Tariffs, Markets and Happy Hour

Can we keep the party going?

The Spanish are not known for their subtle sleight of hand. Last week I started getting texts from my daughter from a bar in Barcelona where the price of the drinks were tied to the Dow Jones index. A gargantuan screen outside that looked like a stock ticker advertised the live pricing - which apparently attracts Americans bugs to a neon light. The place, Littlebit told me, “was so full of Americans it was embarrassing.”

As a former ad-guy, I always appreciate a clever gimmick. But this one says a lot about Americans, why the economy is still defying gravity, and what might (egad!) change that.

After a few lively bouts of market whiplash, the on-and-off-again nature of the “Liberation Day” tariffs seems to have confused a very strong economy into something like a baffled paralysis. Prices aren’t noticeably higher, in fact, it’s near impossible to seem what affect the tariffs had had at all. Unemployment is flat and the S&P500 sits comfortably at record breaking levels. Littlebit, it seems, picked the wrong week to go to a bar linked to the Dow Jones. When the market crashes, all drinks are 3 euros. Muy Beuno!

So what could go wrong? First is those tariffs - the White House announced today that on 1 August the tariffs will “boomerang” to the original levels without a deal - major trading partners like South Korean and Japan, among others, are looking at 25% next month. They are roaring back, this time in a cloud of emotional flatulence: After the country had a good laugh about all that TACO business, Trump isn’t likely going to back off after the August deadline. The spasms won’t be as dramatic as before, but the economy will have to deal with them.

Companies that splashed out ahead of the tariff deadlines pushed import up, which propped up the GDP numbers, and kept prices in check. Firms have been eating the rise in tariffs - the effective rate is 12% the highest in a century - in an attempt to wait out the president’s next wild impulse.

This presents a few issues: The first is that these stockpiles are going to be depleted, and when that happens prices are going to start rising. Very likely about the time we start gearing up for Christmas. Physiologically speaking, this is suboptimal.

The second is less obvious, more dramatic, but at least one bar-owner in Barcelona has sorted it out. That Americans are notoriously bad savers is true enough, but only part of the equation. We are also obsessive investors and that dynamic flow of capital is one reason the economy has defied gravity for so long thus far. In short, investing is how a restless, red-blooded American capitalist saves.

Hence the dilemma, forcing companies to eat into profits and deliver less shareholder value is, essentially, eating into American savings. The other option, to pass higher prices onto those same Americans will have much the same end result. As they say about portfolio fees: You can take them down the throat or up the ass, it’s up to you.

The Liberation Day fiasco crushed consumer confidence: recent data show a sharp month to month drop in household spending in May. Ironically, there is the surreal possibility that tariffs will actually push prices down by throwing a wet blanket on the economy.

That’s the art of a bad deal. But I know of a place in Barcelona where the drinks will be cheap.

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