Welcome back to Dry Powder. I’m William D. Cohan. Ever since Trump’s “Liberation Day” tariffpalooza, confidence in the financial markets has been seriously shaken. But some interesting notes of caution emerged from powerful corners this past week. Tonight, an inside look at what Wilbur Ross, Trump’s first commerce secretary, is telling his inner circle, plus the clear-eyed perspective of Austan Goolsbee, a former economic advisor to President Obama and current president and C.E.O. of the Federal Reserve Bank of Chicago. But first…

Going to California: Looks like Sam Bankman-Fried has finally made it home—or as close to his family home in Palo Alto as he is going to get for the foreseeable future. You will recall that, around the end of March, S.B.F. was transferred from the Metropolitan Detention Center in Brooklyn to a transit prison in Oklahoma City, not long after violating MDC rules by giving a jailhouse interview to Tucker Carlson—hoping, probably, to catch the attention of Donald Trump and secure himself a pardon. Of course, that didn’t work—or hasn’t yet—and he was rewarded with a day in solitary confinement.Now, S.B.F. has reached the metaphorically named Terminal Island, a low-security federal prison in San Pedro, California, by the Port of Los Angeles. At the moment, unless he gets sprung, S.B.F.’s release date is December 14, 2044. According to a recent audit of Terminal Island, the facility has an average daily all-male population of 950 inmates, even though it was designed to hold 892. So maybe it’s a little crowded. But at least it looks like Sam will be able to re-create the steady diet of rice and beans that he would buy at the commissary in the MDC. (When I saw him there last May, he looked like he had lost considerable weight.) The commissary in San Pedro offers a variety of options, including white rice, brown rice, refried beans, and chili, both with and without beans. There are also about 15 “healthy snacks” for sale at the prison, including pitted dates and unsalted trail mix. Bon appétit, Sam.
The Dark Money Game: Suddenly, there’s a lot of decent Hollywood streaming content to help everyone grapple with the daily madness emanating from Washington. Of that bounty, I commend two excellent new documentaries from the legendary Alex Gibney, which are packaged together under the overall title The Dark Money Game and based in part on my friend Jane Mayer’s 2016 blockbuster bestseller, Dark Money. The two films air this coming week on Max, around Tax Day.The first film, Ohio Confidential, is about an extensive corruption scheme that went all the way to the Speaker of the Ohio House, Larry Householder—great name—who was convicted in 2023 of leading a racketeering conspiracy to receive $61 million in bribes. It’s a devastating portrait of bald-faced corruption. The other film, Wealth of the Wicked, focuses on the Supreme Court’s Citizens United decision, and how the influence of big money on the court led to the repeal of Roe v. Wade. I spoke with Gibney about the films earlier this week, and why he decided to make them. He said the Householder scandal was the “ultimate pay-to-play” scam that was unraveled “almost by accident,” after the F.B.I. happened to be listening to the conversations of Neil Clark, a powerful Ohio lobbyist involved in the scandal who later committed suicide. “This was a clear case of a corporation bribing a politician to give them an enormous benefit,” he said. “It involved a suicide, and it involved muscling people all over the state of Ohio. It was incredible.” The second film, he said, “shows the unholy alliance between religious fervor and big money.” One of the main characters talks about how the “wealth of the wicked is laid up for the righteous,” which Gibney explained to mean that “we can baptize the billionaires’ money. We can sort of give it a sheen of holiness as we move forward, and they will fund our cause, which is anti-abortion.” Gibney is clearly angered by recent events, and appalled by the logrolling of the new Trump world order. “You have the world’s richest man lunching at the trough of the federal treasury, and also eviscerating all the regulators who would normally oversee his businesses,” he told me. “I don’t know how you get more urgent than this. It seems like we’ve hit the moment.” Both films are well worth your precious time.

And now, to the evening’s main event…

It’s the Bond Market, Stupid

The latest inside chatter on Wall Street about Trump’s tariff-induced economic hellscape.

William D. Cohan

The equity markets finally showed some signs of life on Friday, with the Dow Jones Industrial Average up 1.5 percent and the Nasdaq up 2 percent. But confidence in the financial markets has been seriously shaken, not stirred, by Donald Trump’s tariffpalooza. As far as I can tell, there has been no coherent logic to the president’s moves, despite the efforts of the sycophantic quartet of Peter Navarro, Howard Lutnick, Scott Bessent, and Stephen Miller to explain what Trump is doing via increasingly pathetic and contradictory public statements. The sole purpose, it would seem, is to use the wholesale imposition of tariffs as a power flex. To wit, late Friday night, in a jargon-filled technical document from the U.S. Customs Department, Trump—negotiating against himself, naturally—exempted smartphones, laptops, and other electronics from most of the tariffs, a clear sop to his good friends in Silicon Valley. The madness, however, continued to play out in the bond market, which did not follow the stock market’s gain on Friday. The yield on the 10-year Treasury bond is now 4.5 percent, up from 3.9 percent in a week—a pretty shocking 15.4 percent increase in just a matter of days. (As I discussed more extensively on Wednesday, it’s always the bond market, stupid.)

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It’s possible that some of the president’s advisors recognize the danger lurking for the economy if the credit markets continue to back up so profoundly, which might explain Trump’s reversals. Navarro argued on Sunday on NBC’s Meet the Press that these exemptions are “not exclusions”—whatever that means—and suggested the details could change again to include tariffs on the computer chips within exempted electronics. Around the same time, Lutnick went on ABC’s This Week and said there would be an additional “semiconductor tariff” in “probably a month or two.” Who knows what the plan is at this point? There were, however, some interesting notes of caution shared this past week from powerful corners. In a note to his inner circle that was shared with me, the former banker and Trump 1.0 commerce secretary Wilbur Ross had a simple message: Everyone just calm down!

Rossing the Rubicon

I’ve known Wilbur for a very long time. We often found ourselves on opposite sides of bankruptcy deals in the early 1990s, when I was at Lazard and he was at Rothschild. He was the wizened old pro; I was the junior neophyte. He knew everything; I knew nothing. There’s no question that Wilbur is a brilliant billionaire. He also remains a huge Trump supporter, and has a home in Palm Beach not too far from Mar-a-Lago. That’s why I found his commentary this week so interesting. “This stock market collapse is not going to continue for long, and the likelihood of a recession is not very high,” Wilbur wrote. He explained that he has been having regular conversations with Noreen Harrington, a former Goldman Sachs senior trader who “owned” the Soros account when Bessent worked for Soros Fund Management. According to Wilbur, Bessent did most of his trades at Soros through Harrington, so she knows “exactly how he thinks and functions.” He said Bessent was known for taking huge trade risk positions, and “often won.” Now, instead of playing with Soros’s money, Bessent is playing on the world stage. “Trump and Bessent feel the U.S. has been disadvantaged in trade and financially for decades,” Wilbur wrote. “The U.S. taxpayers funded European and Japanese defense for 80 years.” He mentioned how U.S. investors had been “cheated” by U.S. allies out of hundreds of millions of dollars. He cited one example wherein U.S. investors were owed $300 million by a foreign government, related to an unspecified project, but the money was instead appropriated for schools and other projects, even though the country’s justice system ruled the U.S. should be repaid. “Biden did nothing to rectify this,” Wilbur wrote, adding that tariffs are just a way of “correcting” these issues—a means to the end of getting countries to come to the table. He alleged that some 50 countries have called Trump and want to make trade deals, but warned that this will be a long, labor-intensive process. “The pressure plan is working, but it will take time to work through the massive negotiations needed,” Wilbur wrote. “So, it will continue to look ugly for several weeks … It is just painful right now.” He said the Chinese will have no choice but to negotiate a deal with Trump, and have already been on “a long call” with Washington, and that their “chief negotiator” will be in Washington on Wednesday. (A White House spokesman did not respond to a request for comment.) As the deals get cut, he predicted, the stock market will rebound, although not to the levels from before Trump took office, because the equity markets were already overpriced and due for a correction of some sort. The tariffpalooza just brought it all on faster and more severely than otherwise would have happened. He pegged the chance of recession at less than 50 percent because banks are in a “very good” capital position and the feared crisis in commercial real estate never materialized. “All in,” he continued, “there is nothing of the usual problems we see that cause recessions. It may get a lot worse if things do not get sorted out over the next few weeks on trade, but Bessent said they know they need some quick major deals, and they are working to get there. Then the big tax bill is coming to a head in late May, and will pass. That will be a big boost for the markets.”

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He urged people to stay calm, and said that by July, things will look a lot better. “I often said the world was at a historic inflection point, and now you see what I meant,” Wilbur concluded. “We are just at the start of an entire new world order in trade, geopolitics, defense spending by Europe, and finance. As well as a remaking of the D.C. bureaucracy and all the fraud perpetrated by the [Democrats] and their N.G.O. friends and media we have experienced for many years. It is now happening. It will be painful and ugly, but it is hugely historic.” I pinged Wilbur to see whether he wanted to elaborate on any of these observations, but this time he chose not to engage. Could there actually be some method to the madness? If so, it’s certainly been very hard to discern so far.

The Iron Triangle of Uncertainty

Meanwhile, Austan Goolsbee, the MIT-trained economist and former economic advisor to President Obama who is now the president and C.E.O. of the Federal Reserve Bank of Chicago, spoke at the Economic Club of New York this past week. Goolsbee is another smart guy who also tells it like it is. Under respectful questioning from Bob Steel, the Wall Street investment banker and club chairman, Goolsbee shared his thoughts on the current economic mess. He emphasized that imported goods account for only 11 percent of G.D.P., so “there’s an argument” that if the tariffs aren’t too high and don’t stay in place for too long, their effect won’t be “material” to the overall economy. However, he said that tariffs would “jump out of their 11 percent lane” if Trump imposed them on component parts and intermediate goods. “Costs go up when you see tariffs on steel, and the domestic steel producers start raising their prices, and the users of steel start facing higher prices,” he said. He warned that “retaliation” by other countries would also “double the impact of the tariffs,” because there would be tariffs on both imports and exports. Finally, the third factor that could increase the impact of tariffs would be if people “start freaking out.” He said the “freak-out” phenomenon “is a well-recognized negative impact of any policy,” and that the Fed has started to talk to corporate executives to gauge their reaction. “Are they front-running and trying to preemptively buy a whole bunch of parts and components to stick them in a warehouse? In which case you might have a real drop-off in activity when the actual policy happens,” he said. “Are consumers changing their behavior in anticipation of a deteriorating economy?” He shared his thoughts on how the Federal Reserve might react to the situation. Tariffs, he explained, are “like a negative supply shock,” and therefore stagflationary, making both aspects of the Fed’s “dual mandate”—on inflation and unemployment—worse. Alas, “there is not a generic playbook for how the central bank should respond to a stagflationary shock,” he continued. “It’s not like a regular demand shock in the business cycle where it’s like, if you’re overheating, you tighten, if you’re cooling down, you loosen. There’s one school of thought that says, if you start to see a recession coming, you should lower the rates. If you see prices rising and the inflation rate going up, you should raise the rates. If there’s a lot of uncertainty, you should wait and do nothing. That’s the Iron Triangle of Uncertainty that we need to sort out.” Paul Volcker, the late Fed chairman who raised interest rates into the double-digits to combat the stagflation of the 1970s, was a mentor to Goolsbee. When he died, in 2019, his widow, Anke, gave Goolsbee a piece of a two-by-four on which someone had scribbled, Please lower these insane interest rates, and sent it to Volcker. Goolsbee keeps the piece of wood in his office at the Chicago Fed. He said he uses it to remind him of two important hallmarks of his job. “One, this is not just a game,” he said. “This is not just the markets. What the central bank does, what the Fed does, affects real people. And two, sometimes the Fed has to do the hard job. That’s why they set up the system to have the monetary independence that we have. Because you know that if there’s political interference in the Fed doing its job, Volcker-type moments are massively more difficult. Sometimes you have to raise rates a lot. You have to bear with the screaming, How can you do this? Because we’ve made a covenant with the economy, with people, that we will get inflation to 2 percent, and we will.” The 2008 financial crisis was largely one of Wall Street’s doing, and the financial crisis in 2020 was spurred by a global pandemic that largely could not have been avoided once it started. We now find ourselves on the precipice of another financial crisis, one fomented and exacerbated by one person: Donald Trump, the president of the United States. He alone can pretty much decide whether to send the world economy over the cliff or pull it back from the brink. It’s clear that Trump enjoys flexing his power. At what point will Republicans in Congress have the guts to say enough is enough?

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