by Louis Navellier
February 11, 2025
When the Trump Administration’s tariff negotiations with a series of major countries is completed, it will no doubt represent the biggest imposition of tariffs since the 1930 Smoot-Hawley duties that resulted in a deflationary Depression – not higher inflation – but I don’t think we’ll see a repeat of that dismal decade.
President Trump mostly wants some U.S. companies to “onshore” their manufacturing from Canada and Mexico, as well as other countries, so his tariff threats are a “bargaining chip.” I suspect that Europe and other trading partners remain uneasy about potential tariffs, so more on-shoring plans may be underway.
For example, VW Group is now exploring manufacturing their Audi and Porsche vehicles in the U.S. to circumvent potential tariffs and to take advantage of cheaper U.S. electricity. VW currently has a plant in Chattanooga and is finishing its Scout manufacturing facility in South Carolina. Apparently, VW Group is taking seriously President Trump’s advice to install more manufacturing capacity within the U.S.
VW Group is also facing a potential fine of up to $1.7 billion for exceeding European Union emission targets by not selling enough EVs. Further complicating VW’s business is that electricity rates are more than three times China’s and double those of the U.S., so the EU is at a competitive disadvantage.
As a result, suddenly the U.S. looks very attractive to VW Group, compared to an oppressive EU. In fact, President Trump made it clear that he is encouraging foreign companies to move their operations to the U.S. to (1) escape oppressive regulations, (2) take advantage of lower U.S. costs, while adding the benefit that he would (3) grant work visas to foreign workers relocating to the U.S. So, you might be wondering if President Trump is just using tariffs to make companies increasingly shift their operations to the U.S.
Furthermore, incoming Commerce Secretary Howard Lutnick (whom I know) loves to point out that the U.S. had tariffs long before it had income taxes, insinuating that if the U.S. increases its tariffs that the Trump Administration could reduce and/or eliminate income taxes. This means that higher tariffs are going to help pay down the federal deficit as well as reduce the tax burden on working Americans.
Now, I suspect you are wondering about the biggest fears of most analysts: Won’t these tariffs be inflationary? Well, thanks to a strong U.S. dollar, the tariffs are expected to be less inflationary than you might think. Furthermore, if companies like General Motors (GM) divert production in Canada and Mexico back to the U.S., then this on-shoring is not expected to be significantly inflationary.
If there is a lot of on-shoring, then there should be a U.S. economic Renaissance and President Trump will go down in history as a great leader. However, if the on-shoring does not happen, the tariffs could be inflationary. Long-term, we should see greater prosperity. Short-term, our allies and trading partners will be kicking and screaming until they conform to President Trump’s demands and onshore their operations.
This should be a dramatic year of change, but since change is difficult, there will also be a lot of distractions, with multiple cries of alarm, such as these headlines from major economic journals:
- “How Trump’s Tariffs Aim a Wrecking Ball at the Economy of the Americas.” – Bloomberg.
- “The absurdity of Donald Trump’s trade war.” – The Financial Times
- “Trump Tariffs Usher in New Trade Wars. The Ultimate Goal Remains Unclear.” – Wall St. Journal
There is no doubt that beneficial trade agreements are better than tariffs. Canada and Mexico benefitted from the North American Free Trade Agreement (NAFTA), which also transformed the U.S. into more of a consumer-led economy as waves of manufacturing shifted more jobs to Canada and Mexico. Unlike the world of the 1930s, however, financial markets are now more flexible and have a funny way of finding equilibrium. For instance, we won’t see a massive (near 70%) devaluation of the dollar to gold, as we saw in 1934, and we won’t see the Fed cut liquidity by one-third, as they foolishly did from 1929 to 1932.
This time around, the dollar is strong, as the Canadian dollar and Mexican peso recently hit multi-year lows. The euro, which is also reflecting fears of U.S. tariffs, hit an intra-day low of $1.0221 and is expected to be at parity with the U.S. dollar in the upcoming months. President Trump on Truth Social said “Will there be some pain? Yes, maybe (and maybe not!). But we will make America great again, and it will all be worth the price.” Why President Trump said “maybe not” is that a plunging Canadian dollar and Mexican peso will help to offset the inflationary impact of these 25% tariffs. In the interim, do not be surprised if your favorite Mexican beer and avocados costs a bit more if tariffs are eventually imposed.
Governor Andrew Baily of the Bank of England said that any tariffs that “fragment” the global economy would weaken growth, but their impact on inflation would be unclear. President Trump this week said the U.S. would “definitely” raise tariffs on goods from the European Union (EU), but he added that trade with Britain, although out of line, can be worked out. So even though Prime Minister Starmer and President Trump are polar opposites, it is possible that Britain will be not be hit as hard as the EU with U.S. tariffs.
The daily headlines may seem scary, at times, but if you could jump into a Time Machine and look back to 2025 from 2030, I suspect this year could be the most transformative year in our lifetimes, so I strongly encourage you not get derailed by distractions like DeepSeek and other “noise” that distracts investors.
In other words, I recommend that you see this as an incredible U.S. economic Renaissance as the Trump Administration asserts its economic leverage and diverts more overseas business back to America!
The Major U.S. Economic Indicators Begin to Pick Up
Last Tuesday, the Institute of Supply Management (ISM) announced that its manufacturing index improved to 50.9 in January, up from 49.2 in December. Since any reading over 50 signals an expansion, the more than two-year manufacturing recession could be over. The new orders component expanded for the third month in a row and rose to a robust 55.1 in January, up from a revised 52.1 in December. Also encouraging is the fact that the production component rose to 52.5 in January, up from 49.9 in December. Overall, the ISM manufacturing index was very impressive and should help to boost first quarter GDP.
Then, on Wednesday, ISM announced that its non-manufacturing (service) index declined to 52.8 in January, down from 54 in December. The business activity component decelerated to 54.5 in January (down from a revised 58 in December), while the new orders component slipped to 51.3 in January (down from 54.4 in December). Since any reading over 50 signals an expansion, the service sector is still growing, but at a slower pace. The best news is that 14 industries surveyed reported an expansion in January (up hugely from only nine industries in December), so that is a very positive development.
Also on Wednesday, ADP announced that 183,000 private payroll jobs were created in January. This was a strong report, with the only weakness being that the manufacturing sector shed 13,000 jobs in January. ADP also reported that median private pay rose by 4.7% in the past 12 months, well above inflation rates.
This raised expectations for a strong January payroll report on Friday, but the Labor Department on Friday announced that fewer (143,000) payroll jobs were created in January than expected (175,000). Extreme cold weather and the California fires may have suppressed the overall payroll number, but the good news was that November and December payrolls were revised up by 95,000 jobs, to 261,000 (from 212,000) and 301,000 (from 256,000), respectively. The unemployment rate declined to 4% in January, from 4.1% in February. The reason the unemployment rate can decline with fewer-than-expected new jobs is that there are big seasonal adjustments in January, and people looking for work declined.
Government jobs rose 32,000 in January, but this number is expected to decline due to the ongoing purge of federal workers. Average hourly earnings rose in January by 0.5% (17 cents) to $35.87 per hour and have risen 4.1% in the past 12 months. Overall, this payroll report was net positive and Treasury bond yields rose in anticipation of continuing strong payroll growth, despite DOGE purges at federal agencies.
Minneapolis President Neel Kashkari said after the January payroll report came out that the U.S. labor market has cooled but remains solid and predicted that interest rates are likely to decline “modestly” in 2025. Regarding the labor market, Kashkari said, “It’s not as hot as it was a year or two ago,” adding that “the economy is strong, businesses are optimistic.” He concluded that, “We’re in a very good place to just sit here until we get a lot more information on the tariff front, on the immigration front, on the tax front…. I would expect the federal funds rate to be modestly lower at the end of this year.”
I should add that falling global yields will likely drive Treasury yields lower and cause the Fed to follow market rates in the upcoming months, which will be bullish for both the stock and bond markets.
The Global News (especially the “Gaza Riviera”) Takes a Bizarre Turn
By far the most outrageous proposal President Trump has made so far is that the U.S. take over Gaza and “turn it into the Riviera of the Middle East.” However, as a condition, President Trump also demanded that the two million Palestinians in Gaza resettle in Egypt or Jordan due to the devastation that Hamas-led Gaza inflicted on Israel since the initial assault on October 7th, 2023. Israeli Prime Minister Benjamin Netanyahu was standing next to President Trump when he made his Gaza proposal. Naturally, it would be in Israel’s security interest for the U.S. to occupy Gaza, but to purge its remaining population will naturally receive endless global criticism. Saudi Arabia and Turkey already dismissed Trump’s plan.
As you might suspect, President Trump does not seem to care about international criticism, and the more outrageous his demands become – like Gaza and Greenland – the more he can pass tariffs and assert U.S. economic dominance. In other words, President Trump is a master of “deflection,” and the more he deflects, the more he will be able to assert U.S. influence. Another example – which I expect we’ll see – is for President Trump to make all UFO files public in the upcoming months, which he can use as another deflection tactic that the international media will likely “jump on,” like dogs gnawing on a bone.
As for Panama, Secretary of State Marco Rubio personally delivered a message to Panamanian leader Jose Raul Mulino and demanded that Panama must reduce Chinese influence around the Panama Canal or face potential retaliation from the U.S. Mulino said that Rubio made “no real threat of retaking the canal or the use of force. On Wednesday, the State Department (on X) said that U.S. government ships will access the waterway “without charge fees, saving the U.S. government millions of dollars a year.”
However, Panama Canal Authority said late Wednesday that no such adjustment had been made to tolls or transit rights for U.S. government ships. Regardless, as Colombia, Canada and Mexico have learned, Panama must do what Trump demands, or he could impose tariffs, sanctions or other economic penalties.
Finally, Britain is widely viewed by economists to be slipping into a recession in the wake of its recent tax hikes, plus Prime Minister Keir Starmer’s ban on crude oil drilling in Scotland, which is putting upward pressure on energy prices in a country where households have to be subsidized to pay their electric bills. I expect that both the Bank of England and ECB will continue to cut key interest rates as their respective recessions deepen, which in turn will help U.S. Treasury yields meander lower. The Bank of England followed the European Central Bank (ECB) and cut key interest rates 0.25% to 4.5% and lowered its forecast for GDP growth. Interestingly, two of the nine committee members wanted a larger (0.5%) cut.
Navellier & Associates does not own Volkswagen Ag. (VWAGY) or General Motors (GM), in managed accounts. Louis Navellier does not personally own Volkswagen Ag. (VWAGY) or General Motors (GM).
All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.
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