When Ordinary Risk Becomes Risk³

Tariffs, deportations, and wars—oh sh*t

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In recent posts, I have discussed the potential for increased risk due to the U.S. bombing of Iran’s nuclear facilities. Except for a brief period early last week, the financial markets have behaved as though nothing is out of the ordinary.

Having been immersed in the equity and bonds markets for the majority of my professional life, I’m not sure which is more mind-boggling, how much the country’s risk profile has changed since Trump took office, or the manner in which the markets have ignored it. Regardless of how much traders and investors may hope everything is ponies and moonbeams, reality tells a different story.

Although the financial markets have been asleep at the wheel, maritime insurance industry has been wide awake. Even before the U.S. attack on Iran, maritime risk rose sharply as insurance underwriters reassessed their exposure to the escalating conflict between Israel and Iran. As a result, the cost of insuring vessels navigating the Strait of Hormuz has skyrocketed:

Marine insurers have raised rates for hull and machinery cover by more than 60% in recent days, according to figures cited by Marsh and McLennan, the global broking giant. The increase takes typical premiums from 0.125% to approximately 0.2% of vessel value - meaning insurance on a $100 million ship now costs around $200,000 for a single passage through the Gulf region.

Tariff negotiations are as uncertain as ever. We may have a deal with China now, but it came only after dragging the stock market into bear market territory and back. Adding to tariff uncertainty, negotiations between the United States and Canada went off the rails just yesterday.

The war between Russia and Ukraine isn’t ending anytime soon. Israel just dragged the U.S. into its war with Iran. And don’t even get me started on deportations. This is the bottom line: Compared to where the economy was when Trump took office, we’re in worse shape—on multiple fronts.

But it’s not as though we weren’t warned.

A few months ago, I referenced a September 2024 analysis by the Peterson Institute for International Economics (PIIE), a nonpartisan think tank. Their economists ran two different scenarios to gauge the economic impact of Trump’s policies on GDP and inflation. These are their assumptions followed by their estimates for GDP and inflation:

• “High scenario”

  • 8.3 million deportations,

  • 60% tariff on Chinese imports,

  • 10% on all remaining U.S. imports

  • Retaliation by all trading partners, including China; and

  • Erosion of Fed independence.

• “Low scenario”

  • The same tariff increases as high scenario,

  • No tariff retaliation by other countries,

  • 1.3 million deportation, and erosion of Fed independence.

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PIIE included the erosion of Fed independence in both scenarios, and rightly so. Word is that Trump has considered naming a “shadow chair,” by nominating the next Federal Reserve Chair long before Powell’s term expires next May:

In the wake of the intense criticism, Wall Street has been buzzing over the potential for “shadow chair,” or someone Trump could install as a central bank gadfly until Powell’s term expires in May 2026.

The talk has impacted markets: Traders on Thursday accelerated bets on rate cuts this year, with three reductions now at about 60% odds, compared with a strong likelihood of two just a few days ago, according to CME Group data. Treasury yields tumbled at the shorter end of the curve, which is where the Fed has its influence, falling much more than those at the long end. The dollar also was down sharply against its global counterparts.

A few days ago, I watched Federal Reserve Chairman Jerome Powell’s senate testimony, which also meant I had to watch Republican committee members refer to their Democratic colleagues the members as the “Democrat” Party, in an ungrammatical attempt the opposing party's name into a pejorative.

Republicans also carried the mail for Trump, Powell on the timing of a possible cut in interest rates, something the president has harped on almost daily. When they weren’t besmirching Democrats, Republicans did their best to trick Powell into commenting on the so-called “Big Beautiful Bill,” which, thanks to the Senate Parliamentarian, has its own set of troubles [emphasis added]:

Republicans suffered a blow Thursday after the Senate referee ruled that a series of health care cuts and savings in their sweeping domestic policy bill are ineligible for the party-line path they're using to get around the chamber's 60-vote threshold.

Senate parliamentarian Elizabeth MacDonough, who adjudicates procedural disputes between the two parties, has disqualified several provisions, including Medicaid rules prohibiting funds without verification of immigration status, reimbursement changes to contracts with pharmacy benefit managers (PBMs), provider tax restrictions aimed at saving federal dollars, and new limitations surrounding eligibility for Affordable Care Act funding.

The disqualified provisions total from $200 billion to $300 billion in savings over a decade, said Matthew Fiedler, an expert in health care policy and economics at the Brookings Institution.

Since the parliamentarian disallowed the efforts to throw millions off their insurance, at least for now, the GOP is scrambling to find a few hundred billion they can slash elsewhere.