Failed Treasury Auction: ‘Things Are Just Warming Up’ (Uncut) 04-13-2025

Countries Dumping USD? Failed Treasury Auction: ‘Things Are Just Warming Up’ | Steve Hanke

The probability of 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 something on the order of earnings growth of 10%. And I say no, it’s going to be zero or maybe even below zero.

Maybe profits will even be in negative territory. 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 Hankey joins us today. He is a professor of applied economics at Johns Hopkins University and an expert on monetary policy.

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 good to see you again. Obviously, I 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. A lot of time it wasn’t the case, although there were books in your office. People should check out our last conversation, by the way, link down below.

I visited Professor Hankey in person. We had a great conversation. Anyway, today we’re going to be talking about what tariffs will do to the economy.

Not good, according to consumer sentiment. Take a look at my screen here. This is from CNBC.

Consumer sentiment, well, this is inflation, but they also had a story on consumer sentiment. Here we go. Tumbles in April as inflation fears spike.

University of Michigan survey shows. Let’s talk about inflation fears because the consumer believes the inflation 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 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 50.8 to 57 in March and below the Dow Jones consensus estimate for 54.6. Now, if you take a look at the 10-year, we were just talking about this offline, 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 American consumer right to be worried about weakening wealth prospects and, of course, higher inflation? Well, they’re correct to worry about a slowdown in the economy. We’ve talked about this a number of times, but now we have a couple of things going on.

One thing that you and I have talked about, David, for a long time, actually, is the fact that the money supply is the fuel for the economy. And when the money supply contracts, like it’s done since the summer of 2022, eventually that slowdown gets transmitted into the economy and the economy slows down. So that’s why I keep using this expression, well, a slowdown is baked in the cake.

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 we had that coming on us this year.

Most people, by the way, haven’t seen this coming at all because they don’t pay any attention to the money supplier, the quantity theory of money. And then all of a sudden we get a second aspect coming in, and that’s the Trump tariff tantrum, I would say. And that has really thrown a lot of sand in the gears, shall we say.

And that will just make the slowdown even worse and probably will have a recession, a technical recession. And so that’s why people are concerned. That’s one reason they’re concerned.

The other reason is something I call regime uncertainty. And that is that when you get tremendous activism in a government where they’re changing kind of everything, you get regime uncertainty. And that’s different than the kind of pinpointed little micro uncertainties that develop about this thing or that thing.

It’s like everything. And the only time we’ve had that, by the way, is with Franklin Delano Roosevelt and the New Deal. 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 just changing, tore up the rule books and were changing everything. And even talking about packing the Supreme Court and all kinds of things. The same kind of rough scenario that has enveloped the Trump administration, where just everything is on the table to be torn up and changed.

And that creates regime uncertainty. Now, what happens with regime uncertainty is that not only the consumer hunkers down and consumer sentiment goes down, but more importantly, investors hunker down and they stop investing. And in the New Deal, by the way, the regime uncertainty was very serious.

And there was essentially no investment in the United States from 1929 until the end of World War II. And the regime uncertainty and the resulting 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 propaganda was happy days are here again.

Franklin Delano 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, making it last a lot longer.

So you have that aspect now coming in on top of the monetary contraction. So the scenario is exactly the same as the Great Depression. The Great Depression, the money supply contracted.

Of course, it contracted a lot more than it has contracted in the United States now. It was down about 38 percent from the start of the depression until the trough of the money supply. So the money supply comes down, that makes everything collapse.

And then on top of it, you get this regime uncertainty that makes investment collapse and you really have a big problem. So where we’re going with this, it relates to the stock market and it relates because if the slowdown occurs like I think it will, and still some people now are talking a little bit about recession, the probability of recession. I think J.P. Morgan or Goldman, I can’t remember which one headed it, you know, between 40 and 60 percent or something like that.

I think it’s over 90 percent. It’s really big. You think it’s over 90 percent? Yeah, I think it’s over 90 percent.

Recession this year? This year. So as a result of a slowdown, of course, sales go down and profits go down. It’s really interesting because I think more people are turning more bearish on the economy like you.

But if you take a look at the New York Fed probability of a recession as predicted by the Treasury spread, it’s actually going down, not up. But that’s a different indicator, I guess, 12 months ahead. There’s a pretty big difference.

I mean, I’m accurate. The New York Fed is clueless. By the way, former St. Louis Fed President Jim Bullard made a comment on the news recently, and I think he kind of echoes your sentiment, but I’d like to get a response to this.

He said that this is looking a lot like Smoot-Hawley. The main thing is that this has dramatically raised the risk of a Smoot-Hawley type outcome. So Smoot-Hawley was 1930, other countries retaliated, global trade collapsed, and the Great Depression was on.

So I think that’s what has really people worried about this. Absolutely. So the Great Depression, you had a two-stage thing.

You had money supply started to contract, the economy starts going in the tank, and then you had the Smoot-Hawley tariff, which in a way, it was very bad, the worst one we’ve ever had in terms of tariffs. But I don’t think it’s as bad as what Trump’s doing. The rates weren’t as high, and they were much more certain what was going on.

But then the stock market crashed. The Smoot-Hawley tariff was announced in March of 1930. And then the stock market started really crashing and went down until July of 1932 and hit a low that it was 83% lower than it was when the tariffs were announced.

So it just totally wiped everything out. So I agree with Bullard, that he’s got it right. And let’s get back to the earnings thing a little bit.

So we have a recession coming. And with the recession, sales go down, and the sales go down, profits go down, earnings go down. And the consensus is interesting.

The consensus on earnings was 15% growth this year. Then they brought it down to 13%. And most recently, they brought it down to 10%.

I think it’s going to be zero. I’ve always said I thought they were the consensus is too optimistic. And the basic reason they’re too optimistic— Jamie Dimon agrees with you.

S&P 500 earnings estimates to fall as companies pull guidance. He’s expecting analysts to slash their S&P 500 earnings 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, I’m exactly on the same page as Dimon. He’s got the thing right. So why? Is it because of weaker consumer demand? Is it because of global trade? Is it because of decreased margins from these tariffs? What is the reason for this? Well, all of the above.

Let me get into the margin thing for just a minute. You’ve mentioned all the key points, okay? So let me just go into one aspect that people don’t understand. But let’s say David Lin is in Taiwan, okay? And Lin or one of your relatives over there in Taiwan is selling Anki something.

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. Because the Lin clan, they think it’s good.

They’re making something out of it. Otherwise, they wouldn’t have sold the thing to Anki. And Anki is getting something out of it.

Otherwise, he wouldn’t have bought the thing. So there’s a surplus resulting from that trade between Lin and Anki. And what does a tariff do? A tariff is a tax on international transactions.

So 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 government’s pocketbook. So that’s why earnings go down.

The trade aspect, tariffs take away some of the surplus generated by international transactions. It’s just that simple. Well, let’s talk about inflation then.

We referenced inflation earlier in the interview as something that consumers are concerned about. 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%. Core inflation rate ran at 2.8%. So basically, inflation is slightly cooling.

Well, let me comment on this. And one reason I want to comment on it, I’ll give myself a shout out on this thing. John Greenwood and I are the only ones that have accurately made a forecast of where inflation would go up to when they goosed the money supply, started goosing 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 one was even close.

They were all talking about transitory and supply-side shocks and all this other garbage. And no one was paying attention to the quantity theory of money. And inflation always results from the fact that prior to the inflation, there’s been 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 hit the panic button. And where did Greenwood and I say inflation would be at the end of last year? That’s the end of December 2024.

We said it would be between 2.5% 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 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 we’ve nailed this thing completely using the quantity theory of money. Remember, inflation is always and everywhere a monetary phenomenon. Now, let’s jump into the – I think people are overexcited about the inflationary effects of tariffs.

They won’t have really any inflationary effects. They will have big effects on particular prices, on relative prices. The consumer price index that you just put up there, 2.4, it contains over 300 items and some are going up, some are going down, some are staying the same.

You put 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 doesn’t mean that that consumer price index might become a little bit more noisy and volatile with the tariffs as those things work into the system. But the overall thrust of the consumer price index will continue to go down and I think it might even hit the Fed’s target of 2% or maybe even a little below this year. I understand your point about 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 the internet about their own experiences. Some stores are now charging a surcharge tariff tax on top of their goods. So 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 the US to avoid Trump tariffs. It’s reportedly flown 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 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, but also people are concerned about whether or not the next one 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 are a couple of things to unpack. You’ve made a very dense statement with a lot of information. So let’s unpack it a little bit.

So one thing you said that some stores are putting a so-called tariff premium or tariff tax on the goods that they’re selling. Now, that has an aspect to it that’s interesting, and that is tariffs do reduce the level of competition. The best antitrust policy in the world is open trade, because if you start misbehaving and start screwing your customers, some foreigner is going to jump in there and take you out.

So tariffs reduce competition, and that can lead to some of these cases that you’re pointing out of the so-called tariff tax. So that’s one thing. However, if you start really unpacking everything you were saying, it involves ad hoc theorizing.

You’re cherry-picking examples to try to make your point that 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 a 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 rest of it is a lot of kind of ad hoc theorizing and my grandmother kind of stories, my grandmother has 10 issues kind of thing. So that’s one take on the thing.

Now, you did say something about the wealth effect, 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 means everybody 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 it does come in. And there will be a wealth effect coming in via the stock market.

So 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%. Hankey’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 are just a lot of things going on now. And a lot of confusion out there because, by the way, if you read the press, you’ll just be totally confused and not get it right.

But remember Hankey’s 95% rule, David, 95% of what you read in the financial press is either wrong or irrelevant. By the way, that’s true for most podcasts except yours, but that’s another story. Actually, I do watch a number of things on yours.

Let’s put it this way. I’ll be diplomatic and say I’m not in full agreement. Well, I guess that’s why we have a market that not everybody has to agree.

I understand your point. Okay. I just want to make one point about supply chain issues.

During the pandemic, yes, the money supply went up, but also people were saying inflation went up because the global supply chain got choked up. I wonder if that scenario could happen again this time. Well, it will and people will point to that like the Apple importation from India instead of China and they’ll say, oh, 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 wasn’t why we got inflation. We got inflation because the money supply, you know, it went up, by the way, after COVID hit and the money supply was goosed by the Fed, it went up to 18% year over year.

That’s the highest year over year rate that the money supply M2 had ever grown since the Fed was founded in 1913. So we had an unprecedented surge in the money supply and none of these people yakking about the supply chain, the transitory thing, ever even mentioned the money supply. They were just out to lunch.

There’ll be a lot of this in the paper. I should warn people, what you said will occur exactly again. They’ll get on the same horse, they’ll ride the same saddle, they’ll be at the same rodeo and they will be wrong 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 global growth prospects? Currently the money M2 is growing at 3.87% annually. Well, it’s a little bit hard to tell. They might do it, which would be fine, but not for the right reason because they don’t look at the money supply.

They’ll fool around with the interest rates, maybe they’ll stop quantitative tightening. Now this, what’s going on in the bond market, the 10 year, remember, I was always bullish on the 10 year and I said for a trade, I thought it was a good thing. And it was a great trade until about a week ago when Trump laid into this tariff thing.

And what happened, we had a treasury auction this week and usually primary dealers and foreign central banks buy around 15, 16% of each one of the supply of treasuries at the auction. This week, they bought like 1.5% only. 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 have to understand the plumbing of the system and how things work. And that auction failure, it was a complete failure.

And I’m certain Scott Bassett, the secretary of treasury, pressed the panic button, which Trump saw and they dialed back on the tariffs, put the 90 day pause in. And now it’s just gotten worse. The 10 year is over 4.5% right now.

Now that’s going to be a huge problem for the federal budget because interest payments are accounting for 13.1% of government expenditures already, a huge thing. Because when you pay interest, when the government pays interest and no one’s getting anything for it, they’re just servicing debt. They’re not getting any product or paying any wages or anything.

They’re just paying creditors who’ve loaned the government money. And that’s going to go up and blow a hole in the budget and cause a bigger deficit. And that bigger deficit, by the way, maybe the Fed will be under a lot of pressure to be buying some of those bonds that are being used to finance 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. That’s the way to think about what’s going on.

Okay. And if that happens, we’ll follow up again and see what happens to the money supply and inflation. I have a few minutes left, Professor.

We have to take a look at the dollar. You mentioned the 10-year yield spiking. So that’s what happened.

The dollar, though, has been going down. And this is something that came in from the news again. The Fed’s Kashkari says rising bond yields, falling dollar show.

Investors are moving on from the U.S. Minneapolis Federal Reserve President Kashkari said recent market trends show that the investors are moving away from the U.S. as 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 credibility to the story of investor preferences shifting. The 10-year yield surge this week.

Okay. Do you agree with the statement? Yes. And what I just told you before confirms that from a technical point of view.

The bond auction failed. Central banks were not buying. What are they buying instead now? Do you know? Of course, gold.

Gold just made a new high today. Yes. You know, it’s April 11th as we speak, and gold has made a new high.

Now, that’s another area. I’ve been right on target with gold. I’ll give myself another shout out.

I mean, God, you’re not giving me any shout outs. I can’t believe it, David. Your track record speaks for itself.

Well, when you’ve got to toot your own horn, it gets pretty bad. You have been right. You’ve also been right on the stock market bubble popping, although that took a lot of people by surprise, the magnitude of the downturn.

Let’s finish off on this question, Professor. Do you think that the worst is behind us for equities volatility? Oh, no. I think things are just warming up.

Especially when the earnings come out. Yes. Right.

Things are just warming up because you’ve got to think of the big fundamentals. And 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 the stock market has to go down. When I say earnings tumble, remember what’s priced in now is something on the order of earnings growth of 10%.

That’s what the consensus of the analysts say. And I say, no, it’s going to be zero or maybe even below zero. Maybe profits will even be in negative territory.

So there’s a long way to go. Right. Good.

Let’s end it here, Professor. Very good updates as usual. Where can we follow you? On my Twitter, I think is the best place, at Steve underscore Hankey.

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 distribute, for example, like the David Lynch show, that’ll be distributed this week on my weekly. You just write me an email, Hankey at JHU.edu and request to be put on my mailing list.

Thank you very much, Professor. We’ll speak again in a couple of weeks. Yeah.

Thank you, David. Great to see you again. Great to see you again as well.

And follow Professor Hankey in the links down below and we’ll see you next time. Don’t forget to subscribe.