March 8, 2018

Dear Friends and Colleagues,

US Commerce Secretary Wilbur Ross was on TV over the weekend. He was holding a can of Campbell’s Soup (watch here) in front of the camera and arguing that the new US tariffs on steel and aluminum would only add less than a penny to the cost of the soup.

Various think-tanks have gone a bit more into depth analyzing the issue. For example, the Tax Foundation has argued that the aggregate ‘tax burden’ associated with the proposed tariffs is $9bn. This is less than 0.05% of US GDP and hence not significant from a macroeconomic perspective.

But those points of view, both based on very narrowly calculating a specific dollar cost associated new tariffs, miss the broader implications. Investors and business managers are learning that tariffs (and counter-tariffs by trading partners) can hit various sectors in the US economy at any point in time via impulsive policy making from the White House (using legal arguments that have not been in play for decades). This is a new dimension of uncertainty, and one that makes good long-term business planning more difficult.

There is plenty of research about the role of ‘policy uncertainty’ and it is one of those factors that make ‘linear modelling’ in economics so difficult (a good example is here).

We can discuss the specific quantities involved, and it is indeed a complex endeavor. But the basic point is simple: The tariffs may add only a penny in additional cost to Campbell’s Soup. But the cost to the macro economy via uncertainty and reduced investment could be much larger and highly relevant at the macro level. It could be a very expensive penny, so to say.

And now a business update about Exante Data (and Exante Advisors): We continue to watch global political developments very closely, as their importance to macro markets are outsized relative to history at this juncture. This is the reason we have added an economist (Wouter Jongbloed) with a PhD in trade policy to the team in recent months (see link).

We have also rolled out a tool to generate real-time decomposition of asset price movements. Our model allows us to strip out ‘standard factors’ and isolate special forces, such as those from political risk. This tool has been helpful in recent weeks, when we have seen big swings in CAD and MXN  (linked to tariffs) that are otherwise unexplained by standard fundamental factors. We have put a few charts illustrating this on our new @ExanteData twitter account here.

Jens Nordvig
Founder and CEO
Exante Data LLC