- Geopolitical Strategist
Portugal, Intermediary
ChangeThe views expressed are those of the speaker(s) and are subject to change. Other teams may hold different views and make different investment decisions. For professional/institutional investors only. Your capital may be at risk.
Episode notes
Macro strategist Mike Medeiros joins host Amar Reganti to dissect the Trump administration's policy moves to date and what they may mean for the US economy going forward.
2:35 - What would happen under full tariffs?
4:20 - Historical path to deglobalization
5:45 - Impact of tariffs on inflation and growth
9:00 - Has DOGE been effective?
10:55 - Reconciliation bill trajectory and effects
16:00 - What are policymakers missing?
Transcript
MIKE MEDEIROS: Globalization worked in aggregate, right? U.S. GDP per capita rose, Chinese GDP per capita rose, global inequality actually fell in the time between those two quotes. those gains were obviously not distributed evenly in the United States. That led to very significant polarization. We’ve talked a lot about polarization here. I think it’s as bad as it’s been in history. And that leads to pretty extreme, policy shifts and more extreme policy proposals. Tariffs are one of those.
AMAR REGANTI: I’d like to start today with a pair of quotes that are, I think, apt bookends for the beginning and the end of an era. “For the first time, our companies will be able to sell and distribute products in China made by workers here in America, without being forced to relocate manufacturing to China, sell to the Chinese government, or transfer valuable technology for the first time. We’ll be able to export products without exporting jobs. Meanwhile, we’ll get valuable new safeguards against any surges of imports from China. We’re already preparing for the largest enforcement effort ever given for a trade agreement. If Congress passes PNTR, we reap those rewards. If Congress rejects it, our competitors reap those rewards. Again, we must understand the consequences of saying no. If we don’t sell our products to China, someone else will step into the breach. And we’ll spend the next 20 years wondering why in the wide world we handed over the benefits we negotiated to other people.” That was President Bill Clinton in March of 2000 in a speech at the Paul H. Nietzsche School of Advanced International Studies at Johns Hopkins University. Fast forward to today, and here’s a statement put out by the Chinese embassy in Washington on March 4th, 2025. “If war is what the US wants, be it a tariff war, a trade war, or any other type of war, we’re ready to fight till the end,” unquote.
I’m Amar Reganti, fixed income strategist here at Wellington Management, and this is the Investor Exchange. Today, I’m speaking with my friend and colleague, Mike Medeiros, macro strategist here at Wellington. He’s a student of policy, a tireless expert for me and investors across the firm. Mike, thanks for joining me today on the Investor Exchange.
MIKE MEDEIROS: Amar, thanks for having me.
AMAR REGANTI: Okay, you heard those two quotes. You -- we’ve professionally lived those two quotes
to some degree. I want to just really backtrack. After Liberation Day, if the tariffs that had been announced, you know, outside of the White House had not been rolled back, the ghoul in me is curious on what you would have forecasted would have been the economic impact for the U.S.
MIKE MEDEIROS: I’ll give you a short answer and a long answer. The short answer is a depression.
AMAR REGANTI: And how do you -- how do you define that? Because we haven’t experienced that in our modern era, I guess.
MIKE MEDEIROS: Let’s just say it would most likely have been the worst recession since the 1930s. Unemployment rate above 10 percent. And the reason I say that is because it was very easy to map the direct impacts from -- in terms of what it means in a growth and inflation perspective. What was harder to map was the uncertainty effects. And uncertainty, through some quantitative measures, was actually worse than it was during COVID in 2020, when obviously we saw the unemployment rate go well into the double digits. And so, there’s a fine line, you know, I think in hindsight, where tariff levels, I don’t know what the number is, but certainly at 145 percent, you know, really lead to more of an embargo. And with China, that’s what we’re looking at. You know, consulting some of our consumer analysts, it was abundantly clear that trade was not just slowing, it was coming to a halt in certain sectors. And that would have been obviously extremely difficult for the economy to handle.
AMAR REGANTI: Do you believe in the “empty shelves” theory at that point?
MIKE MEDEIROS: I have to. you know, it’s -- it was pretty clear from the meeting at the White House with the retailers that that was a distinct possibility, starting in Q3. We saw a lot of it in the shipping data, where the shipping data collapsed after Liberation Day and certainly after 145 percent tariffs went live. And so, you know, the debate at the time was about recession or no recession the magnitude of recession. And you know, barring a change, which obviously happened, it was looking more dire than that.
AMAR REGANTI: I’ve heard you in other venues where you and I have been -- been together at. You know, describe almost what happened between those two quotes, of President Clinton at Johns Hopkins describing this wonderful new era of openness, prosperity, and trade. And the Chinese embassy posting that they were willing to engage in conflict, however it may come. Like from your seat, as a macro strategist, how did we get from there to here?
MIKE MEDEIROS: So, I mean a lot of it like that – was probably one of the best ones you could have picked to define globalization. And globalization worked in aggregate, right? U.S. GDP per capita rose, Chinese GDP per capita rose, global inequality actually fell in the time between those two quotes. those gains were obviously not distributed evenly in the United States. That led to very significant polarization. We’ve talked a lot about polarization here. I think it’s as bad as it’s been in history. And that leads to pretty extreme, policy shifts and more extreme policy proposals. Tariffs are one of those. tariffs, you know, per the Trump administration, are supposed to entice other trading partners to come to the table and renegotiate trade deals. And they’re also supposed to close the trade deficit through lower imports. And so in theory, that’s essentially, I think, what’s happened between those two quotes.
AMAR REGANTI : Okay, well, clearly there was a lot of market volatility in the days and weeks following the announcement in fixed income markets and equity markets, as well. At a certain point the White House and the Treasury Secretary gave signals that they were about to walk this back.
And finally, we’ve had a meeting in Geneva where there’s a significant rollback of China-related tariffs, on both sides. How do we stand now? I mean, clearly not a depression from your perspective, but if we just took at face value where the levels are today how do you think that impacts your view of inflation and growth going forward?
MIKE MEDEIROS: Yeah, so a week ago, the effective tariff rate was 26 percent. And as it stands today, it’s 15 percent.
AMAR REGANTI: Is that just against -- that’s against the whole world, right?
MIKE MEDEIROS: The whole world, exactly. That is still the highest effective tariff rate in the United States in about a hundred years, since the 1930s. And so to me, that still represents a very material supply shock that should reduce global trade activity and accelerate a worsening growth inflation trade-off in the U.S. But obviously we’ve seen this ebb and flow a lot since April 2nd. It did become clear that 145 percent tariffs on China just would not work in practice.As I said before, you would have more shutting off of activity, not a slowing in activity. And that, you know, I’ve described it as destination versus journey, right? The destination you want to get to is unwinding globalization, is closing trade deficits. Very hard to do that in a few months. You can do that over a period of five to ten years, but there are significant adverse consequences if you try to rush it. And so it seems like the decision from the Trump administration, which admittedly is quicker as it relates to China, is much quicker and is a much more significant climb-down than I think anyone in the market, myself expected going into Geneva, I think helps that, right? It helps manage the process and put it particularly on more of a process-based path from here, which was missing in the month of April.
AMAR REGANTI: Like a strategic dialogue, effectively?
MIKE MEDEIROS: Exactly, and at a minimum what that does for the market and for the economy, is it doesn’t extinguish the negative supply shock, but it puts some bands around it. It decreases the probability that as long as bilateral negotiations are going on, it reduces the probability that you get massive swings in the effective tariff rate. Because bringing it back to the uncertainty point, uncertainty works both ways, you know, as it relates to trade. There’s uncertainty o--over whether tariffs are gonna go up tomorrow in a week, and there’s also uncertainty over, from a company’s perspective, of their input cost pressure, right?
MIKE MEDEIROS: Is that gonna co--come down or go up? And that’s where uncertainty can really lead to less hiring, less cap backs, which is really needed at this stage in the cycle, and adverse growth.
AMAR REGANTI: So this is a kind of clipping-of-the-tail scenario?
MIKE MEDEIROS: I think so, yeah. And, you know, I don’t know what the effective tariff rate, is that cuts off activity versus allows activity to go forward at a slower rate. Fifteen percent, is that manageable? Yes. Is it still really difficult? Absolutely. And so I think that’s where we are right now, right? The market had gone up to pricing at a 75 percent chance of recession. That’s now back below 50. I think that’s fair. You have to bring down the probability of recession, but certainly not extinguish.
AMAR REGANTI: You -- you had mentioned earlier the concept of closing the trade deficit, or not, you know, fully, but shrinking it and changing it. obviously tariffs are a tool in that. But the things you seem to allude to, the common phraseology is industrial policy. Which leads me to DOGE, interestingly enough, because to some degree, industrial policy is a form of state capacity, the ability to manage a complicated way of protecting and growing certain industries. First, let’s think about the fiscal aspects of it. You’ve been monitoring DOGE from day one. I -- I know you’ve been following the website, independent sources, the data that put out by Hamilton Project, Treasury, et cetera.What do you think the impact has been of DOGE on the fiscal side?
MIKE MEDEIROS: So as it relates to the fiscal side, right, where has DOGE been powerful? DOGE has been powerful in getting rid of, or firing federal employees. We’ll talk about the fiscal backdrop, which is deteriorating significantly in a second, but, you know, a contributor to that is certainly not federal employment. Federal employment as a share of total employment is the lowest in 70 years. It’s below two percent of total. And so, DOGE was very successful at being able to fire federal employees. And we’ll probably see that hit the labor market data sometime in the second half of the year. Where Doge was woefully unsuccessful was in cutting spending. You and I talked about the market narrative back in late January, early February, when DOGE was getting going. Fiscal austerity was a real theme in the market. And, I was wrong about the impact of DOGE initially be-- because I was just saying, they can’t cut spending. This comes down to Congress.
MIKE MEDEIROS: And I think that’s been proven out, now that we see the numbers, the budget deficit is wider, federal spending is up year over year. We’re on track to have a six-and-a-half to seven-percent deficit this year. Vut I think it caught a lot of people off guard initially. And then now that we actually see the data, it’s been proven to be completely ineffectual in terms of, slowing the rate of federal spending.
AMAR REGANTI: Well, there is a large reconciliation bill out there, which seems to hang over everyone in markets. I -- I guess, how do you, like, there’s obviously differences between what the House is putting forward and what the Senate is putting forward. But based on what you’ve been watching, what do you think this looks like, both in a tax cuts perspective, and what spending might get cut in kind of like net? How are we gonna come out of that process?
MIKE MEDEIROS: I think net-net, everything I’ve seen is pretty negative for the deficit in 2026, and even worse for medium-term debt levels. And I think if you take a step back, what are some key differences between Trump 1.0 and Trump 2.0? Number one is the starting point on inflation. We’ve been above the Fed’s two percent target for almost half a decade now. =Number two is the starting point on debt. You know, debt as a shared GDP is a hundred percent, and we’re running wartime and recession-type deficits in a time of expansion. And then number three is the bond market. The -- the bond market has clearly priced in a lot of these risks. Term premium is higher than in the first term. The level of yields is -- are higher, et cetera. And so I think that’s an important backdrop for this reconciliation bill, because this reconciliation bill has kind of started off in a budget-neutral-type way. And when I read what got through the Ways and Means and Energy and Commerce Committee earlier this week, you know, it’s a lot of front-loaded stimulus. It’s a fiscal impulse of about one percent in 2026, assuming it passes. It’s another smaller fiscal impulse in 2027. And there’s actually no fiscal tightening until 2030. And so [00:13:30] from a debt perspective, right, I think the market is now in the process of revising up deficit and issuance expectations for 2026 and 2027. Now, as you said, this can change, right? And, you know, I’ve said this, Q4 of last year. Now I think it’s much more apparent given rhetoric from the Trump administration. The governor on policy is the bond market. And we saw that play out in early April where you saw pretty significant shifts on trade policy, pretty significant shifts in White House rhetoric towards the independence of the Fed shift dramatically when 30-year yields were at five percent, 10-year yields were at 4.6 percent. And so this is an issue that the administration is aware of. And the question I keep coming back to is that, you know, the other supply shock we didn’t talk about is immigration, right? With demographic headwinds really coming through post-COVID, you can kind of fix those one of two ways. One is with higher participation, prime age participation rates at a 30-year high. The second is with higher immigration. And so with immigration levels slowing dramatically, and I think that’ll show up in the labor force in the second half of the year, you expose a lot of those demographic headwinds, worse growth inflation trade-off, on the services in the labor side. And so where does that kind of leave us in terms of the reconciliation bill? You know, I think 10-year yields at 450, the -- a version of this bill probably passes. If yields are, you know, in two months’ time as they’re still negotiating it closer to five percent, with signs of a negative reflex, the calculus could change. That’s a very long-winded way of saying, like, I think ultimately the bond market will continue to play the role of the disciplinarian, not just for trade policy, but also for fiscal policy.
AMAR REGANTI: So, and one thing I guess I want to make clear, and this is just picking from what you’ve said, this is a stimulative bill.
MIKE MEDEIROS: Oh, absolutely.
AMAR REGANTI: At a time when the economy’s actually still in pretty good shape. I mean, it’s cooling certainly, but it’s still in, you know, historically pretty good numbers as we think about forecasts for GDP and -- and so on.
MIKE MEDEIROS: Definitely. The way the bill is constructed is, you know, most of Trump’s, proposals for new tax cuts have been added to the bill. And a lot of the spending restraint that came out from the House’s first draft of the reconciliation bill has been pared back, particularly Medicaid spending.
AMAR REGANTI: Is that pushback from the Senate or just vulnerable?
MIKE MEDEIROS: I think it’s pushback from the Senate.
AMAR REGANTI: Okay.
AMAR REGANTI: A hundred percent. and so can this bill change? Absolutely, right? It’s not even through the budget committee, right? There are debates going on in the House right now about the SALT cap, about the extent of Medicaid cuts, and they can only lose three votes. And so one thing that’s been surprising to me so far is how smooth the process has been. Having been through a number of these before, you always have to allow for one or two failures before ultimate enactment.
Now, while that bill, I think is stimulative as it’s written right now, could it change in the Senate? Maybe, it’s possible. But I think there’s more of a timing issue, that I think the goal is to pass this by the August recess. And why I say August recess is because of the debt ceiling. Because they want to incorporate the debt ceiling in the reconciliation bill. If you can’t pass this by the August recess, then it bleeds into government funding in September. That’s when you could shift to a two-bill approach, and with the first bill, pass the debt ceiling, increase defense spending and border security by about $300 billion in the initial Senate plan, and then pivot to a second bill, where you would have to fund the government in September to unlock --
MIKE MEDEIROS: -- reconciliation, and then it becomes a timing issue. Because the -- the deadline for the TCJA, or the Tax Cuts and Jobs Act is December 31st. And if you can’t pass something, given the progress they’ve made by August, very hard to see passing something as stimulative in the second half of the year after a failure.
AMAR REGANTI: Okay, well, Mike, what do you think the policy community is missing as this bill’s being negotiated?
MIKE MEDEIROS: I see a lot of parallels in the process and the justification to Trump 1.0. And I think a potential unknown risk relative to that backdrop is the impact that rates can have in crowding out the potential benefits from this fiscal bill. As I said before, you know, we’re at a very different starting point for debt, deficits, inflation, and interest rates. And if this bill goes through and does increase the pressure that the economy gets back above trend and inflation picks up, the bond market I don’t think will ignore it. And the bond market, you know, as we’ve seen, multiple times has the potential impact to crowd out some of the positive benefits from the bill. No free lunch. And if you pass this, right, in its current form, I think the administration is underappreciating how the bond market could crowd out the potential benefits through higher rates.
AMAR REGANTI: So the last question I want to get to is you mentioned timing and I think of Jay Powell.
MIKE MEDEIROS: Yeah.
AMAR REGANTI: So one of the single biggest macro events, which is the reconciliation bill, is at best expected by the August recess. Unless he sees -- and tell me if I’m wrong here -- real substantial weakening in the labor market between now and then, I would almost feel like this Fed, and as it has been before, would be pretty cautious about easing, because there’s this sort of -- and they won’t say it necessarily, but there’s this huge outlier event that could change all of their calculations.
MIKE MEDEIROS : Oh, abs-- I mean, you throw at the economy two negative supply shocks, starting point on inflation is still above target, been above target for four years, and then add in one percent fiscal stimulus, that is a very tough backdrop to argue for cutting. If anything, I think it would argue, and there’s about 100 basis points in cuts priced in over the next 15 months. If anything, I think it would argue for the Fed to be on hold, but certainly more guarded towards inflation. And one of the things Jay Powell has talked about is they know tariffs are at least a short-term inflation issue. They don’t know about the medium term. Econ 101 would say it’s actually disinflationary over the medium term, one-time price level shock. That doesn’t account for the starting point on inflation. It doesn’t account for inflation expectations, which are adapting.
AMAR REGANTI: Input costs that things move back and forth.
MIKE MEDEIROS : Exactly. Input costs, and it certainly doesn’t account for, you know, another supply shock going on in the labor force and additional fiscal easing. And so if you just took the fiscal bill in isolation, it would actually argue they should be hiking. so that’s what kind of leads me to -- to conclude that while you have to be aware of the impact that this could have from a cyclical perspective from an Econ 101 perspective, the timing and provisions and amount of stimulus given the context, there’s a lot of room for it to be walked back as well.
AMAR REGANTI: Okay. Well, it should be an interesting spring and summer as we all watch that.
MIKE MEDEIROS: Absolutely.
AMAR REGANTI: Mike Medeiros, thanks for joining us here today. It’s been great as always to talk to you.
MIKE MEDEIROS: My pleasure, thanks for having me.
Views expressed are those of the speaker(s) and are subject to change. Other teams may hold different views and make different investment decisions. For professional/institutional investors only. Your capital may be at risk. Podcast produced June 2025.
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