How Tariffs Jeopardize The Soft Landing | Jonny Matthews, former Brevan Partner, on Bond Yields, Japanese Yen, and Gold

Episode Summary

Executive Summary: The conversation centers on the economic and market fallout from tariffs, with Johnny Matthews arguing they are inflationary, growth-negative, and highly disruptive to supply chains, while likely not delivering much revenue or reshoring benefit. He expects choppy markets, weaker equities, cautious central banks, relative strength in the yen and gold, and volatility that favors smaller positions and selective trades rather than broad risk-taking.

Main Topics: Tariffs and their macroeconomic costs (Priority: 5/5): Matthews argues tariffs raise prices, slow growth, reduce profits, and create uncertainty, while likely generating only modest revenue relative to the damage they cause. Supply-chain complexity and trade disruption (Priority: 5/5): He emphasizes how deeply integrated North American manufacturing supply chains are, making tariffs difficult to apply cleanly and expensive to unwind. Inflation, growth, and central bank policy (Priority: 5/5): Tariffs are expected to lift the price level and inflation expectations, which could freeze the Fed and ECB from easing even if growth weakens. Market positioning: equities, rates, and volatility (Priority: 4/5): He is bearish on U.S. equities and duration trades that assume aggressive easing, but sees opportunities in relative rotations and options-based rate positioning. Currency moves and the yen trade (Priority: 4/5): Matthews sees dollar/yen under pressure as rate differentials compress, despite the usual theory that tariffs strengthen the dollar. Gold and asset allocation under deglobalization (Priority: 4/5): Gold is benefiting from tariff fears, central-bank diversification, and a broader move away from cash-like assets and into stores of value. China, Europe, and geopolitical spillovers (Priority: 3/5): He notes Chinese equities have responded to stimulus and sees an end to the Russia-Ukraine war as a positive for European energy costs and industrial activity.

Key Arguments: Tariffs function as a tax that raises prices, slows real growth, and lowers profits; the upside in reshoring is limited because many jobs and supply-chain steps cannot easily be moved back to the U.S. North American auto and industrial supply chains are so cross-border and multi-step that tariffs would compound at each border crossing, making the system costly and hard to preserve. The Yale Budget Lab estimates suggest the tariffs could raise the price level by roughly 1.5%-2.1%, cut household disposable income by about $2,500-$3,000, and reduce GDP growth both in year one and over the long run. Second-order effects matter: businesses may delay hiring and CapEx, consumers may react to falling wealth and confidence, and inflation expectations may rise even before the full tariff pass-through hits prices. Central banks are likely to become cautious or frozen because they cannot easily ease while inflation expectations are rising, even if growth weakens. Equities, especially the S&P 500, look stretched after large multiple expansion; Matthews expects rotation toward value, non-U.S. markets, and away from the mega-cap growth leaders. The bond market’s initial rally may be pricing excessive recession risk and central-bank easing; he prefers cautious short-duration or options-based bearish rate positions rather than outright large shorts. Dollar/yen should track compressing U.S.-Japan rate spreads and could fall further even though theory suggests tariffs should strengthen the dollar. Gold is supported by tariff uncertainty, higher inflation risk, and reserve diversification away from Treasuries by foreign central banks. A Russia-Ukraine peace settlement would likely be bullish for Europe, especially German industry, via lower natural-gas costs and improved industrial competitiveness.

Data Points: Q4 U.S. GDP growth: 2.3% - Used to argue the U.S. economy was strong before tariffs. Underlying GDP run rate: ~3% - Matthews said core growth was running near 3% after import distortions. U.S. unemployment rate: 4.0% - Evidence of a still-tight labor market. Job openings versus unemployed workers: More openings than unemployed workers - Cited as another sign the economy was not weak. S&P 500 earnings growth: 18% Q4-on-Q4 - Cited to show strong corporate fundamentals. Estimated tariff tax revenue: $90 billion to $110 billion per year - Matthews argued revenue is modest relative to economic damage. Goods share of U.S. consumption: 32% - Breakdown of consumption composition. Services share of U.S. consumption: 68% - Used to show tariffs affect only part of the economy directly. Imported share of goods consumption: 20% - Narrowed the share of consumption exposed to tariffs. Share of total U.S. consumption exposed after adjustments: ~6% - Approximate direct exposure to imported goods. Potential GDP exposure to tariffs: ~4%-5% of GDP - Matthews’ rough estimate of the tariff-affected slice. Yale Budget Lab price-level impact: 1.66%-2.07% - Estimate for 25% tariffs with blended effective tariff assumptions. Yale Budget Lab household income hit: $2,500-$3,000 - Estimated hit to average household disposable income. Yale Budget Lab year-one GDP impact: -0.5% to -1.0% - Estimated first-year growth drag from tariffs. Yale Budget Lab long-run GDP impact: -0.33% to -0.66% - Estimated persistent growth drag. Average effective tariff rate assumption: 13% - Used in the Yale model discussion. Top two income quintiles share of consumption: 72% - Fed study cited to explain wealth effects on spending. S&P 500 two-year gain: ~50% - Two consecutive years of ~25% gains were highlighted. S&P 500 P/E multiple expansion: Below 17 to above 24 - Used to explain that valuation expansion, not earnings alone, drove the rally. P/E multiple increase: ~30% - Approximate valuation expansion over the period discussed. Forecast EPS growth for current year: 13%-15% - He said estimates were high but likely to be cut by tariffs. Eurozone deposit rate move: 25 bps cut expected - He said the ECB cut was a given in the near term. Eurozone inflation: Above expectations - Used to argue the ECB should be cautious. Eurozone unemployment: Record low - Supports the case against aggressive easing. Conference Board 1-year inflation expectations: 6% - Cited as evidence expectations have moved up. 10-year U.S.-Japan rate spread: Compressed sharply - Used to justify a long-yen / short-dollar view. 10-year Treasury yield: Around 4.1% from 4.6% earlier - Illustrated falling U.S. yields during the period discussed. 10-year JGB yield: ~1.42% and at a 15-year high - Supported the view that yen should strengthen. HSCEI year-to-date performance: Up about 20% - Noted as evidence Chinese equities were responding to stimulus. Gold price behavior: Persistent uptrend - Described as one of the few stable trending assets.

Pivotal Quotes: "The trouble with tariffs to be succinct is that they raise prices, slow economic growth, cut profits, increase unemployment, worsen inequality, diminish productivity, and increase global tensions." — Johnny Matthews: Opening critique of tariffs and their macroeconomic effects. "If it ain't broke, don't fix it." — Johnny Matthews: He used this to argue tariffs are being imposed on an already strong U.S. economy. "Tariffs aren't paid by the tooth fairy." — Warren Buffett: Quoted by Matthews to emphasize tariffs are borne by companies and consumers.

Implications: Expect higher inflation uncertainty, slower growth, and more volatile, range-bound markets. Smaller sizing, hedged trades, and patience matter more than trend-following. Relative opportunities may favor the yen, gold, value stocks, and selective duration shorts.