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Listeners, we say this every show in the credits, but if you love the podcast, you will also love the Unhedged newsletter. And you can get a free trial at ft.com forward slash unhedged offer. Pushkin. The strange sensation you are experiencing right now that you haven't felt in a long time is the belief that things might be okay.
We got news over the weekend that U.S. tariffs on Chinese imports would fall dramatically from 145-ish percent to 30-ish percent, and that Chinese tariffs on American goods would drop from 125 percent to 10 percent. And there was a general feeling...
of human companionship among the negotiators of tariffs over there in Geneva between the two countries. Today on the show, lower tariffs and what it means for the dollar, inflation, and China. This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I am Rob Armstrong, coming to you from unhedged global headquarters in beautiful New York City, joined by...
by my trusty colleague, Aiden Reiter. Aiden, do you feel good? I feel better. Better. I don't know if I feel good. You never feel good. That is true. That's why I ask you. So if you feel better, I think that is a real sign of progress. To quote our producer, Bryant, it is, market rejoices that boot on neck shifts position. Ha ha ha!
Man, for a young man, Aidan, you are cynical. Only about markets. Okay. So let's start with a basic factual question. We've had a major shift in the tariff posture between the two largest economies in the world. Why do we think this happened?
Well, there's a couple possibilities. The first, as we've written on the newsletter many times, is taco. Trump always chickens out. The market had really wholly rejected anything that looked like heavy China tariffs over the past couple weeks. You'd remember that right after he called off the big tariffs and at the same time ratcheted up tariffs on China, the market took another dive. At the same time,
the economy has been sending really concerning signals. So we got the complicated GDP print the other week, but also some concerns from monetary policymakers, from fiscal policymakers, that the economy was not looking great. To say nothing of Trump's approval ratings, especially on the economy, which have been quite poor. Absolutely. So the pressure was on him, and maybe he just simply wilted.
And the Chinese agreed to do the same. Willing to acquiesce. Willing to acquiesce. Is there anything we need to note from the Chinese side? Yeah. So what we had said in the past that China had a stronger political position going into this, that's certainly true. They don't really have to deal with approval ratings the same way that Trump did.
But their economy also- That's such a nice way of describing an authoritarian state. They don't have to deal with approval ratings. Well, it's true. Yeah. Their economy was not in an amazing position, and it was starting to look even a little bit worse on some measures, not all. I mean, their GDP growth rate came in way higher than people predicted in the first quarter. Yes. But with China, we always have to take all those numbers with a grain of salt. Correct.
Some of the other contraindicators, like the Li Keqiang Index, which also has its own problems, showed a lot more softness. And other activity proxies showed a lot more softness. So those are unofficial GDP- Unofficial GDP measures that look at things that are not GDP. They look at banking transactions. They look at rail lines. And just to see how activity is actually happening in the Chinese economy, they have their own issues. Exactly.
But they showed a lot more softness. At the same time, China was also getting terrible ISM surveys. Just for our listeners who haven't been with us for a thousand years, ISM survey is a business survey where you ask a bunch of businesses, "Is business getting better or worse?" Yeah. In various respects. In China, it's called Caixin, but it's the same idea, right? They ask businesses how they're feeling, and it was really resoundingly bad. Services were down, manufacturing was down, export orders were down, especially after a huge surge in exports in the first quarter.
And then at the same time, China, we've been talking about a potential stimulus that would save the Chinese economy for, what, eight months now? It still has not happened. And then looking at their budget, people at Capital Economics calculated that even with this kind of meandering stimulus that hasn't made that much of an impact, they're already running way ahead of what they had projected for this year.
Yes. And the Chinese government's not in love with deficit spending. They have had issues with expanding it in the past. They expanded it this year. But even with that expansion, they're running ahead of steam. Yes. So the point is their economy is not that strong going into this. Yes. So both sides. Both sides have issues. Both sides felt had reasons to...
To think to themselves, gee, this tariff stuff isn't that much fun. Absolutely. Let's take a step back from the brink. We should have, just like in the US, there are some things that look good. There also are some things in China that looked okay. I mean, their real estate market seems to getting better. Yes. But at the end of the day, both had reason to come to the table. But you took the view just now that things actually aren't.
That great. The boot is still on the neck, to use your pungent metaphor. Yeah. I mean, 30% tariff across the board on China is still pretty high. It is pretty high. I mean, we have this fight all the time. You and I, we should tell listeners. But my view is that markets are getting the message that if there's enough pressure, Trump will back down. My core prediction, if 30% proves painful-
Trump will trim that back as well. Now, I don't want to position myself in the world as a Trump mind reader or some kind of Trump savant or explainer. This is an unpredictable man. But I just think the pattern is in place that he doesn't have a very high appetite for discomfort, a high tolerance for discomfort, and that what markets are telling you when they went absolutely bananas up yesterday, and now the S&P 500, for example, is actually higher than it was last
on Liberation Day. Make that make sense. Okay, I will. The reason it makes sense is that...
The market is saying to you the concessions on tariffs have further to run. What we got over the weekend is just a foretaste of the softening to come. Yeah. I mean, we got our first trade deal. It was with the UK and it was barely a trade deal, but it was something. But I'll agree with you this far. The number everybody on the market says is the absolute bottom is a kind of 10% universal tariff on everything. Yeah.
That ain't great from the point of view of kind of FT-like economic thinkers, which both of us are. We don't like tariffs. We think it's an inefficient form of taxation. Yeah. Especially when it's not coupled with industrial investment in your own economy to strengthen the things that- That you're trying to protect. Exactly. That this doesn't seem targeted and whatever. And so I guess one question is, or I should say, you're probably right to wonder-
If markets are really pricing in, even in the best scenario they envision, are they pricing in the damage that has been done to companies and the US economy and indeed the global economy? Yeah. Well, it's hard to say. I mean, it's possible that markets have really seen how terrible it could be with reciprocal tariffs and just any walk back from that horrible extreme is welcome news. Also, I mean, we can even think back to his campaign promises. Originally he said 10% around the world.
60% on China. We're at or below that with the potential to go lower. So if anything, this is a big departure or a slight improvement from what he said earliest phase. 20% of the 30% that's still on China is the fentanyl tax.
That looks to me to be ripe to remove, right? That's something that just screams out, negotiate me away. But now we're going to wind up with lower tariffs on China than we had going into this administration. Because, you know, remember, we had plenty of tariffs that Trump had put on and then Biden even added to. If China is clever, they will give Trump enough money.
other concessions of various flavors that he can hold up the trophy and declare victory
while bringing tariffs down further. Yeah. I mean, we can give China some praise here too. When Trump first hit them with tariffs in, what, February and January, they chose very targeted retaliatory tariffs, right? They were politically meaningful and less economically meaningful, right? Tariffing coal, which is mostly produced in states that support Trump. Tariffing hyper-specific things that theoretically would bring Trump to the table. I don't know if that's actually what brought Trump to the table, but in retrospect, it seems like a good gambit by them. Hmm.
No, that's a good point. I think things are scary. And before we move on from the topic of markets in particular and the dynamics of the negotiation, I just want to say-
I don't love where markets are at here. They've run up really hard, really fast in the face of a lot of uncertainty that still remains. Stocks are still very expensive by historical terms. This doesn't feel like a stable equilibrium to me. Again, my record in saying what markets are going to do is poor, however, it just feels like there is a lot of unsolved bits of the equation right now still, and maybe we can
discuss some of those. Yeah. I mean, one thing we have to think about now that we have driven through this strange tariff cul-de-sac in a limousine driven by the president is how will foreign investors think about their dollar and US investments going forward? As we've talked about a million times on this show, there's a lot of
foreign capital that flows into the United States, equity markets, treasury markets, and so forth. That's the natural counterpart to the fact that we import more stuff than we export. What makes the accounts balance is a lot of money flows in to invest in the United States. And
What are they thinking in the capitals of Europe and developed Asia and et cetera, et cetera, about their dollar-based portfolios? Yeah. I mean, we've heard on this podcast a couple times that people are less bullish on US capital, that a lot of investors are starting to look to European equities and other things. Part of that is just America has done so well, it's become massively expensive relative to the rest of the world. So we were ripe for some rebalancing anyway before any of this stuff happened.
And if you believe that tariffs mean there's going to be less trade with the rest of the world, as you said before, less dollars are going out, less dollars will come back in. At the same time, if you have, you know, Trump is trying to encourage other economies to start spending and boosting their own internal consumption. Yes. So, you know, we have less international trade. That, again, inherently means fewer people will be using dollars, fewer people investing in U.S. assets.
And we're actually starting to see this bear out in some FX markets. So the best example is Taiwan, which had this crazy run up last week. Wild events in Taiwan. This is worth pausing on. It's a kind of little jewel of a story that has larger implications. Yeah. So the Taiwanese dollar had a, I believe, 6.5% run up in two days, which just doesn't happen in FX markets. And it's because, I mean, there's a long complicated history of the Taiwanese dollar and the US dollar being interlinked.
But the main point is, Taiwan sells us a lot of chips. We buy those chips and flood Taiwanese markets with dollars. At the same time, dollars are high yielding. So you have these giant life insurance companies and big pensions in Taiwan that have essentially taken advantage of that rate differential and the strength of the dollar- So they're taking the dollars we spend in Taiwan and sending them back to us as investment. Investment in particularly US treasuries. Yes. And at the same time, they're paying out life insurance policies in the Taiwanese dollar. Mm-hmm.
So essentially it's a carry trade. Yes, but it's also potentially a horrible currency mismatch, which they taught me in finance 101 was a very dangerous thing to have. If you have your assets in one currency and your liabilities in another or vice versa, and one of the two currency goes the wrong way, you have to have a kind of mad shuffle.
Exactly. To make your book balance again. Yeah. So last week we saw that mad shuffle. After the dollar was down for a month, it seemed like Taiwanese life insurers were like, all right, this is our new reality. Yes. Also, we're just going to have maybe less buying of chips from the US, fewer dollars coming in. Yeah. We need to scramble and cover our liabilities in Taiwanese dollars. Yes. And then that resulted in a huge surge in the Taiwanese dollar. I mean, there might've been speculation. Yeah, exactly. People saw that dynamic at work and they flooded into that trade. Yeah. And it wasn't just Taiwan. It was...
It was Korea, it was Japan. It was a lot of Asian currencies that have similar dynamics with the dollar. So, I mean, that speaks to these large life insurers at least viewing the short to medium run risks of saying, "Hey, we're going to have fewer dollars coming in." So there's also a larger point to be made here and a kind of more amorphous one.
which is change in attitude. Yeah. This wild volatility in the currency and the wild volatility in the policymaking makes you think, I'm sitting here running a pension fund in Amsterdam or Madrid or Tokyo and
And maybe I need to reallocate a little here just to be a little more careful for the future. And we should note that these pensions, life insurance funds, and also just anything back with treasuries move slowly. So we've seen decently healthy treasury auctions for U.S. treasuries, which means foreign buyers are still coming to buy our treasuries. Yes. Like the U.S. dollar is not done. Yeah. But it's...
Theoretically, you can imagine less reliance in the future, especially people think that the United States is no longer a great ally or at least as reliable of a base currency. An old head in global markets said to me yesterday that you have to remember that for the pension funds and the insurers, it's mandatory for them to rebalance in the face of volatility. In other words, you're running a portfolio. It has a lot of US stuff in it.
And if you have a month or two of volatility, the risk officer rocks into your office and says, look, buddy, you got to take some of this stuff off the table. You are over your risk limits. And maybe it's crazy that the measures of volatility risk officers and big funds use are backward facing.
Right? Maybe they'll reposition just when the volatility is coming to an end. But the fact is the machine adjusts and establishes a new resting place. Yeah. I mean, we should note that central banks are also part of this equation, right? They hold reserves. Very good point. They hold, you know, et cetera. Taiwan is a good example also of central banks might be attuned to this as well. Right. Typically in Taiwan, you know, there's not
Taiwan dollars is not the most liquid market. And in the past, there has been complicated FX interactions between the central bank and the life insurers. But essentially, part of the ruction we saw suggests that they weren't providing liquidity to the life insurers as they had in the past. Huh.
And that means that it's possible they also think that the long run stability of the Taiwanese dollar should be higher in the market relative to the US dollar. You mean the stability? You mean the level? Level, I mean, yeah. So you mean they're thinking, "We're happy to sit here and let the Taiwanese dollar rise." We're not going to provide the liquidity and smooth this, this has to happen. And that's just speculation from a couple of people we spoke with. Yes. We love a bit of speculation here on the Unhedged podcast. Absolutely. But the point is, central banks are also aware of this and they, central banks,
banks generally, it depends on the country, are managing to some extent their currency risk of the entire currency. Okay, let's broaden out from Taiwan a little bit. I want to come back to central banks in general and the Fed in particular in just a second, but there's one other group of people I want to talk about, which is companies.
Somebody put it to me yesterday that it's only so comforting if you are a corporation or a country that imports and exports a lot to say, oh, well, Trump almost always backs off.
Because if he doesn't back off the 10th time and you're not ready for it, you could be out of business. Yeah. Right? And so I wonder if one repercussion of the last month is I'm a company that imports and exports wherever I am in the world. I want more cash up front before I ship anything to the United States. Yeah.
I want more padding in terms of working capital. I want stronger guarantees from my cross-border partners, et cetera, et cetera. Basically to say, for good or for ill, this kind of scare we've had makes people make their –
supply chain much more resilient and thicker and heavier and maybe slower. Yeah. And this could have good sides and bad sides, right? Absolutely. The good side is there's always a trade-off between efficiency and safety. And maybe we went too far to the efficiency side and we're coming back to the safety side. On the other hand, safety is friction.
right? That there will be economic losses from supply chains that have to work in a fundamentally new way. Yeah. I mean, we kind of saw this with COVID. After the big COVID surge and the Russia surge, and there was all these international shipping stoppages, we saw the shipping industry really invest in improving their supply chains. By the time we had Houthi bombing of ships in the Red Sea last summer, supply chains were pretty resilient and they were able to get around that
relatively quickly. Right, because they've had some practice. They've had some practice. So now you might just have a different reality of supply chains that are also better attuned to policy uncertainty in the US, lower trade flows, who knows? Okay, let's end the show today by talking about the Federal Reserve in all of this and my close personal friend Jay Powell. We got a nice inflation report this morning. Very nice. I was happy to see, cooler than expected.
The trend is firmly down, you have to say. We've talked a lot about how tariffs put the Fed in a difficult position. They potentially both slow growth and increase inflation, so that leaves the Fed stuck, unable to cut. But now we have a soft inflation report and we have tariffs coming down.
Are the shackles coming off the Fed a little bit here? It's still unclear. A, we don't know the direction of tariffs. Also, the economic data is still, while the inflation data is good, the rest of the economic data is-
warm, but also hard to read. I mean, soft data continues to just be terrible. So we don't really know what's going to be the impact of both the pulled ahead demand in the first quarter and whether or not consumption will stay hot. So it's unclear if the Fed will cut at all this year because yes, it looks hotter, but also there is just remaining uncertainty. And we just, even tariffs at the lower level, we don't know what the inflationary impact of those is going to be. So the Fed is still in a tough spot, but you have to concede
that they're at a better spot than they were 24 hours ago. Certainly. That's good news. And with that, we'll take a short break and come back with Long and Short. A lot of your returns, you could be giving up 10%, 20% of your returns through bad executions.
Market makers see you coming. Market makers can see the pattern, the times that you put an order through. They can see imbalances where everybody else is putting on the same trade if you're putting a trade on market on open, market on close, certain patterns. To learn more about managing risk and making decisions amid uncertainty, subscribe to PGM's The Outthinking Investor in your favorite podcast app.
This is Long and Short, which is the part of the show where we go long things we like and we go short things we don't like. Aiden, do you have a long or a short for us? I'm long Pope memes. Pope memes. Or just Pope jokes, I guess. I thought that was like the Pope's new name was Pope memes. Yes, Leo memes the 13th. You know, we have an American Pope. And as a result, American Twitter internet people are just...
a blaze with jokes about, you know, what his favorite Chicago things are. He went to university near my university. So there's a lot of Philadelphia jokes. Yes. It's just been nice. It's a nice reprieve from the negative news. I'll tell you one thing. Doesn't matter who the Pope is. God does not love deep dish pizza. Or the White Sox.
I'm going to go with a very, very controversial short, which is sure to get me some mail and which makes me an absolute hostage to fortune. But I'm going to be short gold. Oh. I think the top is in. Now, as a somewhat reformed gold skeptic,
Maybe you shouldn't take my word too seriously on this, but at $3,250 an ounce, I feel like the top is in. We are at peak trade panic. The road forward is towards easing on tariff policy. And I just feel like, I'm not saying gold's going to fall, but the top is in. Interesting. That is my view. Yeah.
Listeners, we will be back in your feeds on Thursday. And until we are, stay sharp out there. Unhedged is produced by Jake Harper and edited by Bryant Erstad. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhez. Cheryl Brumley is the FT's global head of audio.
Special thanks to Laura Clark, Alistair Mackey, Greta Cohn, and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Rob Armstrong. Thanks for listening.