Digesting the markets Apr 5 2025

Recap of the week: 

- Market was pricing in a few hundred B. in tariffs from Admin. This was why market was actually up 2% for the few minutes as Trump began his tariffs pres on Wed, when WSJ ran headline of 10% flat tariffs across the board 

- "Liberation Day" Wed Apr 2 tariffs ended up being in range $650bn+, taking into acct some exemptions (e.g. semi's for Taiwan), far exceeding expectations, and thus tanking market   

- Moreover, the WH's "reciprocal" tariffs rate ended up actually being trade deficit / imports. Multiple sources in WH confirming this calculation was a direct choice by Pres himself. It is clear that Admin thinks structurally that trade deficits are not a good thing for the country

- One day later, China institutes retaliatory 34% tariffs on US goods, tanking market further as it is clear China's previous strategy of muted responses to earlier Admin tariffs was thrown out the door, moving world closer to a full blown trade war  

Short term view: 

- Key to watch out for: do countries immediately come to negotiation table with Admin and are tariff deals consummated? If no deals appear in next several days, watch out below

- Esp key is EU - do they break from decades long economic alliance with US and institute retaliatory tariffs on US? Do they erect trade walls to everyone and tariff all foreign goods? It's a tricky situation as China goods that were finding a home in US markets will need to find a new home (either domestically or abroad) and EU is one key market - will EU  want to protect their mfg base, or do they move into a leadership position of leading the free trade world that US has abdicated?   

Medium term view: 

- The key bet by the Admin is that i) tariffs will bring in tax revenue ii) tariffs will jump start reshoring of mfg (which was actually already under way under Biden) and iii)  tariffs and reduced gov spending will cause economic volatility, bringing 10yr treasury curve down so as to bring down refinancing interest costs for the ~30% of US debt that comes due in next 6 months (each 100bp of 10 yr rate down is a couple hundred billion difference, and the rate already has come down from ~5% in Jan 2025 to ~4% this week) 

-  Assessing the progress on i (bringing in tariff revenue), ii (reshoring of mfg), and iii (10 yr curve coming down)- iii is already happening in the last several months as mentioned, ii has been happening in the last 2+ years (mfg investment is highest in decades, Biden policy is a major driver); it's on i where there's the greatest uncertainty / market risk 

- Because the tariffs were unexpectedly high and there's so much uncertainty on whether other countries will play ball, multinationals, large and small business owners are frozen on key business planning decisions around investments, supply chains, etc. The disciplined approach is to halt investments and hiring until more clarity can be reached (ie the "clearing event") for the market. This significant uncertainty around economic growth thus has led JPM and others to now project a recession in 2025 for US 

- This cloud of uncertainty is also why the key development market will be looking for is countries coming to some sort of trade agreement with the Trump admin so that clearing event can be reached  

- Once that clearing event is reached, coupled with lowered interest rates kicking in in the upcoming quarters (and impending tax cuts which is next on Trump admin docket after tariffs), market may be positioned to move higher significantly 

- We are still a ways away from this point in the market story - institutional / hedge funds have seen the risks laid out above and moved to the exits - the heaviest 2 day selling since 2010; whereas retail, still inculcated on "buying the dip" principles that have worked so well in the last decade+, moved in on Fri in the heaviest buying on record in the same period - clearly fear has not tamped out the market just yet. As we move through fully digesting the risks in days ahead, there may yet be opportune points to enter the market 

Long Term: 

- The Trump Admin's range of moves from tariffs / mfg, DOGE / cutting the budget, and interest rates are ultimately targeted to being competitive with the main geopolitical rival: China. Trump has been saying "Chyna Chyna Chyna" since his first campaign trail stops in 2015 

- Relatedly, Trump has decided that trade deficits are the enemy of a long term strong US economy - he directly calculated "reciprocal tariffs" on this. However, trade deficits (ie US market spending more dollars to buy goods from other countries than the reverse, meaning other countries hold a lot of dollars) are the driving reason why other countries hold USD / invest in Treasuries. 

In other words, trade deficits are the linchpin to the international USD based economic order.  If the US no longer is interested in maintaining that order, other countries find little use in holding USD. Trump's tariffs puts us closer to a "de-dollarized" global economic future - where we no longer reap the benefits of having the reserve currency - ie simultaneously more costly goods and fewer growth opportunities on the services side 

While there certainly will be more rallies, 80+ years of free economic "tailwinds" and "buying the dip" dogma are now in question. 

- Returning to China, the fundamental bet the Admin is making that is China needs America's consumers more than US needs China's goods production. Let's take a look at the numbers - US demand accounts for ~3% of China's GDP, JPM estimates the "reciprocal tariffs" will shave 0.5% to 1.% GDP growth off China's 2025. China's exports to US markets now account for ~15% of their total exports, less than exports to Global South. This doesn't account for any improvements / growth in China's domestic consumer market. 

Meanwhile in US side, China dominates supply chains in smartphones, electronics, low to medium manufacturing, textiles, and building materials. 

Time will tell if this trade off is one the US can come out on top for. 

Perhaps the long term uncertainty is best summarized in one idea: for as long as anyone can remember, the US has been hands down the best place to invest globally. We are entering into an entirely new era - and that fundamental assumption should now be called into question.