikkei where he was saying very clearly. From a legal perspective, there’s no problem here. He has authority to do whatever he needs to do for the first 150 days. Now, after the first 150 days of tariffs, he needs congressional approval and he’ll have to figure that out.
But 150 days is an eternity if you’re thinking about how to plan for these things. So it seems to me from a legal perspective, he at least has some of the theory and has someone thinking about how to get beyond these things. And in terms of what to actually do, I don’t think constraints, at least from a domestic political perspective, have ever been a problem.
particularly constrained him if convictions and indictments and everything else that Trump has done have not constrained him from getting to this point. I don’t see how he’s going to be lost at the very end from imposing his trade war. So I thought we would do a what if scenario of what happens if he actually does this, accepting that he might slip on a banana peel Biden might defeat him, he might come in and completely change his mind and realize, oh, this is going to cause all sorts of disruption, I won’t do it.
But I just want to, for, 15 or 20 minutes, take him at face value and think about if he does do that, What happens from an investment perspective, like what is our next day look like in terms of whether we’re advising companies or whether we’re dealing with Investor portfolios and things like that.
And how do you want to start thinking about this Rob? Because there’s two historical examples to think about. There’s the tariff of abominations in 1828 and there’s obviously the Smoot Hawley tariffs. And I’ve done Some work on both of them as previous use cases for when the United States passed major protectionist measures like this.
But where would you like to start in tackling this scenario?
Rob: I think we get into the historical parallels and why, maybe they’re not great parallels. But first, I just want to address the constraints notion. Because I don’t really agree that this is not how do I say, that this doesn’t emerge from some deeper policy need in the U.
S. And just to set the table as a preface to this conversation, because this isn’t just Trump being crazy. I think he represents a deep need, or a deep, structural desire for the U. S. to change its position in the world. And maybe because I come from a finance background, I attack this from a different angle and see it differently.
But, From my perspective, what you have is you have the United States that has been the only really sizable free market for everyone in the world to park their capital, to send capital into the U. S. market. And that’s been the case since really the post World War II era began. And the problem is, mathematically speaking, if you’re going to run a current account surplus, a huge current account surplus, meaning everyone can go and buy as many treasuries as they want and there’s no restriction, the corollary has to be a big current account deficit.
And when you talk to ordinary people who aren’t economists and aren’t investors, I think anyone in the U. S. can say something’s gone wrong. There’s some, something wrong with the fact that we have trade deficits every year that are huge. We have government deficits that are huge. We have debt that through our whole lifetime has just gone up and up in different forms and on the balance sheets of different countries.
Actors in the economy, but this has been going on for a very long time. And I think the recognition that’s just not sustainable is underlying all of this. And to make that point even, clearer what Trump is doing with trying to do implement tariffs, which he already did in 2018, by the way, which we can talk about, but what he’s trying to do is he’s trying to correct that trade deficit.
He’s trying to implement more mercantilism. He’s trying to, stop us being taken advantage of, quote unquote, by other countries. But at the same time, if you look at what the Biden administration has done, their signature move was the CHIPS Act. And the U S. It’s, massive stimulus, which basically was industrial policy, giving subsidized capital to certain areas of the economy to try to boost green manufacturing and, everything that’s been going on and been such a huge focus for us in the last few years.
And that’s basically the same thing. Both of those things are trying to boost U. S. production at the expense of consumption. And if you do that successfully, your current account deficit closes. I wouldn’t necessarily take this conversation we’re going to have within the frame of, oh, Trump is just this crazy guy.
He is, don’t get me wrong. But these policies are not just some left field, kooky, nutty thing that is not reflective of something deeper. And I think that’s really important to think about.
Jacob Shapiro: Yeah, globalization has been what is animating really us, quote unquote, industrial policy or lack thereof for decades. So I guess the thing that is so surprising about it to me is, it’s so sudden, but you’re absolutely right that Biden hasn’t changed anything.
If anything he’s sharpened a lot of Trump’s tariffs. And, the other big difference is there were a couple, countries, even allies that Trump went after in his first term. I’m thinking about Canada and aluminum and how Canada was a national security issue. But I think the thing that brings us to the historical issue is that it’s not just thinking about China.
It’s thinking about everyone. It’s the blanket terror thing that is particularly striking. As I said, there are two times in US history that I can find any sort of analog to this. The first was the Tariff of 1828. I have to confess to you, Rob, I did not know much about the Tariff of Abominations before I did some research.
Rob: I know nothing about this subject, so
Jacob Shapiro: we’re coming in cold here. That’s great. Hopefully that’ll be for most of the listeners, too. Okay, so what happens is that John Calhoun of South Carolina, eventually to become vice president, and a bunch of other Southerners join with Martin Van Buren and his faction in the legislature, and they propose a tariff bill that also weighs heavily on the things that New England imports.
And they were trying to kill two birds with one stone. They wanted to create a tariff bill that was so bad, even for the North. That it would obviously be killed, but that it would be the North that would kill it and vote against it. So the tariff threat would go away. Oh, and by the way, the Southerners would get to blame the New Englanders for completely gumming up the works of politics.
You can tell that we really haven’t come that far when it comes to U. S. politics. Goal, the reason the tariff gets its name, the tariff of abominations is because the bill was so bad, so abominable that the Southerners agreed that it would never pass and that was why it was safe to put it over the line.
Actually, the bill passes, the north wants the principle of protection so much that it says, fine, we’ll do whatever you want. We want the tariff in place and it is that the tariff is so bad that Calhoun, who has since become vice president, ends up resigning the vice presidency, breaks with Andrew Jackson and starts talking about nullification.
The idea that the tariffs were unconstitutional, that South Carolina doesn’t have to follow federal laws if it doesn’t want to, it can just nullify them. And this is the beginning of the Civil War. It all goes right to and if you remember your U. S. history, that word nullification might now be kicking up some cobwebs in your head because that’s what this episode is so important for.
Eventually a compromise is made in 1832, it is made after the United States government gets legal authority to enforce laws in South Carolina, including deployment of military forces against South Carolina. Anyway, there’s a compromise tariff that comes in 1833, South Carolina gets off of its high horse and gets rid of the nullification ordinance and everything goes away.
There’s not really any real economic impact. There was a panic in 1819, there was a panic in 1837, but the tariff of abominations does not cause any kind of big trade issue for the United States. It’s biggest import is in U. S. Politics and how it lays the seeds for southern states to say, we don’t want the North to come in and tell us what we can do with our laws.
We want to be able to nullify federal laws that we don’t want. It’s a very early episode of what’s going to happen in the civil war. So it’s interesting as a symptom of, North versus South and manufacturing versus raw materials and what eventually becomes a civil war. But as far as I could find no real economic impact.
The other historical analog is the Smoot Hawley tariff. We have a lot more history on this, too, and we’re a lot more aware of it, or at least we think we’re aware of it. I was surprised that most economists, though, agree that the Smoot Hawley tariff really probably didn’t cause the Great Depression.
And to the extent that it was bad, maybe it exacerbated some aspects of the depression, but the depression was coming anyway. And that it really didn’t play a material role, which was really surprising to me. Like for me, the narrative that I had in my head was, Oh my God, Smoot Hawley leads directly to the Great Depression.
And this was a political issue at the time 1927. Before the Great Depression really kicks into gear. Here’s a quote from its final report. The time has come to put an end to tariffs and to move in the opposite direction. So there was this idea that, free trade was what needed to happen.
In the United States, though, you had the post World War I economy was booming. You had gains in productivity because of electrification, which led to mass production. You had, The advent and application of modern fertilizers. So suddenly farmers are producing way more produce than is needed.
You have surpluses up and down, down the board. And even though wages are increasing, they’re not keeping up with the productivity gains. The United States is running an account surplus at this point, because they were early in their manufacturing history and you get Smoot and Hawley. Who come together and say, okay if we raise tariffs on imports, it’s going to alleviate some of the overproduction problem.
And so they increased tariffs on agricultural and industrial goods alike. And like I said, it doesn’t seem, and I looked at a lot of different economists, whether you’re Paul Krugman or Milton Friedman or William Bernstein or Douglas Irwin, and all of them talk about, yes, there were some, impacts, but.
Most people doubt that it had much to do with the actual economic contraction that was experienced. So I think there’s been a lot of conflation of these things. And if anything, there was some temporary benefit that it actually did do some of the things in the United States at least in the very early stages that it was supposed to do.
So like factory payrolls and construction contracts and industrial production inside the United States all start to increase. So I think there’s it’s really banking issues that came to, seat themselves on the U. S. economy. Yes, U. S. Imports decreased by a massive amount from 66 percent between 1929 and 1933.
Exports decreased 61 percent over that same time period. But how much of that was the depression versus how much of that was the tariff? It seems like economists say it was mostly the depression. Because again, the United States is really not a dominant power at this point.
And to the extent that we learn anything about Smoot Hawley, it’s that didn’t matter that much, that it was actually everything else that mattered. And Smoot Hawley was just the cherry on the top. I’m not sure the analogs give us much.
Because I don’t think we’ve ever had a situation where The global dominant power decided it wanted to go back in history. It’s all been forward march of progress and globalization for hundreds of years right now in the United States is basically saying, nah, like we want to go backwards. Like you said, something went off the rails and we need to change it.
Did you have that impression that Smoot Hawley didn’t actually matter as much as the narrative says? Because I had it very firmly lodged in my brain that Smoot Hawley was the beginning of the end of the Great Depression.
Rob: To answer your question first on the Smoot Hawley, I also was taught to believe that was like us shooting ourselves in the foot. I think probably because we’ve all grown up reading The Economist magazine, which is what every right minded person in the world reads. And don’t get me wrong, I love The Economist and read it every week, but they have a very specific liberal point of view that they apply to history and to current events.
And I think that’s the dominant view, that anything that interferes with free trade or anything that introduces tariffs is necessarily bad. Therefore, Smoot Hawley was a big tariff, and it was therefore a big bad thing. I think that’s what sticks in everyone’s minds if you learned anything from high school history or economics.
I think the historical analogs are interesting, and they do not tell us anything and they tell us everything at the same time. That’s my, my, the way I would describe it. If Trump does this, what we’re gonna say at the end is inflation will go up, not by the amount of the tariffs, because the economy adjusts, and the economy doesn’t reflect tariffs one to one, it’s more complex than that, but inflation will go up, and that’s bad in the current environment.
Growth will go down. I think this will be very bad for the economy if he does this, and I don’t think he expects that, and I’ll explain why. And then from an investment standpoint, you can look at inflation and growth and draw your own conclusions about risk assets, but I think one of the biggest, most specific things Or, we’ve been banging the drum on interest rates are probably not going to go down like people think.
And now the consensus, I think it was a few weeks ago where I said this is a wacky, non consensual viewpoint. Now the consensus is starting to move more in our direction.
But this is really important because it’s not so much the short term interest rates. Okay, oh, if they don’t cut, even if they raise, it’s what’s reflected in future expectations of short term interest rates. Because today, the three year treasury yield is 5. 5%, and the five and 10 year yield are both 4.
1%. So if the market turns around on a dime and says, Oh my God. We’re not at the start of a rate cutting cycle, we’re at the end of one. Then the yield curve inversion that we’ve seen, so long term yields below short term yields, that’s going to turn around. And what that means is that you’re going to see mortgage rates in the, high single digits and maybe 10 percent plus.
And what is that going to do to people’s confidence to America? Politically, you can draw the obvious conclusions. that’s what I think is likely to happen. That’s what we’re positioned for with our clients because in our income oriented strategies, we’re not taking any duration risk right now at all.
Because we expect to have an opportunity to buy bonds at much higher yields, not too long from now. And we’re cautious on U. S. risk assets, you know, for reasons, that, that are more than just, oh, if Trump comes in and does this, but if he does it, that’ll reinforce that position.
So that’s the conclusion before we get the reasons. Real quick on the historical analogies, because so many this is going to sound really obnoxious, but so many people are so dumb when it comes to talking about tariffs and trade balances. And everyone has a political ax to grind and they always use this to promote whatever particular hobby horse they have politically.
There’s very few people who actually understand how these things work and that includes a lot of economists too, right? With that as preface, forget about what almost everyone says about this subject and start fresh here, right? The historical analogies tell us nothing because the impact of tariffs is not good or bad, it depends.
It depends on the state of the nation that they’re being applied to. In the two examples you gave, 1828 to start with, U. S. was an infant country. And the best book to read on the subject is America’s Protectionist Takeoff by Michael Hudson, I think is his name.
I forget. He’s pretty well known. The whole book and the whole notion here is how America successfully, by the way, used mercantilist policies to nurture and to grow its infant, industrial sector and turned into a giant in the process. And that’s what we fought the Civil War over, basically, because the South had a very different vision of what the American economic structure should look like.
The U. S. was an emerging nation. Think of the U. S. as Korea, 1980. That was us in the 1830s. Piss poor, no one cared about us, trying to build something from scratch. We had some human capital, some people who knew what was going on, Alexander Hamilton, setting out the intellectual agenda around this.
We didn’t know how to do much of anything and we learned. So in that case, tariffs were successful, in the 19th century. The smooth holly came at a different time in our history because at that point the U. S. was like China today.
S. growth in the twenties and in the teens was huge, like really huge. Four and a half percent. real GDP growth per year in the 20s. And if you look at like the manufacturing sector, it was like 12 percent off the charts. And our current account surplus was enormous. We were the China of the 1920s.
And we were, instead of China, feeding us, it was Europe that was running the huge current account deficits because they were rebuilding from the war. Their industrial production capacity had been literally blown apart in many cases. The roar wasn’t up and running all this stuff.
In that case totally different background, right? And what did Smoot Hawley do when the depression kicked into gear and there was, how do you say? The easiest shorthand way to think about the depression is as a shock, like a financial crisis style shock. And everyone turned to beggar thy neighbor policies.
Our approach was to do the same. Smoot Hawley was part of that. And that was successful. Because beggar thy neighbor policies in a financial shock work. They don’t work for the aggregate, but they work for the individual country that does them. And you can look at academic research that shows the countries that went off gold first, recovered first, and recovered strongest.
And the ones that held on, fucked. Quite frankly, in economic terms. Is a very different environment again from the first example and from today where you have a shock, you have a demand gap where the demand just isn’t there. And that brings us to today
The last thing I’ll say is, the thing to remember about tariffs, I mentioned they’re not good, they’re not bad, it depends. What they do is they take money out of the pockets of households and they give it to businesses. Forget about all the accounting and everything that we can go into, that’s the net result.
So when you’re running a mercantilist policy, when you’re increasing tariffs, you’re taking money away from people and giving it to businesses. And the key question is, what are businesses going to do with it, and is it something that they need? In the 19th century when we did it, yeah, U. S. businesses needed that money.
We used it, we invested in productivity enhancing capital equipment. That is the story of catch up growth. If you do it right, and we’ve talked about this in the context of China and Japan and Korea many times on the podcast. In the 1920s, giving that money to businesses arguably was a real positive because businesses were the ones that were collapsing.
And to give U. S. businesses a leg up, to spur some investment where investment wouldn’t have happened otherwise, net is probably was a positive and I think the data that you showed indicating that indicators turned up after smooth Holly represents that what happens today, what happens in 2024 when you’re taking money out of the hands of consumers and giving them to businesses.
And the last thing I’ll say on this is, this is not anything like those previous examples. And I think if you look at the structure of the economy today, we have exactly the opposite problem. The Trump administration and the Biden administration has just spent eight years giving lots of money to businesses.
It’s easy to forget, but in 2017, we lowered the corporate income tax rate from 35 percent to 21%. That was an ethical decision, like that almost never happens, we’re going to be reading about that in the history books.
That was huge in terms of giving money to businesses. If you just look at the government tax receipts in 2019, a period when the economy was doing quite well, corporate tax receipts in the U. S. were 210 billion. In 2010, they were 219 billion, 219 billion, excuse me. So the scale of that giveaway should be.
evident in just those two numbers. So just to round up here, what did businesses do with that money? If businesses are starving for capital, if businesses are starving for confidence, if businesses don’t want to invest and now they’re going to need the boost to get over the line and invest, we’re in the opposite situation now.
The problem now is households are getting squeezed by inflation. and households need to increase their real incomes, their purchasing power. Businesses have just been, raking it in and they haven’t been investing. They didn’t invest significantly after all the giveaways were given. They only started investing, when There was the AI impetus and, things that are totally unrelated to this.
I won’t go on and on, but the very last point I want to make is, when I say this is going to be very bad for growth and that I don’t think Trump recognizes it, I think if you look at when he did this the first time, this coincided with the tax decrease.
S. government deficit. So if you’re going to screw consumers, which is what tariffs do, they screw consumers by definition, however you slice it, and the amounts and who gets what is always different. That’s the be all end all. If you’re going to screw consumers for business back in 2018 19 when they did it.
And they blew out the fiscal deficit in the U. S. That’s basically the government footing the bill and making everyone whole and everyone happy.
And that, in this case, was the government. The government was making up the gap. There’s no similar tax decrease coming now. There’s no similar, government stimulus coming down the pipe.
This is a pure tariff move. And I think if you look at what’s happening with inflation already, if you’re looking at how tight the economy is already and how businesses don’t need an incentive to invest, the impact of this is people are going to freak out. And businesses are probably going to invest less than they would otherwise because consumers are getting screwed.
And if you’re at a U. S. business and you see your consumer paying significantly higher prices, that’s what everyone’s been worried about for the last 18 months is that the consumer is going to roll over because inflation is killing them. Now you’re going to inflate the consumer. What do you think is going to be the impact on the U.
Jacob Shapiro: S. business segment? I’ll hand it over now and we can see where we want to go with it from there, It’s perfect. And again, this is the what if scenario. If he doesn’t come into power and he doesn’t follow through then this playbook probably doesn’t look quite the same.
Would you draw a link between how elevated equity prices are in general since 2018, 2019? And the corporate tax cut and that explains some of the levitation, because I guess I’m trying to think of what the rejoinder from the Trump administration would be. And they would say, Oh, but people’s savings have increased.
Now, of course, many Americans don’t invest in equities and things like that, but most people’s 401ks or whatever else, if you’re looking at them since 2019, pretty good. You could say that your worth on paper has at least expanded. Do you think that I’m wondering if the bottom is going to fall out from that, if this scenario comes to pass the way that you’re talking about, or whether you think equities can maintain Their current level, even as all these other things are happening, because I don’t know that you’ll get the groundswell against that position unless, all of these retirement accounts that people are looking at start to also flash red.
Rob: There’s no question that equities have benefited. I can tell you, as an equity analyst, when the EPS, increases by such a magnitude, the valuation goes up, the price goes up, because the tax rate is just, like, when you’re building your model, the earnings of the business are significantly higher as a result.
So that has juiced equity markets for sure. But the problem is the government has blown out its deficit by doing this. The problem is if the government’s going to blow out its deficit, it depends who are they giving the money to?
Who’s getting the giveaways? Because that’s going to drive how the economy does. And by it’s great for equities to be up, And yeah, most people don’t have enough invested for it to matter. And that’s the problem, is the propensity to consume among the people who give a shit about the stock price of NVIDIA is not very high.
They’re not going to go spend that dollar one for one. on, consumer goods and everyday things. You may get, Aspen condo prices levitating, but you’re not going to get an equivalent boost to demand or growth or investment that otherwise wouldn’t be there. And that’s the problem, is you’re not getting any bang for your buck.
You’re pleasing people who own stocks. Overall, the economy is doing worse as a result.
Jacob Shapiro: The I wish we could figure out how to redistribute that income to doctors and nurses and teachers. But that’s probably a conversation for another time. Alright, we’ll do more what if segments, going into the election and as poll numbers come, maybe we’ll take some of these things more seriously, but I think that was good.
Before I let you go and get back to your cider let’s just talk about France very briefly. We don’t have to spend too much time on it, but I thought it was a pretty big week for France. Emmanuel Macron last week. alluded to the possibility of NATO troops being on the ground in Ukraine, whether that was taking over for some, logistics things or taking care of missiles, things like that.
He was immediately shouted down by some other EU states. Some EU states did not shout him down. The Germans were very mad. The Czechs in the background, not so mad when you start to poke around, like it’s not like everybody hated what Macron said.
He just wanted the idea that the EU might deploy troops to be, 0. 5 percent in Putin’s mind. And he couldn’t even get people on board for that. So he literally, he didn’t call out Germany by name, but he basically said his European member states and compatriots need to not be cowards was the word that he used when it comes to dealing with Russia, that Russia has shown what it is, that Europe is dealing with a threat, a revanchist threat that is going to continue to threaten them with nuclear weapons and invasion.
The time for being cowards is over. And Germany also bristled at that, even though he didn’t exactly say Germans are cowards. He basically intuited it all. Signed a defense pact with Moldova. I haven’t gone through it in super depth, so I don’t think that it’s a, if you’re attacked, we immediately intervene.
I think it starts with more like weapons and security cooperation and things like that. Has, made some show of being close with Armenia. Now some kind of defense pact with Moldova. I’m getting World War I spider spidey feelings all up and down the back of my spine. The French government also in the last week or two has been talking a lot about food sovereignty.
And about getting, and this is in some part, you’re starting to see the political reaction to the farmer protests in Europe, where some of these national governments have sat up in their chairs and realized, Oh shit, like these are the people that actually feed us. Maybe we shouldn’t piss them off so much for these green goals that nobody else is taking seriously.
And I think you can see that in what France is talking about with food sovereignty. And as an aside, lucky you, because there’s no country I would rather be in, in the world, that’s taking care of food sovereignty than France. You already have the best food. Anyway, just a lot of interesting things on the table there with France.
I think it’s probably the same story, which is why I say we don’t have to spend too long on it, which is until they get Germany on the same page, probably nothing happens. The Scholz government is super weak. It will collapse at some point. That will probably be the opening for some kind of, French German strategy, decision to move forward if that does not happen before, or at least as we start to get into French election season, that’s still years away.
That could be problematic. But France is really pushing here and it has France first and the EU and NATO and everybody else second. I don’t think the French are doing this out of Some generosity of spirit to the rest of the European nations.
It’s very clear what France gets out of this. Their, defense companies, their agricultural companies, their farmer, like all of that stuff starts to swirl in. But you’re in Brittany. How do people feel about Emmanuel and what he’s saying? How do you feel about his recent stridency?
Rob: How do people feel?
I think it’s always difficult to answer because any discussion about international issues, ultimately founders on the fact that. Here, it’s an internal game, and everyone is primarily focused on scoring domestic political points over the right or over the left, depending on where you come from, and feeding into the worldview that France is going to hell in a handbasket because of the other side.
I’m not sure there’s much to glean from that. My own view from an outsider’s perspective is it’s funny, if you look, there’s been a number of times where Macron has been photographed with de Gaulle’s memoirs on his desk, and clearly he had been reading them. And I think it’s interesting, if you look at the current situation through the prism of de Gaulle and his views and his actions, which many people thought were ridiculous and obscene.
And De Gaulle was one of the few people who was hated by people of the far left and the far right and everywhere in between, because depending on the day, he would shift around. And I think Macron takes that to heart, and I think he wants to be a De Gaulle like figure. And the background to this politically is, Macron knows that he has to shift further to the right, as do the Germans.
And last week, we had this discussion about, What does a sort of right dominated Europe look like? Is that a paradox? Is there a way that, that can work? And I think that in some ways he’s testing the waters there because I think he wants a very muscular France.
I think he would be very happy to work in conjunction with a small group of core EU nations. And I know that they were testing the waters about a coalition of the willing kind of thing within NATO to go and do this.
certain things that overall NATO wouldn’t countenance. Or overall, EU wouldn’t countenance. I read this through the prism, not that he’s trying to be deliberately provocative or I think he’s trying to change The conversation in a way that’s, that people don’t like, and in a way that’s deliberately poking more, much de Gaulle did.
De Gaulle always had contempt. He was a man of the right to the extent that he had contempt for faceless bodies and parliamentary groups and talked and did nothing. And of course, that was a function of his time because the Third Republic was very dysfunctional and weak and no one could do anything.
And you could say a lot of, of the same for other countries in Europe at the time. But I think Macron has a certain element of that in him where He’s trying to exert his executive power to start buildingsomething that coalesces around action.
And in a way that doesn’t that can accommodate the shift to the right that he and, other countries in the EU are making, which is, as we talked about last week about historical identities, rejection of high levels of immigration, I’m curious to see where it goes.
I think ultimately it’s a, positive thing and if it doesn’t flounder and get too much pushback and he’s just stimmied from doing anything, it might be the step in the direction of sort of European unity, which we’ve been talking about for several years,
Jacob Shapiro: Sorry to interrupt your vacation. I gotta go give a speech here anyway we’ll catch you next time. Thank you so much for listening to the Cognitive Dissidence podcast brought to you by Cognitive Investments. If you are interested in learning more about Cognitive Investments, you can check us out online at Cognitive.
Investments. That’s cognitive dot investments. You can also write to me directly if you want at Jacob at cognitive dot investments. Cheers, and we’ll see you out there. The views expressed in this commentary are subject to change based on market and other conditions. This podcast may contain certain statements that may be deemed forward looking statements.
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