Where to? Some will state that uncertainty is at levels never seen before. Perhaps a more accurate statement that today’s uncertainty is the result of changes in the global trading system, a catalyst that has not been experienced in over 90 years.
During 1997, 2008, and 2020 similar statements were made that uncertainty was never at seen before levels. The catalyst in those years was a massive hedge fund implosion in 1997 creating an international debt and currency fiasco, the 2008 collapse of levered finance, and the 2020 pandemic.
It is widely known that 43% of the S & P 500’s cost of goods sold comes from overseas operations and the tariffs will send margins plummeting if the increased costs are unable to be passed onto the end consumer.
However, this is before currency translations are taken into account. The dollar is down about 11% YTD and is greatly impacting cost of goods sold, which according to Treasury Bessent is equivalent to about 20% tariff.
Is the Administration using the dollar as a trade weapon? Can or will other countries claim the US is engaged in currency manipulation?
The world sells to the US given its insatiable demand for consumer goods. Bloomberg writes that 17% of China’s production is exported to the US. Wow!
The equity markets are suggesting the tariffs will not be a significant issue. How realistic is this comment given that almost all believe that tariffs are inflationary and will impact profit margins.
At this juncture, there is a massive disconnect between accepted economic dogma and market performance. As noted yesterday, yields on long dated Treasuries are lower today than before January 20.
The global trading environment is extremely complex, consisting of an infinite number of variables constantly changing in their degree of significance. Just as nothing is ever proven by science [it is the accepting or rejecting of the null hypothesis and repeatability of results], there is not just one thing that dictates trade flows.
Perhaps the only concrete statement to make is that either the intense negative narrative is wrong, or the markets are wrong.
Markets are people and people move markets. Fear is more powerful than greed. Psychologically, we are wired to focus on the negatives as that ensures survivability [think dinosaurs hunting man], the most basic instinct.
Against this backdrop, perhaps the market is suggesting the President is more bark than bite. This view however creates a completely different dilemma.
Changing topics, equities were relatively quiet, staging a nominal decline. Treasuries pared losses following a “solid” $70 billion five-year Treasury auction. After the close NVDA released results that exceeded expectations, sending shares higher by 5%.
Last night the foreign markets were up. London was up 0.02%, Paris up 0.78% and Frankfurt. 0.39%. China was up 0.70%, Japan up 1.88% and Hang Seng up 1.35%.
Dow and NASDAQ futures are up 0.3% and 1.25%, respectively after a court ruling blocked some of the Administration’s tariffs and NVDA’s results. The 10-year is off 10/32 to yield 4.49%.
