What Are the Best & Worst-Case Tariff Scenarios?

I explained much of this on the 2025 RWM client quarterly phone on April 5th. I share this because so many questions are poured in.

Last Monday, I discussed the outcome of chaos. The purpose of the new customs policy was not fully explained, but some of the goals were confusing and unclear, but the majority of the issues were unfolding. It was ham-fisted, opaque and amateurish. It amplified early market responses with a lot of volatility and significant drawdowns.

Think about how the Federal Reserve will prepare the market in advance for major policy changes. They warn that changes have come in advance with some meetings. Shifts will be displayed in the dot plot. There is a debate about their favourite indicators (PCE vs. CPI?). Many Fed presidents will turn fans into fans to speak in a formal academic setting to discuss future changes. A few weeks and weeks later, policy changes will occur. There will be a press conference with the chairman, and a month later, minutes of the meeting will be published.

Whatever the ultimate tariff situation, the White House can clearly learn from the communications strategy that has been completed with the Federal Reserve.

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We don’t know about discussions within the oval office. We see the nature of many false start and feints, onaigain, off-again, and off-again. Only one can observe that the player appears to be unpredictable with mercury. Whatever comes next looks random and is driven by individual whims or vigilantes in the bond market.

Rather than trying to guess the impact, I prefer to WARGAMe various scenarios to identify potential outcomes. Each has a different chance of occurrence. There are many stages, but let’s work in three stages: Best, Worst and Middle Case scenarios.

These not only depict the various outcomes, but the path to getting there. It affects consumer spending, corporate capital investments, employment, and more. We consider this to be a discount feature in the market and evaluate the scope of corporate revenue and profit over the next four quarters.

Market volatility was a real-time attempt to assess these probabilities. A sudden 10% drop in US stock prices will result in a significant drop in revenue and profits that fell sharply the following year.

Consider these three potential consequences.

Best Case Scenario

we”Take the President seriously. But it’s not literal. ”

Let’s start with the unknown and do just that: is this temporary or permanent? Was this an opening salvo, negotiation tactics, or an attempt to completely reorganize world trade? Are there many one-on-one side jobs with individual countries? we”A set of reasonable accommodations around the world? “Is we half or two-thirds of the adjustment, or is this just a start?

I imagine the best case scenario as the downside of the future, but these are all well-versed negotiation tactics that have been found to cut a wide range of transactions.

Pax Americana’s old regime is (almost) present, and some of China’s worst crimes – protectionism, intellectual property theft, corporate America’s hacking, and mistreatment of foreign investors – will be fixed.

The United States remains a global economic, military and political leader. Many countries are unhappy, but solving these things is their (and ours) paramount concern.

Everyone saves their faces, the market ultimately finds its foothold, and we avoid the recession. Later in the year, FOMC will resume its rate reduction regime, encouraging improvements to CPI data and minimal economic disruption.

Put 10-20% of the chances that this will occur.

Intermediate scenario

This gets worse before it gets better.

Many regional alliances have been formed – we can see that we are already in the Pacific margins. Despite a long history of hostility and regional conflict, Japanese, Chinese and Korean bands go back thousands of years. They recognize that this previous suppression of relationships threatens all of them. They negotiate a trade alliance to protect themselves from the United States. The same happens in Europe and elsewhere (South America + Mexico?). Alliances in these regions will develop and give them the weight to negotiate regional deals with the US

There will be some damage to the US economy and trade relations. We have already seen consumers begin to freeze travel and spending plans. The backlash includes boycotts of the US and its products. Travel from Canada to the US fell by 75% already.

On the business side, companies refrain from spending large maintenance, building new factories, investing and hiring. “Hey, we’re not clear about what the new rules will look like, so we’re sitting firmly so we don’t make any major mistakes.”

Before 2025 is over, a mild recession begins. The new Treasury Department issuance is not large, and the costs of funding the US deficit are skyrocketing. Many goodwill accumulated over the 80 years since World War II dissipates.

It is painfully self-owned and not as bad as Smoot Holy’s Customs Act or Brexit of 1930, but it is still a loss of positive momentum caused by unreasonable mistakes, recessions, and dangerous intakes with poorly defined goals implemented in amateurs.

That’s bad, but we survived the worse: Great Fear pression, World War II, Watergate, the oil embargo of the 1970s, September 11th, the Great Financial Crisis, and the Covid-19 pandemic.

Our middle case is painful, but not as destructive as that laundry list Annus horribilis.

Perhaps Congress will eventually reclaim its customs authority. The next president, Potus 48, may be able to repair some of the worst of this. There are many global butt kisses, rewinds, generosity, and we will restore our previous favorable trade relations and status.

The central scenario is 40-60% chance. *

The worst case scenario

The world order of the world is in order since the end of Pax Americana and the end of World War II.

This year, the consumer and business freeze will be deeper, leading to a mild recession. Stagflation recession. It will be difficult to find parts and materials. The main components are missing, but in many ways it is reminiscent of the misery of the pandemic supply chain.

As the Economist magazine observed, this was the biggest economic self-invasion of the century, leading to international reorganization. Europe looks inward, looking towards itself, and giving it a big cowl from the US whenever possible. The dollar will lose its position as a global reserve currency. Our deficit funding can be ridiculously expensive.

Inflation has skyrocketed, and the standard for living collapse. This leads to a global recession. The rising unemployment rate, employment, spending and wages will all decline. We have a sticky, stubborn stagflation, which is a very unpleasant economic scenario. The standards of living around the world also drop off the rails, as things fall.

We have been military, economic and political leaders around the world, but we are not the only ones. Think of England after the collapse of the British Empire.

We have taken away so many goodwill: we have helped to stop illnesses all over the world. We have raised literacy levels everywhere and reduced poverty in so many places. We fought HIV in Africa and malaria all over the world. That leadership is now gone, and in the end, something very good simply dissipates from it.

bad. thing. happen.

This is the worst case scenario, and honestly, I personally have a hard time imagining its worst effects. Ben Hunt could get dark like that, and last week his take – Crashing Pax Americana car -Fleshed out the worst scenario more than I could.

The worst case scenario is 10-20% chance.

To give you an idea of how reckless this is, it’s one spin of six archers in Russian roulette, and there’s a 28 trillion dollar economy across the US…

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I hate to end up with such a down note, so let’s share one of my favorite charts via Batnick. He dates back to 1926 until the first century. It’s always terrible. The worst-case scenario I laid out sounds awful, but look at 100 years there. It was always something It is God to worry.