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Countries Dumping USD? Failed Treasury Auction: ‘Things Are Just Warming Up’ | Steve Hanke
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the probability of a recession, I think
it's over 90% and the stock market has
to go down. When I say earnings tumble,
remember what's priced in now is is
something on the order of earnings
growth of 10%. And I say no, it's it's
going to be zero or maybe even below
zero. Maybe maybe profits will even be
in negative territory. So So there's a
long way to go. Things are just warming
up. This could be a really bad economic
quarter for not just growth but also
earnings. We'll talk about why. Steve
Hanky joins us today. He is a professor
of applied economics at Johns Hopkins
University and an expert on monetary
policy. Will we'll be talking about his
views on what the tariffs will do to the
economy, also inflation. Welcome back,
professor. Good to see you. Last time I
saw you was in person in Baltimore. It's
it's good good to see you again.
Obviously, I'd prefer in person, but we
can't do that.
Yeah, we're back to our usual grind,
both of us in a suit and you surrounded
by books. Um, last time it wasn't the
case. Um, although there were books in
your office. People should check out our
last conversation, by the way. Link down
below. I visited Professor Hanky in
person. We had a great conversation.
Anyway, today we're going to be talking
about uh what tariffs will do to the
economy. Not good according to uh
consumer sentiment. Take a look at my
screen here. This is from CNBC. Consumer
sentiment um well this is inflation uh
but uh they also had a story on consumer
sentiment. Here we go. Tumbles uh in
April as inflation fears spike.
University of Michigan surveys uh survey
shows. Let's talk about inflation fears
because the consumer believes the
inflation uh number will spike. I'm
going to ask you the expert if you
believe the inflation numbers will
spike. But we'll get to that in just a
minute. Consumer sent sentiment grew
even worse than expected in April as the
expected inflation level hit its highest
since
1981. The survey's mid-month reading on
consumer sentiment fell to 15.8
uh to 57 in March and below the Dow
Jones consensus estimates for estimate
for
54.6. Now if you take a look at the
10-year uh we were just talking about
this offline. Um it's been spiking up.
Maybe the bond market also believes in
higher inflation expectations. But
anyway, let's go back to consumer
sentiment. Is the consumer is the
American consumer right to be worried
about uh weakening wealth prospects and
of course higher inflation? Well, the
they're correct to worry about a
slowdown in the economy. Uh we we've
talked about this a number of times, but
now now we have we have a couple things
going on.
One one thing that you and I have talked
about, David, for a long time actually
is the fact that the money supply is is
the fuel for the economy. And when the
money supply contracts like it's done
since the summer of
2022, you eventually that that gets that
slowdown gets transmitted into the
economy and the economy slows down. So
So that's why I keep using this
expression. Well, a slowdown is baked in
the cake and and it has nothing to do
with whether who's president or any of
those things. It's just a function of
what the money supply is doing. So, so
we had that coming on us this year. Mo
most people, by the way, didn't didn't
haven't seen this coming at all because
they don't pay any attention to the
money supply or the quantity theory of
money.
And then what all of a sudden we get a
second aspect coming in and and that's
the the Trump tariff the Trump tariff
tantrum I would say and and and that is
really throwing
a a lot of sand in the gear shall we say
and and that will just make the slowdown
even worse and and probably will have
you know a recession a technical
recession
And and so that's why people are
concerned. They they they that's one
reason they're concerned. The other
reason is that something I call regime
uncertainty. And that is
that when when you you you get
tremendous activism uh in in a
government where they're they're
changing kind of everything.
uh you you get regime uncertainty and
that that's different than the kind of
pinpointed little micro uncertainties
that develop about this thing or that
thing. It's it's like
everything. And the only time we've had
that, by the way, is with Franklin
Delanar Roosevelt in the New Deal. In
the in the New Deal, the New Dealers
were changing everything in the 1930s
with Roosevelt, even doing things like
making it illegal to hold gold. So they
were they were they were just changing
to tore up the rule books and were
changing everything and and even talking
about packing the Supreme Court and all
kinds of things. This the same kind of
rough scenario that that has enveloped
the Trump administration where just
every everything is on the table to be
torn up and changed and that that
creates regime uncertainty. Now what
what happens with regime uncertainty is
that not not only the
consumer hunkers down and consumer
sentiment goes down but more importantly
investors hunker down and and they stop
investing and and in the New Deal by the
way the regime uncertainty was very
serious and and there was essentially no
investment in the United States from
1929 until the end of World War II and
and the regime uncertainty and the
resulting
uh drought in investment meant that the
Great Depression actually lasted a lot
longer than it would have if we wouldn't
have had the New Deal. The the
propaganda was happy days are here
again. You know, Franklin Delaner
Roosevelt, the New Deal. That was their
slogan. It was absolute propaganda. what
they were doing is just slowing
everything down, making the depression
much worse, let making it last a lot
longer. So, so you have that aspect now
coming in on top of the monetary
contraction. So, it was all it's the
scenario is exactly the same as the
Great Depression. The Great Depression,
the money supply contracted. Of course,
it contracted a lot a lot more than it
has contracted in the United States now.
It was it was down about
38% from from the start of the
depression until the trough of the money
supply. So So the money supply comes
down that that makes everything collapse
and then on top of it you get this
regime uncertainty that that makes
investment collapse and and and and you
really have a big problem. So, so where
we're going with this, it relates to the
stock market and it relates
because if if the slowdown occurs like I
think it will and and still some people
now are talking a little bit about
recession, the probability of a
recession, I think JP Morgan or Goldman,
I can't remember which one headed it,
you know, between 40 and 60% or
something like that. I think it's over
90%. It it's really big. You think it's
over 90%. Yeah, I think it's over 90%
this year. This year. So So as a result
of a slowdown, of course, sales go down
and profits go down. It's it's really
interesting because um I think more
people are turning more bearish on the
economy like you. But uh if you take a
look at the New York Fed probability of
a recession is predicted by the Treasury
spread, it's actually going down, not
up. But that's a different indicator, I
guess.
um 12 months ahead month there there
there's a pretty big difference. I mean
I I'm accurate in the New York
Fed is clueless. Fair enough. Um by the
way uh former uh former St. Louis Fed
President Jim Bullard made a comment on
the news recently and I I think he kind
of echoes your sentiment, but I'd like
to get a response to this. Um he said
that this is looking a lot like a Smoot
Holly. The main diff the main thing is
that this has dramatically raised the
risk of a smooth holly type
outcome. So smooth holly was 1930 other
countries retaliated global trade
collapsed in the great depression was
on. So I think that's what's what has
really people worried about this.
Absolutely. So this this the great
depression you had a two-stage thing.
You had the money supply started to
contract. the economy starts going in
the tank and then you had the smooth
holly tariff wi which which in a way it
was very bad one the worst one we've
ever had in terms of tariffs but it I
don't think it's as bad as what Trump's
doing the rates weren't as high and and
they were much more certain what what
was going on but but then the stock
market crashed after the a the smooth
holly tariff was announced on
The the Smooth Holly tariff was
announced in March of 20 of 1930 of 1930
March and and then the stock market
started really crashing and went down
until July of
1932. It hit a low that it was
83% lower than it was when the tariffs
were announced. So it just to totally
wiped everything out. So I I agree with
Bullard. Um I you know that he he's got
it
right and and let's get back to the
earnings thing a little a little bit.
So, so we we have a recession
coming and and with a recession sales go
down and if sales go down, profits go
down, earnings go down and and the
consensus uh is interesting. The
consensus on
earnings was 15% growth this year. Then
they then they brought it down to 13%
and and most recently they brought it
down to 10%.
I think it's going to be
zero. I I've always said I thought they
were being the consensus is too
optimistic and and the the basic reason
they're too optimistic. I think Jamie
Diamond agrees with you. Yeah. S&P
earning estimates to fall as companies
pull guidance. He expects uh he's
expecting analysts to slash their S&P
500 earning estimates for growth of 5%
to becoming flat and then as much as
negative 5% probably the next month. So
that's exactly what you're saying. Yeah,
D. Yeah, I'm I'm exactly on the same
page as Diamond. He's got the thing
right.
But so why why is it because of uh
weaker consumer demand? Is it because of
uh global trade? Is it because of a
decreased margins from these tariffs?
What is the reason for this? Well, all
of the above. Okay, let me let me get
into the margin thing for just a minute.
You you mentioned all the key points.
Okay, so let me just go into one aspect
that people don't understand. Yeah. Let
let let's say let's say David Lynn is in
Taiwan. Okay. And and Lynn and Lynn or
one of your relatives over there in
Taiwan is selling Hanky something. So So
there are gains from trade as they call
it. There's a surplus generated by that
trade coming from Taiwan to the United
States be because the Lynn clan is is is
they think it's good. They're they're
making something out of it. Otherwise,
they wouldn't have sold the thing to
Hanky and Hanky is getting something out
of it. Otherwise, he wouldn't have
bought the thing. So, there's a surplus
resulting from that trade between Lind
and Hanky. And what does a tariff do? A
tariff is a tax on international
transactions. So it it drives a wedge
into those profits or those benefits or
the surplus resulting from the trade and
it takes it away like any tax and puts
it in the in in the in in the
government's
pocketbook. So So that's why earnings go
down. the the trade aspect. It tariffs
take away some of the surplus generated
by international transactions. It's just
that simple. Well, uh let's talk about
inflation then. Uh we referenced
inflation earlier in the interview as um
is something that consumers are
concerned about. Uh you talked you said
that they should be concerned about
slower economic growth, but should they
be concerned about higher inflation? So
this is the latest number. Inflation
rate eased to 2.4%. It came down from
2.8 to 2.4%. Uh core inflation rate uh
ran at
2.8%. Um and uh yeah, so basically
inflation is slightly cooling. Well, let
me let me comment on this. Um because
and and one reason I want to comment on
it and I'll I'll give myself a shout out
on this thing. John John Greenwood and I
are the only ones that have accurately
made a forecast of of where inflation
would go up to when they goose the money
supply started gooseing it in 2020 after
the COVID pandemic started. So we got
that exactly right. We said it would go
up to 9%. It went up to 9.1%. No, no one
was even close. They were all talking
about transitory and supply side shocks
and all this other garbage and and and
no one was paying attention to the
quantity theory of money and and
inflation always results from the fact
that prior to the inflation there's been
a a a big upward tick in the money
supply. So the upward tick in the money
supply and then with a lag you
eventually get inflation coming into the
system. Then the Fed put everything in
reverse and started contracting the
money supply once they once they hit the
panic button. And where did Greenwood
and I say inflation would be at the end
of last year. That's that's not very
that's the end of December 2024. We said
it would be between 2 and a half and 3%.
It turned out that it was 2.9%. It was
up on the high end of our range. And now
we're into February's number for 2025.
And where what do we have? We have
2.4%. It's actually a little
below the low end of our range that we
had for the end of
2024. So, so we've nailed this thing
completely using the quantity theory of
money. Remember, inflation is always an
everywhere monetary phenomenon. Now
let's jump into the the I I think people
are over excited about the inflationary
effects
of tariffs. Uh they they they won't have
really any inflationary effects. They
will have big effects
on particular prices on on relative
prices. The the the consumer price index
that you just put up there 2.4 for it
contains over 300 items and some are
going up, some are going down, some are
staying the same. You put a tariff
tariffs on and depending on what the
goods are, some things will go up. But
if the money supply doesn't
change, the overall picture will remain
pretty much the same, which which
doesn't mean that that consumer price
index might become a little bit more
noisy and volatile.
w with the tariffs a a as those things
work into the system. But the the
overall
thrust of of the consumer price index
will continue to go down and I think it
it might even hit the Fed's target at 2%
or maybe even a little below this year.
I I I understand your point about uh
relative prices moving and the overall
money supply still determining the
overall CPI, but take a look at stories
like this. First of all, people have
been commenting on on the internet about
their own experiences. Some stores are
now charging a sir charge tariff tax on
top of their goods. So the the price of
whatever they're paying for those goods
are going up because they're getting
taxed by those stores. Apple is said to
be flying iPhones from India to a US to
avoid Trump tariffs. is reportedly flown
two 600 tons of handsets from Indian
factories as Chinese goods face huge
tariffs. Now obviously they can't keep
doing this indefinitely. I think people
are speculating that the next generation
of iPhones
um will have to go up in price. Reuters
reported that Apple had targeted a 20%
increase in production at iPhone plants
in India. So they're moving away from
China. Uh but also there people are
concerned about whether or not the next
one uh would be higher in price. I mean
on the other hand the consumer can't
afford a more expensive iPhone right
now. So they're in a bit of a pickle,
hence the lower earnings. But anyway,
the point I'm making, professor, is that
a lot of companies are thinking about
raising prices to combat these tariffs.
There there are a couple things to
unpack. You you've you've made a very
dense statement with a lot of
information. So let's unpack it a little
bit. So So one one thing you said that
some stores are putting a a a so-called
tariff premium or tariff tax on the
goods that they're selling. Now that
that has an aspect to it that's
interesting and that is tariffs do
reduce the level of competition. You
know, the best antirust policy in the
world is open
trade- because if if you start if you
start misbehaving and start screwing
your customers, That's right. some some
foreigner is going to jump in there and
and and take you out. So, so tariffs
reduce competition and and and and that
can uh lead to some of these cases that
you're pointing out of the so-called
tariff tax. So, so that's one thing.
However, if you start really unpacking
whatever everything you were saying,
it's it's it's kind
of involves ad hoc theorizing. You're
you're cherrypicking examples to try to
make your point that that tariff tariffs
are going to increase the price of
everything and look at this store or
look at what Apple's doing or look at
this thing and that thing. The overall
thing you have to stand back and say
what is the only reliable theory of
national income determination that means
where is nominal GDP going that's the
real component plus the inflation rate
that's nominal GDP and the quantity
theory of money is the only
reliable established theory for national
income determination. So the the rest of
it is is a lot of kind of ad hoc
theorizing and and you know my my
grandmother my grandmother kind of
stories you know my my grandmother my
grandmother has tennis shoes kind of
thing. So that's that's that's that's
one take on the thing. Now, you did say
something about the the wealth effect
that and the wealth effect comes in
through the stock market because if we
go into recession and earnings come
down, that means that stock prices will
come down and that that means every
everybody's going to that's invested in
the stock market will see their wealth
go down. And when your wealth goes down,
you tend to hunker down a little bit,
not spend as much.
So, so it it it does come in and and and
and there will be a wealth effect coming
in via the the stock market. So, we we
not only have the money supply itself
coming down and contracting, not growing
very fast. Actually, it's growing now
year-over-year at 4.2%. and Hanky's
golden growth rate, a rate consistent
with hitting a 2% inflation target in
the United States is
6%. So, it's not only the stock has
contracted and come down since the
summer of
2022, but the rate of growth, it's never
really picked up to, you know, the
golden growth rate is 6% consistent with
hitting that 2% inflation target. So
there just a lot of things going on now
and and a lot of confusion out there
because by the way if you if you read
the press you'll just be totally
confused and not get it right. But
remember Hanky's 95% rule David 95% of
what you read in the financial press is
either wrong or irrelevant. That by the
way that's true for most podcast except
yours but uh that's another story. All
right.
Actually, I see I actually I do watch a
number of things on on yours and I let's
let's put it this way. I'll be
diplomatic and say I'm not in full
agreement with
with with some of your with some of your
Well, I guess that's why we have a
market that not everybody has to agree,
but I understand your point. Um, okay. I
just want to make one point about supply
chain issues during the pandemic. Um,
yes, the money supply went up, uh, but
also people were saying inflation went
up because the global supply chain uh
got choked up. I I I wonder if that
scenario could happen again um this
time. Well, yeah. No, it it it it will
and and people will point to that like
like the Apple importation uh from India
instead of China and they'll say oh
that's see how that's screwing up the
supply chain and the logistics of
everything but it will be the same story
the same transitory effect supposedly
which was all
wrong that it that that wasn't why we
got inflation. We got inflation because
the money supply, you know, it it went
up, by the way, after the after COVID
hit and the money supply was gooseed by
the Fed. It it went up to 18%
year-over-year. That that's the highest
year-over-year rate that the money
supply M2 had ever grown since the Fed
was founded in 1913. Yeah. So, we had an
unprecedented surge in the money supply.
and and no one none of these people
yakking about the supply chain the
transitory thing ever even mentioned the
money supply do you or they were just
out out to lunch I mean this is this
there'll be a lot of this in the paper I
should warn people there will be what
you what you said will will occur
exactly again they'll they'll get on the
same horse they'll ride the same saddle
they'll be at the same rodeo and they
will be strong as they were when the
inflation started going up in 2020 2021.
Do you think the Fed My question is do
you think the Fed now looking around
will be forced not forced? I mean no
one's forcing them but will they be more
inclined to increase the money supply
this time in light of slower grow uh
global growth prospects? Currently the
money M2 is growing at 3.87% annually.
Well,
uh, I it's it's a little bit hard to
tell. They they might do it, uh, which
would be fine, but but not for the right
reason because they they don't look at
the money supply. They they'll fool
around with the interest rates. May
maybe they'll stop quantitative
tightening. Now, this what's going on in
the bond market, the
10-year re remember I I I I was always
bullish on the 10-year and I said for a
trade, I thought it was a good thing and
it and it was a great trade until until
about a week ago when when Trump laid
into this tariff thing. And what
happened? We had a Treasury auction this
week and usually primary dealers and C
foreign central banks buy around 15 16%
of of each one of the
uh the the supply of treasuries at the
auction this week. They they were they
bought like one one one and a half%
only. And and within minutes after that,
Trump
called for a 90-day pause in the
tariffs. That's what caused that. If you
want to know what was going on, you you
have to understand the plumbing of the
system and how things work. And and that
that auction failure, it was a complete
failure.
And I'm certain Scott Basset, the
Secretary of Treasury, pressed the panic
button, which uh Trump saw and and they
dialed back on the tariffs, put the
90-day pause in and now it's just gotten
worse. The the the if the 10 years over
four and a half% right now. Now, now
that that's going to be a huge problem
for the federal budget because interest
payments are are are accounting for
13.1% of government expenditures
already. A huge thing, you know, because
when you pay interest, when the
government pays interest, no one's
getting anything for it. They're just
servicing debt. They're they're not
getting any product or or paying any
wages or anything. They're just paying
creditors who who've loaned the
government money and and that's going to
go up and and blow a hole in the in the
budget
and cause a bigger deficit. And and that
bigger deficit, by the way, may maybe
the the Fed will be under a lot of
pressure to be buying some of those
bonds that are being used to finance the
the deficit. Or maybe they'll buy
because the dealers aren't buying and
the foreign central banks aren't buying
and the Fed starts buying. And if that
happens, then the money supply will go
up. David, that that's the that's the
way to think about what's going on.
Okay. And if that happens, we'll follow
up again and uh see what happens to the
money supply and uh and uh inflation.
All right. I have a few minutes left. Uh
professor, we have to take a look at the
dollar. U you mentioned the 10-year
yield spiking. So that's what happened.
The dollar though has been going let me
just close this. Dollar has been going
down. Um and this is what um this is
this this this is this is something that
came in from the news again. Uh the Feds
Kashkari says rising bond yields falling
dollar show investors are moving on from
the US. Minneapolis Federal Reserve
President Kashkari said recent market
trends uh show that the uh investors are
moving away from the US is the safest
place to invest. Normally when you see
big tariff increases, I would expect the
dollar to go up. This is true. It went
up in February. The fact that the dollar
is going down at the same time, I think
lends some more credib credibility to
the story of investors preferences,
investor preferences shifting the
10-year yield surge this week. Okay. Do
you agree with the statement? Yes. And
and and what I just told you before
confirms that from a technical point of
view, the the the the bond auction
failed. Central banks were were not
buying.
What are they buying instead now? Do you
know? Of course. Gold. Go. Gold just
made a new high today. Yes.
It's you know it's it's a April 11th as
we speak and and gold just made a new
high. Now that's another area. You know
I I've been right on target with gold.
I'll give myself another shout out. I
mean God you're you're not giving me any
shout outs. I can't believe it. David,
yeah,
your track record speaks for itself.
Well, you you know, when you've got to
toot your own horn, it gets pretty bad.
You have been right. You've also been
right on the bubble uh the stock market
bubble popping. Although that Yeah.
Yeah. That that took a lot of people by
surprise, the magnitude of the downturn.
Let's let's finish off on this question,
professor. Do you think that the worst
is behind us for equities volatility?
Oh, no. I I think things things are just
warming up. Yeah. Especially with the
earnings. Yeah. Right. This things are
just warming up because you got to think
of the big fundamentals and and and and
if if if my big picture is right because
of the one-two punch between the money
supply contraction and then the regime
uncertainty associated with the Trump
administration and the tariffs. You add
those two things together and we have a
recession and sales tumble,
earnings tumble and and and the and and
the stock market has to go down. When I
say earnings tumble, remember what's
priced in now is is something on the
order of earnings growth of 10%. That's
what the consensus of the analysts say.
And and I say no, it's it's going to be
zero or maybe even below zero. Maybe
maybe profits will even be in negative
territory. So So there's a long way to
go yet. Right. Good. Uh let's send it
here, professor. Very good update as
usual. Where can we follow you? On my
Twitter, I think is the best place.
Steve_hanky. That's for kind of real
time information. If for some reason you
want to be added to my weekly
distribution of, you know, I I
distribute, for example, like the David
Lynch show, I that that'll be
distributed this this week on my weekly.
You just write me an email,
hankyjhu.edu and and request to be put
on my mailing list. Thank you very much,
professor. Uh we'll speak again in a
couple weeks. Yeah. Thank you, David.
Great to see you again. Yeah, great to
see you again as well. And uh follow
Professor Hanky in the links down below.
And uh we'll see you next time. Don't
forget to subscribe.
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