Soft Landings, Tariff Tides, and Trust Jenga

The Fed got its soft landing. Credit where credit is due.

That the landing was marred by tariff maneuvers and will be erased by the incoming tide does not expunge the magnificence of the landing; this was Miracle on the Hudson-level stuff. One of the first questions this newsletter asked (in a 2022 essay on oscillations in complex systems) was: Will the economy stick a soft landing this time? The answer, tragically, turned out to be, “Yes, but then....”

In my view, Jerome Powell is the best leader the Fed’s ever had, for two reasons:

1. He accomplished something no other Fed head achieved by taming inflation without a recession (yes, I’m giving credit for that now before the sand castle is washed away);

2. He embodies the apolitical independence of the Fed, which bolstered the US’ role as a financial world leader for decades.

But Then….

Then, of course, the tariffs happened. The economy likely was beginning to slow at the tail end of 2024, though my hypothesis is that it would have been a slow, gliding, and shallow decline over a year or two, easily managed by Fed rate cuts to avoid steep drops, with an AI-driven emergence from recession afterward.

But the tariffs were so broad and steep that the 145% briefly levied against China eclipsed 1930’s legendary Smoot-Hawley levels, such that when we pulled back to merely around Smoot-Hawley levels, the markets expressed…. relief? It is a very weird time.

Because here we are now:

• China still produces a heck of a lot of our stuff.

• Tariffs are still pretty high from a historical perspective.

• Supply chains are notoriously prone to oscillations that echo and reverberate far beyond initial shocks, so that’s what they are likely to do next: oscillate. As 2020 pandemic supply chain havoc showed us, even short-term disruptions can cascade through supply chains for months to years as participants attempt to catch up.

The Beer Game Abides

The Beer Game is a classic (and fun!) supply chain simulator game that illustrates this phenomenon, and Zensimu has a free version available to play, though it requires you to provide an email address. With a couple of play-throughs, anyone can see why oscillations in supply chains can cause longer-term problems.

At the same time, new decisions on tariffs seem poised to continue flowing into the system, increasing uncertainty and creating further potential for oscillation. The US tariff policy approach, so far, has been draconian, then on hold, possibly negotiable, but then possibly unilateral, with an unknown future state. This is not a stable situation.

Markets generally hate uncertainty, and so do businesses, and so do most people, when it comes down to it.

Jenga Is a Bad Model for World Trade

Speaking of instability, let’s talk Jenga. You might know the game: a group of players gathers around a tower of rectangular wooden blocks. The goal is to pull out blocks from the structure one at a time and replace those blocks at the top of the tower, all while keeping the tower standing as long as possible. Jenga is a game of destabilization brinksmanship.

Is this how we want to conduct global trade policy? It shouldn’t be.

And the current will-we-won’t-we approach isn’t just affecting market stability. Trust is the even more critical asset being destabilized, and if you pull out enough blocks labeled “Trust,” what is left of our tower (the global world order)? How will it reconfigure in coming years and decades if it sways and maybe falls?

Adding to the difficulty of our present moment, trust is hard to repair. To continue the Jenga metaphor, it’s not as simple as just replacing blocks if we mess up, saying, “Sorry, my bad,” and going along as we did before. Think about it: If you’ve been good friends with someone for decades, and that person one day stabs you in the gut, then puts away the knife and offers their hand in friendship again….

It’s going to take a long time to rebuild trust. Maybe it will never happen, but even if it does, that memory of getting stabbed in the gut will endure for a long time, and the friendship won’t be the same as it was before. This is Relationships 101.

Trust Is Built on Multiple Interactions Over Many Years

There’s another way to describe how the recent tariff policy is destabilizing: the US is treating its trading partners as if we will never have to deal with them again, kind of like the time I went to a car dealership and negotiated with the salesman there, who I never saw again afterward. I did issue an ultimatum and got the car for a fair price.

But if you have to work with someone repeatedly, over many years and many interactions, it’s much less in your interest to issue ultimatums or otherwise alienate them. Instead, you interact with them differently than if you only had to deal with them once. We have to deal with our trade partners over and over again, over many years, and they’re going to remember how we treated them. For us to get the best deals, we need mutual trust, not just power. Trust is power, if wisely wielded.

This free online game, The Evolution of Trust by Nicky Case, provides the best, most entertaining encapsulation I’ve seen of the difference between multi-shot versus one-shot interactions. It should be required for anyone even remotely involved or interested in trade negotiations.

To Sum Up

In short, broad-ranging tariffs often haven’t worked as intended historically and are vanishingly unlikely to work well now. The soft landing will be erased, which is tragic, because it was truly remarkable.

And yet, I don’t see this perspective reflected in stock market action. For the last few weeks, I’ve felt like I’m enjoying a nice day at a crowded beach that is much too wide and getting eerily wider by the second as the tide goes out. No birds singing, yet everyone is happily chatting as if everything is back to normal after that scary earthquake in early April.

This type of story doesn’t usually end well.

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Notes on what’s next: In an upcoming essay, I’m planning to update the recession tug-of-war diagram. It’s well past time for a new one, because in my summer 2023 diagram, I was short-term optimistic, building on my February 2023 prediction that we’d simultaneously have a strong labor market and a good economy. In 2024, I felt like everything was too much in flux to make good predictions. But we’re beyond that period now, and my view shifted starting in December 2024 as what appeared to be euphoria swept through markets. (Yes, I do have the receipts for this view shift.) My opinion is that I expect a US recession in the second half of this year, possibly a deep one, though as with my 2023 outlook, I maintain humility and am open to being wrong; in fact, this time I hope I’m wrong. More to come in the next essay!

Notes on what I’m reading now or recently finished:

• Goodbye Globalization (business, economy)

• Metabolical (health)

• Change Your Questions, Change Your Life (business, life)