I'm waiting for my 'spidey sense' to start tingling; President Trump is more concerned about interest rates and the bond market than the stock market; Nate Silver on why relying on the markets to 'tame Trump' is a mistake; Nobody seems to care much about the March inflation report

1) Well, the reality is setting in...

Markets gave back some of their huge gains from Wednesday, with the S&P 500 Index falling 3.5% yesterday. Investors are coming to grips with what I wrote in yesterday's e-mail: Just because a huge catastrophe – think a 2008-style financial crisis – is likely off the table doesn't mean we're out of the woods.

As I said:

Even during a 90-day pause (and who knows what happens after that?), the tariff regime is still going to be a shock to the international system...

I'm particularly worried about the tariff battle with China because of the size of the trade between the countries, the level of tariffs, and the reality that both countries are ruled by proud, stubborn men. So compromise here will be difficult.

Personally, I haven't been selling anything amid the recent turmoil. But I haven't been buying anything, either. I'm waiting for my "spidey sense" to start tingling – but as I've said in multiple e-mails recently, I'm hunting for bargains to put on my radar screen.

2) Most stock investors aren't aware of this...

But the bond markets are much larger than stock markets – and bond investors are less tolerant of volatility and losses. So major financial crises (like the global financial crisis) generally occur when bond markets rather than stock markets break down.

This risk – and the rise in interest rates – is likely why President Donald Trump announced his 90-day tariff pause on Wednesday. Barry Ritholtz of Ritholtz Wealth Management posted this summary on social platform X yesterday:

And a thread on X from The Kobeissi Letter has more details. As it begins:

And as it continues:

Finally, as the thread concluded:

I will continue to follow interest rates and the bond market more closely than usual – and share it with my readers – because I think it will tell us what Trump is likely to do.

3) Meanwhile, statistician Nate Silver does a good job of analyzing why investors are still very much on edge in yesterday's post in his Silver Bulletin blog: We shouldn't rely on markets to tame Trump.

As Silver says, it comes down to investors trying to account for multiple degrees of uncertainty all at the same time:

1. The immediate effect of tariffs;

2. Second-order effects on consumer, business, and investor confidence;

3. Potential spillovers into broader financial markets – particularly the bond market, which had apparently spooked Trump, and

4. What the tariffs imply about Trump's future actions and the United States' overall state capacity.

As he puts it:

Investors are relying on a lot of implicit assumptions about an economic world order led by a relatively rational superpower – the United States – that may no longer hold.

And as Silver continues:

True, you'd rather have seen Trump capitulate [on Wednesday] than not. One remarkable feature of markets is that they provide a scoreboard – real-time feedback that even notoriously stubborn Silicon Valley types tend to take seriously. But considering those four buckets above, how secure should investors be feeling? Even with the 90-day pause, consumers and businesses will still be spooked by this and will experience higher prices from the tariffs that remain in place. The long-term effects on the United States' cultural and financial hegemony are harder to quantify but potentially significant.

Markets and elites "got through" to Trump this time, but what if he wakes up on the wrong side of the bed 90 days from now and isn't in such a generous mood? Not that I think headline writers should be catering to Trump's mood swings, but triumphant headlines from Democrats about how Trump "surrendered" might give him second thoughts about doing the same thing next time around if he's worried about looking like a loser.

In summary, fasten your seat belt... prepare for more volatility... and don't obsess over the chaotic short-term news flow. Keep your eyes on the horizon.

4) Lost amid all the volatility in the stock market was the March inflation report the government released yesterday...

It showed lower-than-expected price gains, which normally would have made for bigger news. In fact, a month-over-month decline happened for the first time in nearly five years. Meanwhile, year-over-year inflation cooled to 2.4%.

But nobody really cares because of fears that tariffs will spike inflation going forward. Here's the Wall Street Journal with more on this point: Inflation Eased in March, but Tariffs Threaten to Stoke Price Pressures. Excerpt:

Normally, a slowdown in year-over-year price increases would be welcome news for consumers, who have faced years of high inflation, and the Federal Reserve, which has been struggling to bring down price pressures. But this time, it will be hard for investors, policymakers and businesses to read too much into the March data.

President Trump's "Liberation Day" announcement of sweeping new tariffs didn't happen until April 2, which means their direct effects won't show up until the next consumer-price report a month from now.

The article also cited this point from U.S. Bank Chief Economist Beth Ann Bovino: "It's good news for the Fed, but the data seems stale."

While the recent inflation numbers are indeed "stale," the fact that both overall and core inflation are now below 3% gives the Fed more flexibility to cut rates to offset or at least mitigate a tariff-induced recession.

As a former hedge-fund-manager friend of mine – who posts anonymously on X under the handle BeenThereDoneThat Capital – posted yesterday:

On the plus side, my friend is right that the Fed now has room to cut rates to stimulate the economy if needed. (Investors are now expecting four rate cuts this year, up from one just a couple of months ago.)

But there's a risk that if tariffs lead to higher inflation and an economic slowdown, the Fed's cuts could fuel even greater inflation. This is yet another risk factor to monitor...

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.