July 28, 2025 | Hoisington Q2 2025 Review and Outlook

Hoisington Management’s 2025 Second Quarter Review and Outlook is available here.

At his June 18 press conference, Federal Reserve Chairman Jerome Powell referred to tariffs as inflationary. Hoisington points out that this is only the first-round effect:

Second, third, and later-round effects also come into play, causing the quantity demanded and price to decrease for the goods subjected to tariffs. When retaliators respond by swiftly raising tariffs, as has been the case historically as well as this year, the micro-demand curves in the country that initiated the tariff increase, referred to as the “instigator country,” shift inward, and the benefit of hiking tariffs is lost. A substantial fall in the quantity demanded for the goods of export industries at home and abroad leads to a contraction in their total revenues. Soon, firms must make the difficult decision of whether to raise prices and lose market share or cut profit margins to maintain their market share. In addition, they will need to reduce their demand for the factors of production (labor, natural resources, and capital). These micro effects quickly domino into the macro-economy.

Less global trade means fewer US dollars being sent into the hands of foreigners who owe trillions in US dollars.

Neither Treasury yields nor risk assets, near cycle highs, are priced for a persistent downturn in economic activity and retreating dollar liquidity.

Hoisington concludes that the Fed will need to ease monetary policy to try to offset the deleterious effects of tariffs and a worsening debt overhang:

While inflation will likely rise over the near term it will be temporary. The far more critical consideration is the coming contraction in global economic activity. This environment is very attractive for long horizon investors in long-term Treasury bonds.

Danielle Park July 28th, 2025

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