The beatings will continue until markets improve
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Pushkin.

The American president, Donald Trump, says he really, really means it this time on tariffs. You are listening to Unhedged, the markets and finance podcast from the Financial Times in Pushkin. I am Rob Armstrong, coming to you from Unhedged headquarters in beautiful New York City, joined by Aidan Reiter. Hello. Aidan. Hello.

Can we believe what this guy says about tariffs? He said just this morning he would impose another 10% tariff on China and that his threatened levies on Mexico and Canada would go through next week. And yesterday he said he would slap China.

a 25% tariff on imports from Europe on the grounds that the European Union was created in order to screw the United States. I feel like he says something different every day. So far, only the aluminum and steel tariffs have happened. And if I might wax Shakespearean, there's been a lot of sound and fury on tariffs, but not a lot of signification.

Not a lot has happened. Do we believe him this time? Well, I believe him on China. So he did hit China with 10% tariffs last time around, in addition to the 25% on aluminum. So if you look at the economic advisors in his orbit, most of them have no interest in negotiating with China, at least judging on their past beliefs and their past writings. So I believe China will go through. Yes. Canada and Mexico, who knows? Yes.

everybody when he said he would do it on the first day of his presidency. And then since then, he called it off at the 12th hour. You know, who knows? Yeah, yeah. Those relationships are so economically...

Is it important to us that it seems like maybe he knows he's playing with fire if he hits them hard with tariffs? We've gotten some negative economic sentiment and some potential of negative economic growth. Hitting Canada and Mexico probably has an outsized impact versus hitting China or Europe. So he might feel like he has less room to actually go ahead with those. Europe is the big one, right? There's an important... For us, of course, we're a European newspaper coming from the UK. Europe, of course, in the broad sense, not in the narrow sense of the European Union.

And we haven't seen that strong a reaction to all of this news and to the Europe news in particular. Of course, what we monitor when we are trying to determine if the market believes Trump is the buck, the theory is tariffs mean a higher dollar rate.

Because they decrease American demand for foreign currencies, we're buying less stuff, and they increase foreign demand for the dollar because you got to pay the tariffs in dollars. Yeah. And also theoretically, if they raise inflation, rates step higher for longer, that makes the dollar stronger. Dollar stronger once again, indeed. But the dollar moved a little bit today. It's a little stronger today, but not loads. It's still in its same trading range. And it's been coming off for the past couple of days. Couple of weeks even. Couple of weeks.

The market, I think, is ambiguous. And one interesting aspect of this that I wanted to get into is that European stocks are doing pretty good this year. They've had a good run. Yeah. So they are outperforming US stocks by something like eight or 10 percentage points. Since January 1st. Since January 1st. They've been on a good run. The biggest companies in Europe-

From ASML to Nestle to SAP to LVMH, they've all had a good start to the year. And indeed, all the whole wide European index has done well.

And this is a remarkable change. Is that because right now we've seen the Mag7 essentially flat and value is doing well? Other people have argued Europe is more value. Is that what's going on? This is the traditional rap on Europe, that its stock markets are full of companies in sectors that just haven't done well in recent years anywhere. So it's like banks and miners...

basically value stocks, industrials, whereas the American stock market is like big tech companies, growth companies, growth retail companies, et cetera, et cetera. And so Europe has been lagging for like 15 years now. Is that starting to reverse? Possibly. I mean, the biggest change in stock markets, as I think we have discussed here on the show in recent weeks, is that the MAG-7

are not mag. Flat to down. Yes, they are the sad seven. My stock pick to short Google is looking a little smart right now. And my long is looking terrible. And so part of the difference, part of Europe's big comeback is just America's stock market is no longer being dragged along by these seven enormous tech companies. I also wonder if the kind of general American exceptionalism trade could only go so far.

American stocks broadly, Magnificent Seven aside, just got so expensive relative to Europe that at some point you had to see some mean reversion and then you throw in...

not knowing what on earth American fiscal policy is going to be. And that sort of makes the mean reversion happen. It says to people, well, maybe Europe doesn't look so bad all of a sudden. Yeah. I mean, we've argued in the newsletter, right? Maybe Europe is overly cheap. It gives you cheap exposure to the US. We found that to be not so true. It's not like Europe is absolutely cheap in relative terms, the growth you're getting there. But again, if the US is so expensive, it

It makes sense to buy it. I did a little work yesterday, and it's interesting that over the last couple of years, underneath the surface, European stocks have been making a comeback. So while the headline index in the United States continues to outperform the headline index in Europe...

In certain sectors, Europe has been making its comeback, industrials, financials, materials, kind of stuff like this. And it's just in those tech sectors that America, for the last couple of years, is outperforming. That's not true, by the way, over the long run. Over the long run, meaning 15 years, U.S. has been winning everywhere. One question I have, Aidan, is whether what we are seeing is at least a tentative recognition by the market that

that the gap in economic growth between Europe and the US is not as great as we once thought. So if you'd asked us like three months ago, why do these two stock markets act so differently? Why do the bonds and the currencies of these countries act so differently? It would be very clear. Europe was on the edge of recession and America was booming. And now there's a little wobbliness, as you mentioned, especially in sentiment in the US and in some of the hard data too,

And maybe Europe is not quite as bad off as we thought before. Do you think that's possible? I mean, I don't think the picture of economic growth in Europe has actually changed that much in the last month. That's probably right. Right? Like not too much has changed. They're still struggling with a lot of the same issues. They still don't have market integration as Mario Draghi has constantly harangued them to do. Right? They still have the same major headwinds against them. Population decline, et cetera, et cetera. Yeah. I think the only thing that's really changing on the European continent, besides things happening across the Atlantic...

is the Ukraine war might come to something of an end, who knows? Right. People can see it. People can see it. It's not a way Europe would have chosen to end, right? It's not a good picture. But there are some stocks within Europe that have definitely responded well to that news. Yes. So the defense stocks, which we wrote about this week. So the US has a massive military industrial complex with big, great companies in the defense space. Lockheed. Lockheed.

General Dynamics. ... Northrop Grumman, RTX, which was UTX and United Technologies and Raytheon merged. Yes. Europe has some good ones, but nowhere it's nearly as big as the US. Yeah, it's like half the size of the, or less the size of the US industry. Yeah, I think last quarter, the top four European defense companies had a third of the revenue of the top four US companies. So anyway, but there are some really good companies in Europe. And they've been jamming. And they've been jamming. A lot of them, yeah.

2022, when the Ukraine war started, the three biggest defense companies in Europe, Leonardo, the Italian company, Thales. I don't know. Thales. The French company. Thales. Thales. Probably that. Yeah, that sounds right. I'm just into Duolingo on French.

Tell from France and BAE in the UK have all had amazing runs, specifically Leonardo. And this makes sense in a way. We have a war in Europe. Yeah. Obviously, that's good for European arms manufacturers. Absolutely. Right out of the gate. And then, more recently, you have the United States say to Europe-

You guys, from a security point of view, are on your own now. The US defense umbrella is being folded up and put into the closet. You are going to have to spend a lot more of GDP on defense.

And of course, the European response to that is, well, if we have to do that, we're not going to spend it at your companies. We're going to spend it at our companies. Exactly. So it looks like this is kind of an obvious trade. Yeah. So right in the middle of this month, J.D. Vance was in Munich and Pete Hegseth, the new Secretary of Defense, was in Europe. And he said, we're pulling our troops out of Poland.

You guys have to not only increase it to the NATO threshold of 2%, need to go up above that. Trevor Burrus: You're talking military spending as a percentage of GDP. Jason Kuznicki: Military spending as a percentage of GDP. So now it's looking like they were going to get north of 2% soon. Now they're targeting even higher. And then on top of that, US doesn't even seem like a reliable ally anymore now that Trump is debating with Putin. So of course, as you said, they want to spend on their own companies.

Yes. So since the middle of the month, all the five biggest US defense stocks are flat down, where all five of the European ones are up. And- The other piece of context, of course, is that Doge is coming for the Pentagon eventually, right? Or not even eventually, it's happening now.

They're talking about basically cutting that budget. Yeah, they definitely want to cut that budget. It's unclear how that's going to flow through to armament, right? Like they might just try to cut all the contractors and smaller pieces, not the actual military, because there is a very strong lobby in the United States government. Yes, I've heard something about that. The military industrial complex. Also, they're focused on quote unquote lethality. I don't think you'd want to get rid of our weapons if you want to be more lethal. Yes, but investors are not waiting around so much to hear about the niceties of this.

Exactly. They are saying, let me sell something, and the big defense companies are what they are selling. Yeah, and on top of that, for the past couple of years, the US, specifically the Joe Biden administration, has worked really hard to help Europe to arm Ukraine. And one of the ways they did that, as we spoke with some experts, is they would essentially say, hey, Europe,

We're going to buy your old system if you give it to Ukraine. Your own weapons system. Your old weapons system. We're giving you the money to do this, and now we're giving you the money to buy our newest weapons system. Right. Right? So you get something great, Ukraine gets something great, and we'll help foot the bill. That's not happening anymore. Right. And what that means is the bill is being footed by Europe...

And in theory, what we're speculating here is that the bill comes from Atal A. Leonardo. Or bill goes to Atal A. Leonardo, right? They're paying their own companies as opposed to us getting them to pay our companies. Fair enough. Europe is not going to completely go off of U.S. armaments, right? They still have to build up their defense industrial base. I would think it was impossible to really go cold turkey with a U.S. defense company.

I mean, what US has right now, according to the experts we spoke with, is a lot of off-the-shelf supplies ready to go. Europe has time they need to build over the next couple of years their own defense industrial capacity. Some of the biggest countries in Europe with the biggest armies actually don't get so much of their imports from the US. They do. It's more of like 10 to 15%. So, it's like Germany, France, the UK. Germany, France, UK, Poland. They are less reliant on the US. It's more the smaller countries in Europe. The idea is now these companies are going to build up more. They're going to get more government support and fill the void for the smaller companies.

Countries. Countries, yes. Not companies. Smaller... I don't think the Czech Republic would love if we called them a company. So...

But the smaller European countries will be served by the industrial base of the larger European countries. Yes, and they're still going to... The US has a huge lead in a lot of technologies. They're still going to buy a lot of things from the US, but they'll try to the best of their ability to replace a lot of that. And that's not a good thing for the US, by the way. It hurts our relationship with allies, it hurts our companies. One might say this is a very short-sighted, if you were trying to actually help the US military industrial complex.

Aidan, you have achieved something that I thought was impossible. You have made me feel bad for the U.S. military industrial complex. Every night I go home and I just cry for Atheon. Oh, my God. I shed so many tears thinking about those poor, poor contractors. But what this discussion makes me wonder is whether what we are seeing, and I should say it's extremely early days, but what we are seeing in...

The defense industry is a microcosm of what we might see more broadly in the world, in America's relationship with the world, commercial relationship under a high tariff regime.

Yeah. I mean, if you anger your allies by telling them to get lost, they're not going to want to buy your products. And if you slap tariffs, you're going to make it more expensive for them to do that to begin with. Yes. So, I mean, we've heard a lot from readers and listeners who've written to us saying, "We're no longer buying US things."

I mean, these are really highly engaged readers and people who follow news. They're FT types. They're FT types. Who knows? They're more upfronted by offenses to globalism than most. So who knows if that's representative? But you could imagine a lot of countries wanting to turn away from the U.S. Here's the thing about all of this, though. I still don't know. And this is kind of where we started the show, Aidan. It feels to me like we are at a crossroads or a fork in the road. And there's two roads ahead.

One world, economics, finance, markets world, is the world in which Trump is serious about all of his tariff threats. Not just China, but Canada, Mexico, Europe, all of these allies, heavy tariffs on them. That's his actual destination, not just a threat. And those tariffs are coming. And then the other road is the world where...

It's mostly huffing and puffing and not that much realization of actual tariff policy. That world is potentially more uncertain.

You'll kind of have the norm of what we have right now, where Donald Trump is constantly threatening tariffs. We don't know if other countries will play ball. We don't know if they'll happen. And the market and the world will just be kind of caught in the lurch between the two. You might have some real changes, right? Some real concessions made by other countries, whether that be on trade balances or deals or whatever. You could have a lot of these more fake things. And that's going to translate to a lot of uncertainty for consumers, businesses, and investors.

It's a world where we are constantly trying to guess what an uncertain future we might have. Yeah, if anybody's tired from this last month, it might continue. One thing we can be certain about is that we will be right back with Long and Short.

In the short term, there's going to be a lot of volatility. But in the end, I think what we've seen is that the underlying aspects of productivity may end up being the more profound driver than the fears of government impact from the fiscal or the monetary side for that matter. To learn more about macroeconomic disruption, subscribe to PGM's The Outthinking Investor in your favorite podcast app.

Listeners, welcome back. This is Long and Short, that part of the show where we go long things we like and short things we don't like.

Aidan, are you long or short anything today? I am. I'm long the Oscars. I am very excited for the Oscars. Come on. Awarding art is silly. I understand it. Not being said, I really like the discourse. I really like the rankings. Also, Conan O'Brien is hosting, which I think will be really great. Right on. I'm going to go out on a limb after the discussion we just had, and I'm going to go long the dollar. I think that the tariffs, my gut, and I'm not saying I can make a very coherent argument for this.

My gut is that Trump will not want to be seen to back down and he will put the tariffs on and the dollar will return to its highs. Or you just want more spending power when you go on international vacations. It's true. That is another thing that I want to do. Listeners, we will be back in your feed next week. Until then, stay sharp out there.

Unhedged is produced by Jake Harper and edited by Brian Erstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forges. 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.com.

I'm Rob Armstrong. Thanks for listening.