Trump's tariffs — if sustained — likely to push the U.S. and globe into recession, JPMorgan, $JPM, said this week.
Do you agree?
I compare what Trump is doing to the famous story of JCPenney. JCPenney was a mall slop store, and their core business model relied on pretending that all of their clothes were on sale when in reality that was just their normal price.
One CEO came in, and wanted to change the business model to low prices everyday. In my opinion, that was a good business move. Much bigger companies than JCPenney so have succeeded on low prices everyday, including Walmart and Target.
The problem is, there existing customer base expected fake sales and when they didn't see them they stopped coming. The result of this was a huge drop in sales.
A lot of advertisers take this to be evidence that you shouldn't make changes like that, and the return back and the ensuing recovery in sales is taken as an example of returning to normal after a bad decision.
The thing is, JCPenney still went out of business because that business model might have been making the money in the moment but it wasn't sustainable in the market that exists now. They needed to eat dirt for a few quarters and rebuild their customer base with people who weren't tricked by fake sales.
In the same way, it is entirely likely that high tariffs on countries like China will cause a major global recession. However, it's still the right thing to do. If the West wants to have things like labor law and environment regulation and reduction of carbon footprint they can't just keep on using China as a picture of Dorian Gray to cast all of our sins upon so we look like we're getting better by just getting them to do it for us.
Unfortunately, the two processes that are going on here don't act at the same speed. It takes seconds for an importer to call China and cancel their order, and it takes a couple quarters for that to burn its way through the economy. It takes years for a factory to be built, and after that it takes more years for it to get up to speed, to produce things at a profit, and to probably integrate into The national economy. Therefore, this really is an example of short-term pain hoping for longer-term game. Unfortunately, it's also an article of faith that it might actually work.
The idea that you can misread scary looking signs to be worse than they are is by no means a new one. In the epic of gilgamesh, the oldest story we have written down, has Gilgamesh and enkidu approached Humaba in the great cedar forest, and Gilgamesh had dreams that terrified him, but enkidu reassured him that they were actually signs of his ultimate victory, and he did ultimately prevail. Of course, in the same story and could do later interpreted his own dreams as a portent of his death and Gilgamesh tried to convince him that maybe the dreams meant something else but they did not, which shows that sometimes bad signs are just bad.
One CEO came in, and wanted to change the business model to low prices everyday. In my opinion, that was a good business move. Much bigger companies than JCPenney so have succeeded on low prices everyday, including Walmart and Target.
The problem is, there existing customer base expected fake sales and when they didn't see them they stopped coming. The result of this was a huge drop in sales.
A lot of advertisers take this to be evidence that you shouldn't make changes like that, and the return back and the ensuing recovery in sales is taken as an example of returning to normal after a bad decision.
The thing is, JCPenney still went out of business because that business model might have been making the money in the moment but it wasn't sustainable in the market that exists now. They needed to eat dirt for a few quarters and rebuild their customer base with people who weren't tricked by fake sales.
In the same way, it is entirely likely that high tariffs on countries like China will cause a major global recession. However, it's still the right thing to do. If the West wants to have things like labor law and environment regulation and reduction of carbon footprint they can't just keep on using China as a picture of Dorian Gray to cast all of our sins upon so we look like we're getting better by just getting them to do it for us.
Unfortunately, the two processes that are going on here don't act at the same speed. It takes seconds for an importer to call China and cancel their order, and it takes a couple quarters for that to burn its way through the economy. It takes years for a factory to be built, and after that it takes more years for it to get up to speed, to produce things at a profit, and to probably integrate into The national economy. Therefore, this really is an example of short-term pain hoping for longer-term game. Unfortunately, it's also an article of faith that it might actually work.
The idea that you can misread scary looking signs to be worse than they are is by no means a new one. In the epic of gilgamesh, the oldest story we have written down, has Gilgamesh and enkidu approached Humaba in the great cedar forest, and Gilgamesh had dreams that terrified him, but enkidu reassured him that they were actually signs of his ultimate victory, and he did ultimately prevail. Of course, in the same story and could do later interpreted his own dreams as a portent of his death and Gilgamesh tried to convince him that maybe the dreams meant something else but they did not, which shows that sometimes bad signs are just bad.
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“Disruptive U.S. policies have been recognized as the biggest risk to the global outlook all year,” wrote Bruce Kasman, JPMorgan’s chief economist, in a note to clients.
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