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Pushkin. Tomorrow is Liberation Day, the day that Donald Trump reveals the secrets of his trade and tariff policy at last. But what exactly is it that we're being liberated from? It's no secret that markets, investors and companies are all feeling a little bit jumpy about the state of the economy. Are they right to worry?
Today on the show, we take a look at the numbers and figure that out. This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I am Rob Armstrong. I write the FT's Unhedged newsletter, and I'm the sometime host of this show. I'm joined today by my very able second in command, Aidan Reiter. Pleasant tidings.
Aidan, you and I have been thinking about the economy a lot. And the way we've been thinking about it is in terms of this dichotomy between two kinds of data, the soft data and the hard data. Yeah. Is it real or is it fake? Yeah. The soft data is not data about like soft things like soft serve ice cream and down comforters. If only. Soft data is about sentiment, what people say, how they say they feel.
what they express. Hard data is about what people do, what they are buying or not buying, what they are selling or not selling.
We see a pretty big divergence between hard and soft. Yeah, we definitely see a divergence. Or maybe there's a delay. It's kind of unclear. Yes. What we can say is, originally when the market fell in February, people were freaking out over what seemed like bad economic data, but it was almost all soft data that they were responding to. For example? So there were these ISM flash estimates. So the ISM survey is the survey of business owners, people in business, to get a sense of how they feel about their business and the economy writ large. And they ask them questions like,
Do you expect to hire more people or less people in the months to come? What's your costs like? Do you expect them to get more expensive, less expensive, et cetera? Orders, whatever, all of this stuff. And they have this thing called flash estimates where they kind of release the preliminary numbers halfway through the month. And we got these preliminary numbers that were really, really bad in the middle of February. Yes. They showed that...
New orders were weak, I think. New orders were super weak. Services, which has been the thing that has chugged along for the past couple of years, slipped into contraction, which nobody anticipated. So the market just totally freaked out. And that came next to a Michigan Consumer Sentiment Survey, which is one of the more widely liked consumer sentiment surveys. Yes, long history it has. So you can look back at this survey series going back to like...
50 years ago or something. Yeah, it's an old series. Anyway, it had a really sharp drop at the same time. So people started freaking out about these two things. We should note though that the ISM flash estimate was pretty off. When the final numbers came out, it actually showed that services were doing just fine. Manufacturing was actually still in expansion at the time, surprisingly. But it did show there was some real fear among people in the business community about costs going up for them, the prices rising as a result because of tariffs.
And there are a lot of concern about what new orders might be in the future because they were already starting to see a lot of people front-running tariffs now. Yes. And they were concerned- Like buying equipment before the tariffs come in. Exactly. And it shows concern about, well, what will our orders be after the tariffs go into effect? Yeah. But I think it's that Michigan survey. It sort of asks questions like, will the next six months be a good time to buy an appliance?
or something like that, a series of questions like that. And that had such a dramatic drop that people were like, oh my goodness, the great American consumer that supports 70% of our economy is basically closing their wallet now.
it now. 0:02:00.6 S2: Yeah. But that was in February, and the market has done its little dip and dive, its correction. We've gotten new versions of both of those indices, so we've gotten updates to both those indices, and we still haven't seen that much hard data, so those are still soft data. 0:02:14.6 S1: Yeah, to support them. I wanna pause though and talk about the question of partisanship in the Michigan data, because the Michigan data
They ask also, "Are you a Democrat or Republican or an independent?" And the story of the data was telling was somewhat different depending on which political party you're talking to. 06:00 Aaron Powell: Yeah, so there's definitely some kinks in the Michigan data that have... There's things about it that have changed over the past 10 years. This is a long dated series, so we can see how it's evolved.
What's interesting about Michigan survey, and again, we just got the newer version of those readings, and they also showed another big drop. But what's interesting about them is when you look at both this month and last month,
It shows there was a big drop across all types of people, whether it was your partisan leaning, your income level. It wasn't a big drop for Republicans. It was a drop, two drops in a row, but not a big drop. So the point is we right now live in an environment where people are really in their own media bubbles, right? Facts are not necessarily shared. Your perception of what the president's doing might not be the same based on what information you get. So we have seen more partisan divides between Republicans.
Republicans, independents, and Democrats in the past 10 to 20 years. At the start of any administration, there's usually a big sentiment shift. So if your party is now assuming the mantle, you see a big jump in sentiment. If your party is leaving, you see a big drop. That happened in 2021 when Biden took office. This time, it was a much more radical drop for Democrats. This was a big, sharp drop and a really big appreciation for Republicans in the months leading up. But interestingly, in the last
survey, all these indicators dropped, independents, Democrats, Republicans. And when we spoke with Joanna Hsu, who is the person who actually puts out the survey, her point to us was, "Yes, partisanship definitely is at play here, but what's important is the direction."
Right? The absolute level is warped bipartisanship, right? So we shouldn't read so much into the absolute level compared to previous 10 decades, et cetera. But what's important is that you saw a drop among all cohorts. Yes. The direction of change shifted. And that is concerning. Yeah, it sure is. And that's also true for people of different incomes, right? So you saw a direction of change for
of low-income Americans, high-income Americans. Again, there is partisanship that's kind of baked into that. There tends to be a higher skew of liberals among higher earners. But again, the direction is important here. 21:00 Trevor Burrus: Yes. So we live in a world where when you ask people, "How do you feel about the economy?" It really matters what political party they belong to, the answer that you get. 21:14 Trevor Burrus: Absolutely. 21:14 Trevor Burrus: But at the same time...
The right way to read these sentiment surveys is not in terms of their absolute level, but in terms of where is the momentum.
And for both parties, the momentum has shifted to the negative in the most recent readings of these surveys. 05:00 Aaron Powell: Yeah, it suggests that bad vibes are permeating whatever news bubble you're in. 05:03 Paul Matzko: Yeah, and we see a lot of people talking about nervousness and uncertainty about tariff policy, the vacillations about tariff policy, and that seems to affect people of all parties.
There's plenty of articles in our newspaper and other newspapers where people who are Trump voters are like this. We support what he's doing, but we're not quite sure what's going on right now. There is a third soft indicator or sentiment indicator that I think moved markets quite a bit in the last month or so.
The biggest of the kind of institutional investor surveys comes from Bank of America. I think we talked about this survey on the show before. And again, they ask questions like, what are you buying this month? Is it stocks? Is it bonds? Is it American stocks? Is it European stocks? Whatever. And in the last reading, there was a very radical shift around US stocks. The amount of bullishness or enthusiasm about US stocks went through the floor.
and enthusiasm for cash rose pretty briskly. I always like to say the old Wall Street phrase, which is that a bear market for stocks is a bull market for cash.
Right. And so that sort of spooked people. It was like, "Whoa, things are changing." Now, you can argue about what kind of indicator sentiment is. There is the whole weird paradoxical thing where when investor sentiment is bad, that is precisely when you want to buy, right? Because when everybody is feeling low,
The only direction they can change their mind in is the positive direction. So we can have that debate. But the point was we had this strong piece of evidence that money managers are getting nervous. So we have the Michigan surveys, the ISM surveys, the Bank of America asset manager survey, all sending a spooked message. But now let us transition from the world of soft data to the world of hard data. And I'll start on that front.
with flows. So one way, one indicator of what is or will be going on in markets is you can look at the net amount of money that is going into different kinds of mutual funds, ETFs, index funds, and so forth.
And contrary to what you might have thought would happen if you read that Bank of America soft data survey, what are you doing with your money, flows into US equities have been pretty good. And part of that may be like retail monkeys reaching for the banana, but the flows were so good that there has to be some institutional impetus behind that. So after markets fell, there was a bid.
for equities and US equities in particular. So that's hard data that sends a different message than the soft data. 0:00:00.6 S1: Again, that's a point where people might be scared, but watch the hands, not the mouth. 0:00:03.6 S2: Yes, express preference versus revealed preference. 0:00:06.6 S1: Yeah, and we should note that the negative sentiments have continued. Again, we just got Michigan the other day, it was negative again. The vibes continue to be bad, but we're not really seeing it in any of the data for the most part.
That being said, we just finally got the first economic hard data that showed some genuine concern. 0:02:00.0 S1: Yes, go ahead. 0:02:01.0 S2: So earlier in March, we got the CPI data right around the time that people were freaking out. 0:02:04.0 S1: That's Consumer Price Index. 0:02:06.0 S1: Consumer Price Index, a measure of the US inflation. And this is at the time that people were freaking out about the soft data.
And it actually wound up being okay. Yeah. It wasn't too hot. It came in cooler than expected. People were happy. Markets were happy. Yes. If you looked further into the details of that, the subcomponents of CPI that feed into personal consumption expenditure, which is another form of inflation measure that is favored by the US Federal Reserve. It's a measure of inflation and spending. And spending. Yes. And the Fed tends to prefer that as an inflation gauge over CPI.
Yes. That's what people say. I don't know if they actually... Yeah, no, but PCE is considered like the gold standard. It's more carefully adjusted, more polished and so forth than CPI. And a lot of inflation watchers noticed that in the CPI data, the components that feed into PCE were actually all running a little hot. Yes. So a lot of people expected there to be hot PCE, right? Higher inflation. We just got the PCE last Friday.
money, and it was hotter than even those people expected. Yeah. But that wasn't the worst bit in that data. It wasn't the inflation bit. It was the spending bit that was a little worrisome. Yes. The spending consumption went up, but not by nearly as much as people expected. And their personal savings rate also went up higher than people expected. Yeah. And that is an indicator, that's a hard indicator of sentiment. If you're saving more money
It shows that you're nervous. You're worried about having a little buffer in place. The household has to be careful about the months to come, et cetera, et cetera. Absolutely. So you have the things that we heard in last Fed meeting. You have a little bit higher inflation.
and a little bit less spending in that PCE release. And that was what the market was genuinely concerned about. And it wound up being somewhat true. That being said, it's not a crazy overheat of inflation. It's not a crazy dip in spending. But if that were to continue, that would be very concerning for the US economy. Because both sides are going the wrong way. Exactly. Slightly higher inflation, slightly lower spending and higher savings.
mildly stagflationary, some might say. Oh, you had to say the word. If you say that word, if you say that word three times in a row, the 1970s appear in a puff of sulfur. So that is worrisome. What I consider the hardest of hard data is
to be the labor market data. The simple fact is, if the economy is really turning south, if we're really heading for a recession, that is always accompanied by weakness in the labor data. In other words, if you have a job, things just ain't that bad. The really bad thing is getting fired.
So, what is the labor market data telling us now? We still have a low unemployment rate. Yeah. We're still expecting... We're gonna get jobs this Friday. So, that will be a one that the market is really focused on. Last month's jobs report was kind of fine. Not too bad, not too good. And JOLTS, which is the Job Openings in Labor Turnover Survey, was also fine. People aren't leaving their jobs or staying at their jobs at weird rates. So, again, this soft data, the vibes, have yet to really come into the hard data.
The best hard data we've gotten that things are bad is the PCE so far. Yeah, it's true. I mean, it's worth dwelling on the jolts data because people who are inclined to tell a more negative story about the American economy emphasize that while the actual rate of unemployment is low...
And nobody's really getting fired. What they like to point out is that nobody's really getting hired either. I don't know if the word is like rigid or stable in a bad sense, inflexible job market where nobody's out there hiring people.
It's just that nobody's getting fired either. And in a really strong labor market, you would see- High turnover. High turnover. You'd see more hiring, more quitting, maybe even more firing. But as it is, it's sort of still stagnant water here. Yeah. People want to hold onto their workers in case they have more orders in the future. Yes. Or you don't want to leave that job if you don't know if there's going to be a job around the corner. Yes. Now, when I am looking for the market's best barometer-
of what is going on. I like to look at credit spreads, which I will now briefly explain for our many listeners who are normal human beings.
The credit spread is what companies pay for debt over and above what the government pays. So what the US government pays is the least amount you can borrow. That's the risk-free rate. The US government is not going to default, et cetera. So we think. So we hope. So we hope. We piously hope here at Unhedge that the United States government will never default. But maybe that's what Liberation Day is all about. It could be. Liberating us from our expectations that the US government could pay its debts. Yes.
So the bigger a spread companies have to pay over the treasury rate is a very good, very reliable indicator of people's worries about the economy because it's telling you something about the risk that companies will default on those debts, which has a lot to do with whether the economy is expanding or contracting. And they're sending a kind of what I would describe as an only mildly
spooky or unpleasant message. So for BB rated companies, which are sort of the best of the low rated companies, slightly wobbly or highly leveraged cyclical companies, that rate
the spread has gone from sort of 1.6% up to 2.2. And that's happened just this year really. So we do see a widening spread. That is telling us something about people's worries about the economy, but it should be noted that that spread was unbelievably low when this run up started.
looked at from a longer term perspective, it almost looks like a return to normal. But again, it's the kind of question you raised earlier. Do we care about the level of the indicator or the direction and speed of change of the indicator? And if you look at the level, spreads don't tell that scariest story. But if you look at the rate of change and the direction of change,
somebody is saying, "Something a little bad is going on with the US economy." Yeah. And we should note that treasury yields, which is what forms the underlying part of that equation, those have been pretty much stable for the last month. Because the bond market just can't decide what to make of upcoming deficit questions, what to make of inflation. So, treasury yields have not really been moving that much over the last month, even though equities have had these giant swings.
Yeah, I think it's generally believed that the kind of credit markets are more sane than equity markets, or at least that's what credit market people tell you. Or at least they're more patient. Now, my favorite indicator, of course,
... is company earnings. And company earnings in the fourth quarter were very good. Yes. And so that, I mean, if US companies large and small, of course, there's always exceptions to this. It's a big economy, varied picture. Lululemon, terrible. Lululemon. But Lululemon does not an economy make. Tragic. It makes sections of New York for sure.
The overall picture was quite good with the slight asterisk that, of course, whenever a company reports its earnings, they have a call with analysts and the analysts ask, what about next year? And the answer to those questions is, well, we don't really know. It's pretty uncertain times.
So, companies were quite hesitant about giving 2025 guidance. They gave unusually wide ranges for 2025 guidance. So, they see the uncertainty, but the fact remains that their earnings, as far as we have visibility into them, have been good.
Yeah. I mean, that's- And that is a very good position to be in. Yeah. That's hard versus soft data, right? Hard data, what we earned. Soft, what we expect. But you do have some really notable bad softs. So Lululemon is an example, but Walmart had really bad soft data, bad outlook. Well, their outlook was, "We don't want to give you an outlook because we don't know what's going on with the consumer." But when you're Walmart, that is a bad outlook. Yeah, yeah. No, that's a really important one. What's Bitcoin and crypto telling us?
My least favorite piece of hard data is the price of Bitcoin. And since the 20th of January, the price of a totally real form of value Bitcoin has gone from $104,000 to $83,000.
So that is a big change. That's like a 20% correction, which is bigger than the market's correction. Yes. And if you wanted to try to pull information out of the Bitcoin market, a course of action I strongly recommend against, you would say that's kind of the bleeding edge of the market. Like those are...
That asset is where people are going to be the most sensitive. It's the most speculative asset. So the price action you will see there is the most indicative of something. 05:00 Aaron Powell: Of something, but if you ask people in this space, they'll be like, "Well, obviously it's an inflation and market hedge, so it should be going up when the market's going down." But that's not what's happening here. 05:04 Paul Matzko: That is not true. They say that.
And they are wrong. I should mention, by the way, that last week on the show, we described CoreWeave as having started out as a Bitcoin miner. That's not right. It was an Ethereum miner. Another very important, valueless asset. So, summing up in a way, if you're going to have bad sentiment...
We're in a pretty good position to endure it right now. Absolutely. Because a 4.1 or 2% unemployment rate is a darn good place to start. Strong corporate earnings is a darn good place to start. Low credit spreads is a darn good place to start. So I feel quite torn about this situation because a lot of the stuff I look at is sending me a signal that's saying, this is a good time for the US economy and it'll be a good time to own US risk assets.
But everybody is kind of spooked and nervous at the same time. And I don't know what to make. I don't know how to think about the way that the sentiments, the feelings turn into action if they turn into action at all. 0:02:00.6 S2: Yeah. I mean, I think also there's a complication of data here because we have theoretically a lot of front running of tariffs that's messing with how we measure regular things in the economy. 0:02:07.6 S1: Yes. 0:02:08.6 S2: Right? So you have Atlanta Fed puts out this thing called GDP Now, which is...
a roving estimate of what was GDP right now in this first quarter, et cetera. And that has shifted into contraction, even when you remove people front-running imports of gold and front-running imports of what other consumer durables. But there's some weird quirks with how they account for exports. There's other weird quirks that, again, makes this really hard to tell, right? Not only are we dealing with uncertainty on the horizon of what will happen with tariffs, what will happen with consumer sentiment, et cetera, but we're also just dealing with a
somewhat new economic regime that brings its own complications to our regular measures. 3:00 Paul Matzko: It's remarkable you think about trying to forecast the future of the economy, but it's hard to know what's going on in the economy right now. So far from being able to say where it's gonna be in a quarter and two quarters or whatever, just where are we is always a hard question. 3:18 Paul Matzko: But we should take solace in the fact that we've only gotten just a little bit of bad hard data and the rest is just vibes.
Listeners, we'll be right back after a short break. A lot of your returns, you could be giving up 10%, 20% of your returns through bad executions.
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Welcome back. This is Long and Short, the portion of the show where we go long things we like and short things we don't like. Aidan, do you have a long or a short for us? Yes, I am short the new Indonesian Sovereign Wealth Fund. Indonesia announced that they are going to place all their state-owned enterprises under the umbrella of a new special sovereign wealth fund that will have control of them, and it will essentially be directly in control of the president as opposed to Congress or other politicians. It's unclear what it's
governance and guardrails will be. It just feels like it is too easy to create this giant structure that essentially goes around democracy in order to empower a president. And as we think about sovereign wealth fund that Donald Trump has promised in America, I think we should keep this example in mind of when is this actually good for people and when is it maybe not. And speaking of that certain president, I am going to go short liberation day, but in a very specific sense, I am not
I'm going to give you a rant about tariffs, but I would say the idea that we're going to get a lot more certainty about tariff policy tomorrow has probably been overbought at this point. That I think we may end tomorrow, Liberation Day, with as many questions as we began it. And if that happens, I think the market reaction will be negative.
Listeners, we will be back in your feeds on Thursday. And until then, stay sharp.
Unhedged is produced by Jake Harper and edited by Bryant 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.
I'm Rob Armstrong. Thanks for listening.