Stephanie Pomboy: Tariffs Aren't The Only Big Challenge We Have To Worry About

**Adam Taggart** (0:00)
All right, and we should be live here. Welcome to Thoughtful Money. I'm Thoughtful Money Founder and your host, Adam Taggart. Thank you for joining us for our new Wednesday series, Macro with the Macro Maven herself, Stephanie Pomboy. Steph, how are you? Thanks so much for joining us today.

**Stephanie Pomboy** (0:15)
I'm good, and apologies again. You know, it's like permanent allergy season for me around here, so I'm gonna be blowing my nose as usual. I apologize, but there's so much to talk about that hopefully people will not be too distracted by my runny nose.

**Adam Taggart** (0:32)
Yes, and I am so appreciative of you being willing to give me six hours here to get through it all. Ah!

**Stephanie Pomboy** (0:39)
Oh, my God. Wow.

**Adam Taggart** (0:41)
It would take that long. I mean, there is so much going on. It is almost hard to determine where to start, and I know you and I were texting each other earlier about some late breaking interviews that were being given by cabinet members of the administration and Jamie Dimon, so we'll get through all that. Although I guess, Seth, this is the first time we've talked on camera since Liberation Day. So maybe we can just kick this off grounded in your general thoughts of what happened last week, how the world's reacting to it, and then we'll go from there.

**Stephanie Pomboy** (1:16)
Yeah, well, I mean, I think you and I have talked about this before. I've always viewed the whole tariff, quote unquote, diplomacy, as a negotiating tactic. I don't know that I've been persuaded that Trump really imagines an economy that ceases to have income taxes and relies on an external revenue service and tariffs as the main source of revenue for the government. So my sense all along has been that he has been really just trying to get reciprocity and fair trade, and essentially to reshore production here in the US, rejuvenate, revitalize our domestic manufacturing industry, as well as things like pharmaceuticals in particular, and other sort of, let's say, strategic and national security type of products. So that has been my operating framework. Now, I may be wrong about that because I have no inside track in the administration to know whether or not this is, in fact, just part of a broader shift to ultimately move to a tariff economy from income tax economy. I doubt that again. But so within that, if you grant that this is really a negotiating process, then I think it's not surprising that we're seeing these volatile swings in the markets that are just reacting to these headlines with the tit-for-tat in this brewing trade war. But ultimately, I think the question is where, what's the long-term picture? And I always prefer to focus on the long-term because it gives me a sense of calm and equanimity in an environment where things are hysterical every day. And if you just step back and sort of identify what the bigger picture is here, I think the key for people to focus on, and you and I texted about it briefly beforehand, is what this means in terms of our deficit financing, because basically what we're doing here is upending the entire globalization quid pro quo that has existed for the last four decades and has served as the framework for every investment decision we've made during that time, was basically the US consumer will continue to be the engine of growth for the globe, and that in response to our willingness to buy their goods, the rest of the world would lend us the money with which to do so. So the real existential question right now is, what happens to the treasury market as we engineer the shift from massive trade deficits where the US consumer is basically supporting growth, exporters around the globe, to the US now turning inward and relying on itself to manufacture a lot of the goods that it was getting elsewhere, and therefore no longer needing the rest of the world, well, not, let's say, no longer receiving money from the rest of the world in exchange by purchasing our treasury. So that's really the issue that I come back to is watch the treasury market here, and how it's reacting to the whole tariff drama. And I think what we've seen in the last few days, obviously, is a sharp increase in long-dated treasury yields.
And perhaps as a function of China dumping treasuries as a way to kind of intensify the pressure on the Trump administration, but also in so doing, triggering an unwind of this massive treasury basis trade, which gets a little wonky, but basically, there's tremendous leverage built up in the treasury market around hedge funds that we're positioning, the arbitrage between the cash and the futures market, and that's being unwound. And the catalyst for that unwinding, I would say, is this whole tariff discussion. But again, the big picture is who's going to finance these trade deficits, I mean, these budget deficits in a world where the US is no longer the center of everything, and there's therefore no reason for the rest of the world to be slavishly buying our treasuries.