Tornado Economics 🌪️
When policy decisions become market disasters
Five years ago, the world entered one of the most uncertain periods in modern times. When the global pandemic started, no one knew what to expect. As we hunkered down in the early days through to when we masked up, we intended to stop the spread of COVID-19.
And there were unavoidable outcomes. People died, and the global economy teetered, with various markets emerging back to black over time.
Still, there was an unintended consequence.
Pharmaceutical firms developed and scaled new mRNA vaccines, leading to an up to 94% effectiveness rate against COVID-19. This technology was decades old, but it took the pandemic to reach critical mass. Today, there are even more benefits this technology could bring, from increasing the flu’s annual 40-60% effectiveness rate to HIV and cancer.
Unintended consequences can be good or bad. They live at the border of externalities in that they impact another stakeholder group and are often unknown or go unrecognized too late.
The pandemic changed everything overnight. But in its wake, it also unleashed a medical revolution.
Nothing seems to be positive for the markets as of late. The word on everyone’s lips is uncertainty, as the market (checks portfolio) has lost $5T in three weeks. Companies are now trying to figure out how policy changes create unintended consequences.
Uncertainty is the new normal. That’s a problem.
The world has always been unpredictable. Still, stable governments provide a stable operating environment. Sure, there are changes, but they are planned, the unintended consequences are considered, and typically are thoughtfully executed.
That stability is critical for boards and management teams to operate a functional company. It is one of the bedrocks of the modern markets.
Unfortunately, we’re not in Kansas anymore. The fast-paced change of US policy and its subsequent ‘because the President believes it, just wait’ defense is like a tornado whipping through the markets.
For companies, managing uncertainty is challenging enough, but predicting its unintended consequences is nearly impossible.
Welcome to America’s Brexit moment: a manufactured instability that will have unintended consequences for corporates and consumers.
Manifestations and lamentations
Unintended consequences are popping up all over the place. Unfortunately, companies and their stakeholders don’t have the luxury of waiting for some future potential state where things stabilize.
The problem is that we’re in the eye of the storm, and it doesn’t appear to be moving off. As it clears, we may see the unintended consequences only in its wake.
Let’s review some examples.
Tornado Economics: When policy whipsaws markets
Decades-old economic policies are suddenly being rewritten overnight, and companies are caught in the storm. US AID, created under President John F. Kennedy, primarily focuses on humanitarian assistance worldwide. The intended consequence is to save America money in the administration’s ‘America First’ agenda. The outcomes, like reduction in aid and potential harms, are known and are ones that the White House is willing to live with.
The unintended consequences are hard to predict but are already manifesting. Five hundred thousand tons of US food commodities are stuck, valued at over $450M, because US AID would buy food from US farmers and distribute it globally. Tariffs and the slowdown of global trade also hurt farmers. Trump’s answer is to ‘have fun’ selling their products domestically.
And this is the broader point for companies. The administration is attempting to support reshoring and bringing back manufacturing to the US. Pfizer and Eli Lilly are considering investing in new US manufacturing capabilities. This, again, is an intended consequence.
Still, decades of globalization and supply chains can’t be undone overnight, let alone in (checks watch) 57 days. For companies, this means absorbing the cost of rebuilding domestic operations, if they can (and quickly!), while adapting to the realities of a higher-wage economy.
And, of course, the most significant unintended consequence appears to be reduced global trust, infighting with allies, and retaliatory tariffs. Instead of using investment dollars to bring companies back to the US, like the carrot of the IRA and BIL, this stick approach does not appear to be even yielding the intended consequence well.
The Deregulation Paradox: When less oversight creates more chaos
After the election, part of the stock growth, or ‘Trump Bump’, revolved around the potential for regulatory easing in the US. Those gains have been wiped out as the very foundation of stability has been eliminated.
Last week, many people shared the announcement that the EPA was rolling back protections. The EPA’s website touts the intended consequences of ‘the Great American Comeback,’ including “drive down cost of living for American families, unleash American energy, bring auto jobs back to the U.S. and more.”
Yet, we are dealing with a Supreme Court that has pushed power to the states to regulate. The unintended consequence of these rollbacks will likely be state-level environmental protections, making it impossible for companies to operate. As other agencies take similar approaches, states may pick up the slack.
There are already regulations like this. States have controls over banks at the state level, so it is nearly impossible for a small fintech firm to operate in the US unless it partners with an established bank. SoFi has an entire article dedicated to this complexity, including this note:
In the United States, financial institutions are regulated by the Fed, the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the SEC, FINRA, the CFPB, the NCUA, and the CFTC. State agencies also enforce regulations on financial institutions, especially insurance providers.
Instead of freeing businesses from red tape, deregulation is handing them a fragmented, unpredictable legal landscape. This brewing regulatory risk will lower American innovation and eliminate its greatest strength, ‘E pluribus unum’ (out of many, one).
Oops! When ideology backfires!
This short-sightedness for unintended consequences around regulations plays out even in the conservative base.
In November, I predicted the SEC would eliminate Staff Bulletin Letter 14L, which they did. Still, one group isn’t pleased about it. The change was around reducing ESG-focused proxy resolution filings.
The infamous National Legal and Policy Center penned a blog article out of frustration. The SEC did not move forward with the NLPC’s proxy resolution for Bank of America to produce a report “concerning the legality and judgment of management’s decision-making, and insufficient disclosure specificity, regarding the dissemination to government agencies of customers’ personal information” around transactions around January 6th.
However, the SEC did move forward with an energy-related resolution to “disclose annually its Energy Supply Ratio (“ESR”), defined as its total financing through equity and debt underwriting, and project finance, in low-carbon energy supply relative to that in fossil-fuel energy supply.”
The conservative base may have strengthened ESG’s position in the rush to limit its influence!
If you spit out your coffee, I apologize. This is a wonderful unintended consequence and will only further surface as the NLPC and SEC uncover the difference between materiality and values.
I will leave this other story here as another Oops!: Elon Musk’s Tesla warns Trump in letter that trade war could harm its business.
The manufactured recession comes for us all
Last time around, during Trump’s first administration, there was ‘chaos at the White House.’ I remember visiting for a session on technology early in the administration and being told something like, “The media is reporting it is chaos here. Did you see any chaos?”
Yet, for all the policy disagreements I might have, the quick dismantling of the bedrock of American business has rippling, unintended consequences. This is the fundamental uncertainty.
And so, let’s turn to perennial finance/business spokesman and CEO of JP Morgan Chase, Jamie Dimon. This past week, Dimon was featured in Semafor for stating, “Uncertainty is not a good thing.” Indeed, it is hard for businesses to predict the outcomes, which are unintended consequences.
Still, Dimon went on to say this:
I don’t think the average American consumer who wakes up in the morning and goes to work … changes what they’re going to do because they read about tariffs.
Whether consumers realize it or not, uncertainty is already shaping their behavior. There are signs that this is weighing on consumers’ minds. Consumer confidence plummeted to a 2-year low. In this situation, the average American consumer spends less money.
This uncertainty will have the unintended consequence of creating a manufactured recession. The Independent listed some sectors to watch for this as consumers pull back. Ironically, one of the sectors has surfaced already, and at a JP Morgan industrials conference: airlines, which includes up to a 2% drop due to government employees being fired and no longer traveling.
By late last week, the WSJ and FT reported that consumers were pulling back, citing evidence across reduced foot traffic in stores and other negative retail signals.
As the dominoes tip over, the unintended consequences could impact business across various sectors. Our world is too interconnected for me even to speculate who could be spared.
For my part, we’ve put all major home projects on hold, and we will likely not be planning international travel due to the global opinion of the US. I’m seeing others hunker down, too.
No matter how 2025 turns out, companies that prepare will weather the storm, but those who don’t will be left holding the bag in its aftermath.