How Tariffs Jeopardize The Soft Landing | Jonny Matthews, former Brevan Partner, on Bond Yields, Japanese Yen, and Gold
01:11:29 Share

The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough. Thank you. Let's close this door.

Very excited for today's talk. I'm speaking to Johnny Matthews, former partner and portfolio manager at Brevin Howard. He currently manages the portfolio for Fordham Capital and is author of the great macro note, Super Macro. Johnny, great to have you on Monetary Matters. Welcome. Welcome. Thank you very much for having me back again. I'm honored to be on the show again.

Johnny, what is going on with tariffs? Tariffs, tariffs, tariffs. What do you think? What do you've heard? What's going to happen?

I've got a great quote here. This is from a guy at JP Morgan, David Kelly. I'm going to read it. He says the trouble with tariffs to be succinct is that they raise prices, slow economic growth, cut profits, increase unemployment, worsen inequality, diminish productivity and increase global tensions. Other than that, they're fine. And I don't disagree with him.

What I can't understand is that Trump inherited an incredibly strong economy. At the end of last year, we had Q4 GDP growth was 2.3%, but consumption growth was over 4%. A big, a massive influx of imports lowered the GDP figure. But, you know, the run rate, the underlying, the core run rate of GDP was running at 3%.

We still have more available jobs in the U.S. than there are unemployed workers. The unemployment rate is down at 4%. Corporate and household balance sheets are incredibly healthy. We had solid earnings growth. Q4 on Q4 in the S&P 500, 18%. So, and household income, real income is growing at a healthy pace.

So, you know, if it ain't broke, don't fix it. This is the most fantastic economy. Why on earth would you want to put all this economic disruption into the mix? I really don't understand the point. I get maybe you want to tackle, you know, the inflow of fentanyl from Mexico and, you know, its origin is China probably. But this is really taking a sledgehammer to crack a nut. And

If it's for the purposes of raising taxes, it's really not going to be that effective. And we'll talk about the impact later on. But the bottom line from estimates that I've seen is you may get a total tax revenue from the tariffs of $90 to $110 billion a year, which is really, really not that much in the scheme of things. You're going to pay a big price in economic damage.

To me, it seems like incredibly economically illiterate policymaking. But what do I know? I'm just a trader. Trump's got an economist with a PhD from Harvard advising him. Is that Steve Baran? Yeah. Oh, yeah, yeah. I've interviewed him. Yeah.

fair to say that the consensus among PhDs from Harvard is not that tariffs are a good thing, that Steve Moran is either something of an outlier. Well, Johnny, it's hard because normally, you know, I rely on people with a little bit more gray hair than me of, oh, what happened in 2005? What happened in 2008? But when it comes to tariffs, pretty much most people who've been alive, tariffs have only gone in one direction, which is down. The last time tariffs were

was high was the 1950s. And really, the highest they were was like the 1890s or the 1900s. So it's tough to know. And I mean, Trump wants to go back to those days. He talks glowingly about the golden age of tariffs with the tariff king, President McKinley, who he just renamed the mountain, McKinley. So tariffs, the impact of tariffs are they raise inflation and they lower real growth.

But they do subsidize local industry, right? Because it is better to build things in America if producing things in China costs 20% more. Well, let's look at this in some detail. And I looked at a report. It was either from the Peterson Institute or the Cato Institute, one of these independent research places. And they were talking about, for example, the auto industry and the complexity of the supply chains.

So right now, you know, the work is divided up enormously. And they took an example. They followed a capacitor, a little electronic component imported into the West Coast, sent down to Mexico to be assembled into a circuit board. That circuit board then went to Texas to be assessed and certified, went back down to Mexico, assembled in what's called a

an actuator i think is the is the thing that controls car seats the motors on car seats that actuator was then sent through america up to canada assembled in a car seat and the car seat then ended up in a car in the us that's just one example you know they said that

an engine or a transmission system can crisscross the border either the Canada-US border or the Mexico-US border seven or eight times before it ends up in a car. So

First of all, I don't see how on earth you can untangle that complexity. Ultimately, you can, I suppose. The other thing is, how does the auto industry deal with this? I mean, are the tariffs applied each time it crosses the border? In which case, you can forget about making cars this way. Yeah. I mean...

Warren Buffett said on Sunday, tariffs aren't paid by the tooth fairy. They're paid to the government either by companies or by consumers when companies raise their prices and likely some combination of both. So it is a tax. It will likely lower real growth and raise inflation. So-

How much do you think it's going to raise inflation by real growth? What is it in fact going to be to the stock market and the bond market? And I should say that the stock market is now down. So the stock market really doesn't like it. And by the way, the bond market kind of does like it. Yields are actually going down, even though tariffs are supposed to be inflationary, which is interesting.

Well, I think that there's one way you could correct the trade imbalance and you could lower inflation. And that's by just putting the US into a recession. It's very simple. You get inflation down, you get bond yields down, and you'll balance out trade easily. The US will stop importing so much stuff. So if that's the objective, fine. It looks like we're on the way.

It's very, very hard to really assess the impact of these tariffs because there are these second order effects. If we just look at it in isolation, we look at the tariffs are applied to goods, not to services. So I've got a chart, look at US consumption. It is comprised of 32% goods, 68% services.

20% of those goods are imported. So really you're down to about 6% of total US consumption. And then not all the countries, not all the imported goods will be subjected to tariffs. So you could look at it that way and say, well, okay, you know, it shouldn't have too big of an impact. Maybe it's 4% or 5% of GDP that is going to be subjected to tariffs. However,

It is a very regressive tax. For multi-millionaires, it's not going to make much difference, this small increase in cost of imported goods. But for households living paycheck to paycheck and really spending most of their monthly income on food and on living, it will hit them the hardest.

So, from that perspective, it is a very, very regressive tax and very unfair. If we look at the economic impact, and there is a slide somewhere in the deck from Yale Budget Labs, they have an economic model to look at this. And they basically put in the 25% tariffs into the model and look what the impact is.

The initial impact is an increase in the price level of somewhere between 1.5% and 2%, 1.66% to 2.07%.

And this is assuming the average effective tariff rate is 13%. So that's the average over all the imported goods. We've got 10% on crude from Canada. Some goods from other countries won't be subjected to tariffs. So you get a blended rate of something like 13%. That has, that impact, that increase in the price level hits the disposable income of the average household by 15%.

something like three thousand dollars two and a half to three thousand dollars the but it also has a year one impact on GDP of between half a percent and one percent and a long run impact on GDP this is really really counterproductive aspect of this long-run GDP growth will be slowed by between a third of a percent and two-thirds of a percent and for that

you know all that for raising perhaps 100 billion a year of revenue of tax revenue is it really worth it to me it really doesn't seem like it is worth it but that is that is those are the the numbers from this budget labs model from yale there are unpredictable second order effects and we're seeing that right now we're seeing sinking business and consumer confidence soaring

inflation expectations, whether it's the Conference Board Consumer Survey or the University of Michigan Consumer Survey, inflation expectations going sharply higher. The uncertainty that this has created, a lot of businesses will hold back their hiring and capex plans. They must put them on ice for a month or two to see how this shakes out.

So, and we're seeing it in the sentiment numbers, the PMI surveys, which are dropping very, very fast. So these then have knock-on effects that you can't, you won't necessarily get out of a model. Also, you've got the knock-on effect on the stock market, the wealth impact, wealthy households, and the top...

This is from a Fed study. These are not my numbers from a Fed study. The top two quintiles, so it's the top 20% of all income earners and the second 20%, they are responsible for 72% of total consumption. So now they have grown wealthy through real estate gains, stock market gains, and income gains as well.

But if you really put a big dent in the stock market, it will damage confidence. And that decline in wealth will have an impact on consumer spending. They will want to increase their savings rate. That's just the way it goes. The savings rate moves in inverse to the wealth to savings ratio. Wealth starts going down. People tend to try and save a bit more.

So there's all these other second order effects. And we don't know the extent of the damage that these tariffs are going to cause. I had hoped, I had expected, and I got this wrong, I had expected that there'd be some kind of concessions for Canada and Mexico. And Scott Besant seemed to hint at that. Lutnick did too. And yet that doesn't seem to be the case. So I am rather concerned for where this ends up now. Yeah.

Johnny, for as long as I've known you, among the recessionary chorus from The Economist, you have faded it. You've openly said, I am a recession denier. The economy is not only fine, the economy is good. And you've been right. The unemployment rate revised down to 4.0%. Basically, real growth has exploded higher in 2023 and 2024.

Are you worried about a recession now? What is your base case? How bad do you think tariffs will be, not just for nominal GDP, but for real GDP? I mean, do you think there will be a real GDP recession in the US? I've got to say on the face of it, although I've spoken about all the negative impacts of these tariffs, I think the US still has enough momentum to ride this out without falling into a recession. But

The problem the central banks have got, of course, is that, you know, they said the price increases were transitory once before. So now once we start seeing price increases from these tariffs, if the price level moves up in line with the expectations of these very smart economists at Yale, then it'll be very difficult for banks

not just the Fed, other central banks to continue easing policy. The other thing is that I think, and they've all argued, they all argue, you know, inflation expectations are well anchored. This is always the argument. Inflation expectations are well anchored, you know, and, you know, we're forecasting inflation to carry on going down. It's very difficult for them to make that argument now. From, I think it was the conference board, one year ahead, inflation expectations are at 6%.

I mean, you've got to take these things with a small grain of salt because consumer inflation expectations tend to follow the price of gasoline, not how much it's moved up, just where it is. They tend to track the price of gasoline. But over the last couple of months, these inflation expectations have gone up while gasoline has been heading lower in price or not going anywhere. So I think...

I think it's having such a negative impact on the consumer and on their inflation expectations. I think the central banks will be somewhat frozen. I think they're going to want to just stand still and see how things shake out. They're not going to want to be cutting while prices, while inflation is picking up. So how does this impact your macro views? Are you bullish on stocks? Are you bearish on stocks? Are you bullish on bonds? Are you bearish on bonds? Well, I've...

I've been a bit bearish on especially the S&P 500 for quite some time. And I've got a chart somewhere near the end of this slide deck. I think it illustrates the point that we had two consecutive years of 25% gains for the S&P. That's the red line. So the S&P just went up 50% over the last couple of years. Ownings per share

growth was nowhere near that fast. Earnings per share growth was something like 20% over those two years. And what fueled the rest of the rally in the S&P was an expansion in the multiple. So at the end of 2022, I think the multiple was below 17 and it finished 2024 above 24, the P multiple. So you had a 30% increase in the P multiple.

and a 20% increase in earnings per share. That blue line on the left axis, earnings per share. Red line is the level of the S&P. And you can see how the S&P 500 has just moved well in excess of the growth in earnings. Now, forecast earnings for this year, for the current year, I think were 13%, 14%, 15% or something pretty high. They've started to come down.

they will take another haircut from these tariffs. So I am quite negative on the S&P, first of all. I have expected, as have a lot of people for some time, I have expected some of the value sectors and the more value-oriented sectors

country indices to outperform the S&P. And we're certainly getting some of that this year. The Eurostox up until the last couple of days was really healthily outperforming the S&P 500. FTSE 100 also doing very well this year. And the same thing within the S&P 500. We're seeing the magnificent 7.5%.

coming off quite sharply. And the 493 stocks have been doing OK. They've been doing OK. We're seeing a rotation from growth into value, into value. It's the same thing being played out across sectors and across country indices. This move away from high growth into value stocks. And that is a theme that I think can play out further this year. I'm not a

massive fan of putting on relative value trades myself. I like to pick a side, you know, decide which one, which one I prefer. And when it comes to fixed income, I've, of course, you know, I've been pretty bearish. I don't have anything in treasuries. I am short boons through options. And the reason is, primary reason I've got this short position in boons is that I think the ECB, the hawks are beginning to make more and more noise.

the current level of the deposit rate, this Thursday they're going to cut 25 bps, that's pretty much a given. But the level of the deposit rate then will be somewhere in the range that the ECB considers to be neutral. So first of all, they won't be able to say in their statement, monetary policy remains restrictive. It's now going to be neutral. I think the hawks will take that phrase

out of the statement. The other thing that we've seen yesterday was that Eurozone inflation printed above expectations. It's not declining as fast as people had expected. So you got the two things. Inflation isn't moving the right way. The ECB will have to revise up its inflation forecasts. Unemployment in the Eurozone is still at a record low. And so I think the ECB is

And now we've got tariffs. I think the ECB, like the other central banks, has to adopt a more cautious approach to easing policy. We really don't want to see inflation flaring up again. So my choice in rate space has been playing it through buns with tariffs.

And what duration of the bunds? So bunds are German bonds. At the front end, it's mostly controlled by the ECB. What type of bonds? I'm using bund futures, options on the bund futures. So these are 10-year. And because they have such a...

because interest rates are so much lower in the Eurozone, they are much more volatile. A basis point change in rates has a much bigger impact on a bund than it does on treasuries. Okay, so you're bearish on German 10-year, which is 2.47. What other trades do you have on? I have, and it's not going very well. I just put on a short position in deck 25 SOFA.

I think I can, I've got a slide in the deck somewhere towards the end that might show this. So your short interest rates, basically you make money if interest rates go up, you lose money if interest rates go down of December 2025. So yeah. So what I mean by this, this is so for futures trade, it's 100 less the average three-month interest rate at the expiry. So right now,

I'm showing on this chart that that firm red line is the implied rate from Dec 25 SOFA futures. The dotted line is from the summary of economic projections, what the Fed was projecting in December when it said it was projecting basically two rate cuts this year.

You know, from December, the market priced in fewer than two rate cuts. It priced in a rate at the end of the year of around 4%, above 4%. Since this tariff, since these tariffs have started to become a thing, the rate has declined a long way. So the market is now pricing in three cuts, at least three cuts. So I was betting against that.

It just put the trade on yesterday, but it's not going very well. And I'm concerned for where this goes. I mean, if this tariff mess gets a lot worse, who knows what the Fed will do? It's going to be difficult for them. My base case is that they're going to be paralyzed by rising prices despite

the negative economic impact from these tariffs, which would mean that they cut again in June and

Or they may not, you know, who knows? They may be on an extended pause. As AI demand surges, nuclear energy is making headlines, driving tech's biggest companies to turn to nuclear power to meet growing energy needs. The VanEck Uranium and Nuclear ETF, ticker NLR, has provided investors with comprehensive exposure across the nuclear energy value chain for over 15 years, from downstream utilities to upstream uranium miners and innovative companies developing next-generation reacts.

And so what do you think about stocks?

Well, it's like I said, you know, this rotation from, I think we get a continual rotation from growth to value. And I really don't think you're going to have, I mean, almost rule it out, you're not going to have another year of 25% gains for the S&P 500. You can almost forget about that. I think the other interesting thing is, we haven't spoken about, is currencies and dollar-yen currencies.

Dolly Yen is something else I'm quite focused on. I have some out-of-the-money puts, which I've had for a little while. I'm beginning to sell them out. Dolly Yen is moving a lot lower. It's a shame I didn't include a slide of this, but if you look at real 10-year rates, spread between real 10-year US and Japanese rates, so in other words, the rate on tips and the

Inflation protected yields. - Japanese, yeah. The spread has been really, really declining. It's the same with conventional yields. If we look at the 10-year treasury, it's come down in the last few weeks from 4.6% to, I'm not sure where it is right now, but 4.1% or whatever it is. The yield on the JGB has just been going up and up and up. It's at a 15-year high.

Now I know it's still pretty low. It's 1.42% or something. But the spread between the two has really, really compressed. And Dolly Yen tends to track these rate spreads. And it's under a lot of pressure today.

You know, classic economic theory says that, you know, the country that imposes tariffs, the currency, you tend to get these currency adjustments. So the dollar should strengthen and the other currency is weaker to absorb some of the impact of tariffs. Right now, we don't know if tariffs being applied to Japan, but the yen is really strengthening. So dollar-yen has come down a long way. And I think it could go quite a bit further.

So you're bullish on the yen, but tariffs are supposed to strengthen the dollar, right? And that's people like Treasury Scott Besson says that, oh, tariffs won't be inflationary because the dollar will strengthen. And therefore, the dollar is more to buy more. Yeah, well, this is the theory. This is the theory that the dollar will strengthen and absorb some of the impact of tariffs. But since...

I think since the start of this year, you know, the broad trade weighted dollar index has just been declining and declining. And now we've got these tariff announcements. It's taken another leg lower today. And so it's not the case. I mean, certainly it's the case that the exporters will take some of the impact of this tariff in their margins. Same with the importers in the US, distributors. Everyone will eat some of the impact of these tariffs.

everyone along the supply chain at first. So you'll get a price increase, an increase in the price level that doesn't fully reflect the 25% tariff. Maybe it's the price of whatever it is that's had the tariff applied to it goes up by, let's say 15%, shall we?

Over time, though, and you can say, well, that's not really inflationary. It's a one off price jump. It's not going to happen again the following year. But I think what happens is everybody absorbs it in their margins and then tries to rebuild those margins the following year and the year after that. You've also got the impact of the disentangling the supply chains, which won't happen overnight. That will be a very difficult, complex process.

And then you have the other impact, which I haven't spoken about, is that one of the reasons why goods inflation was pretty much non-existent over the 20 years prior to the pandemic, goods inflation ran along at close to zero. And it was just because we had an increasing amount of import penetration from China. More and more goods

were substituted in the US economy by lower cost imports and that suited the consumer. That was great. It held prices in check. That process is going in reverse. So year by year there's going to be fewer and fewer of these imports coming from China that are depressing prices.

The substitution will be made for domestically produced goods. And I think that is inflationary as well. There are so many sources of longer term inflation from these tariffs that I think it'll take a long time before we truly understand the impact. And what do you think right now, the first day of the tariffs, how you don't know what's going to happen. I don't know what's going to happen. The economists on TV or the economists not on TV. No one knows what's going to happen.

But how do you think the market, which is always the current measure of what every market participant thinks over the next 30 days, 30 weeks, 30 months, how is that going to change? What does this look like? And I'm not comparing this, you know, I don't think this will be anywhere near as dramatic as

you know, February 25th, 2020 to March 23rd, 2020, that incredible change of, okay, day one COVID, oh, it's no big deal. It's just like, you know, it's just like the flu until March 23rd, you had a 35% correction in less than a month. But what is that? What does that look like? You know, how are you kind of assessing the, and I guess I don't really know what I'm asking, but what are you, what are you going to be looking for to assess?

Are people freaking out? Is this going to continue to stay, whether it's bond yields going lower or stocks going lower, or you expect a reversal? What are you paying attention to? I think, first of all, the market partially prices some relief from these tariffs. This expectation that maybe there's a deal to be done. Maybe, for example, Mexico says, well, we've put another 10,000 cards on the border. We've got another 10,000

Drug enforcement officers to stop the flow of fentanyl and Canada does the same. Or there was this, and I think it was Scott Besson that was talking about it last week, this idea that Mexico would apply 25% tariffs to Chinese imports and maybe Canada could do the same, in which case there would be no need for the US to apply the 25% tariff to Mexican and Canadian goods.

Maybe there's a deal along those lines. And I think the market is wary of something coming out of the blue that gives relief from these tariffs and everything springs back because, you know, there have been occasions previously where, like, for example, when the tariffs originally were supposed to go into place at the start of February and then it was postponed a month, massive sigh of relief for the market. So I think the market is still looking for that.

I think what we're going to have over the next, you know, things stay as they are. We're going to have a very, very choppy trading environment, really choppy. There will be days when we get rallies on some bit of news, but it's going to be very choppy. And the difficulty is the economic data. It's going to be very hard to look at the economic data and be able to say, right, I can see what's going on here.

it's not going to be so bad or whatever, because we had a surge of consumer spending in the run up to Christmas and then consumer spending dropped in January. And there were several reasons for that. First of all, you had tariff front running by consumers. Everyone knew the tariffs were coming. They were buying their BMWs or, you know, whatever it was, they were getting in ahead of these tariffs. Second thing is that there was a lot of

auto purchases that were to replace the cars that were damaged in the hurricanes. We had two pretty bad hurricanes and the LA wildfires. So you had a surge in auto purchases. And then in January, they fell off a cliff. So February already, auto purchases have bounced back and consumer spending, real consumer spending should be a lot stronger in February.

You know, it's going to take a long time before we really see the impact of these tariffs. Now the tariffs are in place. We've got to see how the consumers cope. Do they, consumers and businesses, consumers and businesses, I'm not sure how long it would take before the price levels adjust. You know, the tariffs have gone into effect. It's probably going to take a few weeks before price levels adjust. So we're just, it's going to be very difficult to see the impact of these tariffs.

One place where I do think the impact will show up is in capex plans and hiring plans, which will continue to deteriorate. We've seen the first signs of that in the purchasing managers indices. You know, the ISM manufacturing yesterday, the employment component dropped back. The ISM manufacturing index has spent, how many months is it?

26 months or so also pointing to contraction. We had two consecutive months of increase and now it's starting to fall apart. And for the other, the regional Fed indices, we're seeing capex intentions turning down again. Hiring, we haven't yet seen a slowdown in hiring. We had really, really strong job growth, like 200,000 a month average over the past six months.

It'll be interesting with the latest payroll numbers due this Friday, see if we can see any impact. And so far, it's hard to see any impact. But markets are going to be on alert for this. And as far as trading is concerned, I think I'm not looking right now, but the reaction of the market, which I think may be wrong, is a steepening of yield curves. So the markets are pricing differently.

more aggressive central bank easing, pulling the front end of the yield curves lower, while the back end of the yield curve, when I looked earlier, the 30-year treasury was actually slightly higher in yield. So quite a dramatic steepening in yield curves. And I'm not sure that's correct, which is why I am short these SOFA futures. I think certainly Thursday, we're going to hear from the ECB. We'll see what their thoughts are.

And I'm not saying the Fed will follow the ECB by any means, but you'll get some central banker speak there that may give you a clue as to the way the central banks are thinking. Tell us what we saw in the PMIs. The employment intention went down? Yeah, maybe I should explain this in a bit more detail. The ISM Manufacturing Index, there are

five components of this index. There's employment, new orders, production, deliveries, delivery times and inventories. And the five components were very mixed. Those component indices, you know, added together make the headline. The headline had been below 50, pointing to contraction in manufacturing for the last two and a half years or so.

And then US finally, and other countries, finally, manufacturing is beginning to dig itself out of a hole, get back on its feet. So we had two this month and the previous month. The ISM manufacturing index was above 50. But within the five component indices, they were very mixed. The employment component declined. New orders dropped a long way. And then the others were kind of mixed.

But the new orders is kind of a leading indicator for where things are going. New orders dropped back below 50, suggesting new orders are contracting again. And I think they dropped below 50. Either way, it was a steep fall in the new orders index that suggests these tariffs have taken the wind out of the sails of the manufacturing sector. And I think that'll be replicated in Europe, in the UK and Asia. So

So they're already having an impact on, if you like, the forward-looking indicators of manufacturing. I don't know how it'll affect the service sector, but obviously that's a bigger part of the economy. But the employment, you know, the fact that the employment component, it's not a great, to be honest, it's not, the ISM Manufacturing Employment Index is not a great lead indicator of employment in the sector.

But it's another straw in the wind. There are, you know, there's so much that's standing in the way of strong employment growth now. First of all, businesses, you know, reluctance to, I would think reluctance to continue their expansion plans in the face of these tariff announcements. The Fed reducing their head cap, when I say the Fed, I'm talking about federal employees,

The numbers being reduced. That is a very, very small impact, I should say. That's a small impact. But everything combined and we're going to see slower, slower payroll growth. It's just going to take time before it shows up in the data. That's the problem. It's going to take time. And we don't know. There may be some kind of deal that gives the US relief from these tariffs in the meantime. Sorry, Mexico and Canada, some sort of tariff relief.

So it's very, very hard to navigate the markets at the moment. I think the best way is to wait for extremes. Wait till the market prices in a real extreme of policy action by the Fed that you can bet against or a real extreme in longer term fixed income yields where you feel comfortable to say, you know, you can draw a line in the sand and say, well, OK,

I really don't think it's going to go below that. I'm happy to stand in the way of that. And you've got to be able to accept a lot of intraday noise. I mean, markets really are incredibly volatile intraday.

Yes, and they're very non-trend following. Trump could say something that sends the market soaring on Friday, and then there's a news announcement that sends it crashing on Monday. And I think it's very hard for the market to trend. And that's what you meant by choppy, which makes it harder to trade. Yes, and I think in all honesty, most of us macro traders think

We do tend to be trend followers. You know, we'll have a macro idea if it starts to go right. And, you know, everyone says you should stick with your winners. We typically tend to add to the winning trades and pile onto them in bigger and bigger size. That's not working in the current environment. In the current environment, I think you need to be quite nimble and be prepared to fade the extreme moves because we're going to have this to and fro situation

People panicking about the impact of tariffs, panicking about how much cutting the central banks are going to do when I really think the central banks are stuck on hold for a period because they don't know how this thing is going to shake out. So you've got to be able to fade these extremes. And you don't want to get yourself in a situation where you're stuck with a position that's going really badly against you and you're just kind of paralyzed with fear, don't know what to do.

So would you recommend paring down position sizes for people just because things are much more uncertain and volatile? Absolutely. And, you know, the time currency volatility was certainly for dollar yen. I mean, it's picked up and it's not extreme for the equity market. Now, implied volatility has got, you know, it's moved a lot higher. So.

trying to trade the market through options is going to be much more challenging. You're not going to get the payoff that you hope. So that route is out. I think you've got to trade in much smaller size and wait for an extreme where you can say, okay, well, I'm pretty confident I can hold this position and have quite a wide stop. One of the reasons that I now have Boond

put spreads rather than any outright position in the bund future it is just so damn volatile i mean it is just incredibly volatile at the moment and you know yesterday during the day the bund future was down over a over a point it's really you know we had by by midday we had the biggest increase in the 10-year bund yield in in something like a couple of years

That had faded by the close. And then, you know, first thing this morning, everything's rallying. All fixed income is rallying. And the moves are just too extreme to be able to sit there with a really big position or a position that's not protected by options. So you've got to be careful the way things are now. What do you think about the Chinese stock market? You know, I think it's incredible. Everybody had strong doubts about China.

the impact of the stimulus, the stimulus measures the Chinese have taken. And yes, and yet, you know, it seems stock markets, the HSCI is one of the best performing major market indices this year. I'm not sure where it is now, but it was up 20% years to date. And if you look at the real estate market, the real estate market has stabilized in that prices are not

Well, they made a small decline in the most recent monthly data, but the size of the monthly declines, I mean, prices have been going down for something like 18 months on a month-by-month basis, but they're coming to the end of that. They're stabilizing. Prices are stabilizing. And if confidence returns to the real estate market, because the Chinese have a lot of their household wealth in real estate investments,

That's been a secure place for them until recently to park money. It's something they trust and they invest in real estate. So it's quite essential for the Chinese policymakers to stay in the market to help support consumption. The real estate market is still heading south and eating into the wealth of consumers.

there's no way in the world you're going to get a pickup in consumer spending. But so far, it seems like they're having some success in stabilizing both certainly the equity market and the real estate market. And if they can continue to do that, I think the Chinese market will be okay. I'm

I mean, you can look at valuation metrics of the Chinese market. It's always going to be on a very low PE. You know, the standards of corporate governance in emerging markets, the capital controls, all these kind of things make it so that emerging market equity industries will always be at a discount to advanced economies.

So that's not really an argument for why you should stick a whole lot of money into the Chinese equities. But...

That said, they are on a very low P.E. And if you're, you know, if you're happy to take some kind of risk, that's not a bad place to park your money. Yes, I think that P.E.'s of different countries relative to other countries changes over time. I know like most of the time, you know, an emerging market country, as you say, the price to earnings ratio, the valuation is going to be lower than of the U.S. market because the U.S. market existed, you know, for decades.

over 100 years and has a track record of returning capital shareholders in the light i know sometimes in the bubble like 1997 sometimes you get like thailand's stock market the pe's trade at a premium briefly because everyone's so bullish and they say oh thailand's growing faster and yes the gdp is growing faster but that doesn't mean that the earnings are growing faster and then you know i think like india's price range ratio is probably higher than most of europe and india is a less developed economy but

But yeah, in general, just because the Chinese market is cheaper than the American market doesn't mean it's going to be a buy. But you think you're fading the doom porn about the Chinese macro situation. Yes, and I think they can cope with the tariffs, honestly. I do think they can probably cope with the tariffs. Although they're a very export-dependent economy, I think they'll be able to cope with it. And I think...

I think you can look at other countries as well and look at other countries that trade on much lower valuations than the US. You've got to be a bit careful because if you look at the composition of the country indices, like, for example, let's take the FTSE 100. There's a lot of banks, there's a lot of mining companies, a lot of oil companies. Now, these kind of companies trade on relatively low PE ratios. They do in the States as well.

mining companies. I mean, you know, they're very, very cyclical. They, you know, it's a tough business and the P's are always super low. Well, the FTSE's got a whole load of mining companies and oil companies. So, you know, it's not a growth index. But that said, I think the way things are this year, you know, if you want some kind of stability in your equity investments, I think you've got more chance with one of these type of

value indices like the FTSE or like European equities or Chinese equities. I think you've got to, or if you want to stick to the US markets, you've got the Russell Value Index. That should be a preference as opposed to the Russell Growth Index. I think this whole thing of PE ratios going to the moon, that's over for now. That's over for the US now. Yeah, yeah.

I that's that's big. I think there is an aspect, Johnny, of value companies could go down more than growth companies because they are cyclical. Like a lot of the growth companies are service companies and a lot of value companies are are cyclical goods companies. And if a country is importing furniture from Vietnam, that's probably going to be a value stock. I don't know that that's going to be doing better than Facebook or Meta, you know?

Well, that's true. I mean, the auto companies always value companies. And I don't I really don't know how the auto sector copes with this. So I think and it's beyond my it's beyond my capabilities. But I think if you've got to be I think you've got to be prepared to do a kind of sectoral analysis and decide which sectors you want to be exposed to. I think that's important the way things are, because.

Like I said before, the tariffs are applied to the goods sector, service sectors, unless they're dependent on a particular industrial sector.

they should fare a lot better. They should fare a lot better. And it's also important, just because tariffs can have a massive impact on a country doesn't mean a massive impact on the stock market in terms of the fundamental earnings. The Chinese economy is incredibly export-driven, but a lot of the stocks that dominate the index are not as heavy. So I'll be careful and choose a stock that I don't own. But for example, JD.com, it may trade up on good tariff news and it may trade down on bad tariff news. But

JD.com, they probably have a division exporting stuff to America, but it's not very big. Most of that is to

China and non-US, non-European market is my understanding. In the same way, the German economy, the actual German economy has been very weak, real GDP flat for five to six years. But the DAX, the German stock market has done really well because they sell stuff to other markets. Johnny, how are you thinking about how tariffs will impact the rest of the world outside of the US? Is Europe going to start imposing tariffs on China? Is protectionism going to spread

across the world in the same way inflation, okay, inflation started in, you know, some countries and then it spread to the rest of the world. Is Africa going to impose tariffs on Europe and China? Is Europe going to impose tariffs on Latin America and Australia? Is this sort of tariff chaos going to go global or is it really restricted to President Trump and the US and the other countries doing maybe reciprocal tariffs against the US? I actually think it's

the latter, other countries imposing reciprocal tariffs against the US. Although let's just make something clear here. You know, Trump says we're going to put on reciprocal tariffs. Europe has, I think it's a 10% tax on imports of autos, whereas the US taxes European autos, the import tax is something like two and a half percent or something. Well,

you know so so that for a start is unfair but to be honest with you you know even if there was no no tariff on us auto imports in europe i don't think we buy your cars anyway because our roads are our roads are that much smaller and you know you you just couldn't drive a cyber truck around london you know it just wouldn't fit so that that's not the main issue but

Obviously, I can see why Trump would say, OK, you know, Eurozone, they've got 10% tariffs on autos from the US. We're going to put 10% tariffs on their cars. He's also attacking the value added tax, which is it's it's different. I mean, it's it's it's not really fair to say, OK, you know, in Europe, they've got

value-added tax so we should we should apply tariffs because because you know if I you know they they have that tax on goods I mean you have a sales tax in most states in the US anyway so you've got kind of you had the same kind of thing there so I I think I think eurozone yeah I mean it'll it'll impose

It'll take countermeasures to combat tariffs that Trump imposes that he doesn't already impose. I think, funnily enough, the UK, I think the US actually has a small trading surplus with the UK. I can't think what we export to the US, maybe some, I don't know, maybe some cheese or, you know, some tea bags. I guess. Yeah, there we go.

You know, we buy some Harley Davidson's bourbon and, you know, I don't know, we buy some stuff in the US. So the US has a small trade surplus. So we're keeping under the radar. You know, we're just keeping quiet, trying to keep up, trying to not make ourselves noticed. And I think I think with luck, we'll avoid getting into any sort of trade war with the US. But the amount of trade that we do with the US is microscopic anyway.

So I actually I think I think the other countries will kind of almost club together to make sure that they have free trade agreements between them and and the US, the US is more isolated. You know, the tariff barriers will go up for for business with the US in the same way as the US imposes it wants to impose tariffs on the rest of the world.

But I will say this, and there is another very important point to make on this whole question of tariffs that we haven't discussed. If you look at what might be one of the motivations for tariffs, which is to get manufacturing back to the US, to onshore manufacturing,

I just don't think they're going to achieve it. Sure, you've got to disentangle the supply chains, but there's a lot of low-cost work that is done outside of the US where you couldn't get the US workers to do the work for that kind of pay. The wages in agriculture are so low, it's difficult to find US workers to do that work. And it's much more straightforward to just say, well, okay, that's the kind of job

They're happy to do in Mexico for the kind of pay that they're getting there in Mexico, while the U.S. focuses on the service sector economy, which it excels at, you know, the tech industries and the entertainment business and everything else, everything else that the U.S. does really well. That's what they should focus on this. You know, the economic theories of comparative advantage. I mean, they really do come into play.

And the same, you know, that avocado picking is just one example. But I'm sure that within the manufacturer of there is a lot of manual work that gets done in Mexico that, you know, is where the hourly rate is very much lower than US workers will be prepared to work for. So it's really, really hard to see where the upside is from this. It really is.

Johnny, what are some broad lessons or conclusions you would want to leave our audience with in terms of advice, either on trading these markets or not trading these markets and in terms of analyzing, just understanding how tariffs are going to impact the markets and the economy?

Look, I think my main piece of advice would be keep your position sizes quite small at the moment and really wait for something that you feel is quite a compelling opportunity because this is very different to last year. Last year, in all fairness, was a relatively boring year in terms of volatility. Realized volatility on the S&P was very, very low. And for the rates market,

I guess there was a slowdown during the year where people expected, okay, it's going to do loads and loads of cuts. And then that expectation faded towards the end of the year. We had some stronger payroll growth. So there was some volatility in the rates market. But if you look at the 10 year Treasury yield finished the year last year, roughly where it started, somewhere around 450.

it didn't really move that far. I think this year is going to be very, very different. And I think both the short-term and the long-term rates are going to move to, I won't call them extremes, but to levels that

you know, certainly most people wouldn't have expected at the start of the year. So you've got to be prepared to wait. Just be patient. Wait for a good opportunity. Most you think rates will go low to a low level people to inspect or to a high level? They've already gone below the level that I expected, certainly the short term rates. And what I'm saying is that, okay, you know, I'm prepared to fade that in a small way.

And I will stop myself out if I'm wrong and wait for a better opportunity. Look, I'm happy to admit I got in a bit too early with this trade. That is in the SOFA futures. But I think we are going to see extremes. I think you see rates come down to very, very low levels in the short-term rates and probably long-term rates. And then markets will settle down and kind of come to terms with these tariffs and maybe figure out that,

we're not going into a recession and then you know they'll reverse and go the other way we've seen it so many times since the pandemic where rates market goes in these cycles people you know really push them to extremes and then they go back the other way and push them to other extremes you know let's face it during the start of this year i think you know the market was also almost

almost pricing out any rate cuts this year. So, you know, it does go between extremes. And so, Johnny, to sum up your views, you're bearish on rates, but you're not going to take too big of a swing. When it comes to the U.S. stock market, you think it's too hard. You're bearish U.S. rates, you're bearish German rates.

You're long the yen against the dollar. What, if any other trades you have on or things you're looking at, as well as what do you think about gold, which is one of the few assets that is trending? It's like every Monday, Tuesday, Wednesday, gold goes up. That seems to be the one source of stability in markets. It's just it just keeps going up. Well, it is it is slightly distorted by the, you know, the threat of tariffs in that in that sense.

it's complicated. I don't want to get into too much detail, but there is an arbitrage. There's a spread between the price of gold in London and the price of gold in New York. And what's happening in the futures market, gold futures, where you can take delivery of gold into a COMEX warehouse, people want the US futures. And the bullion spot price in London is trading at a discount. And the gold is flowing into the warehouses. If you're

i've had experience with this with a personal account punt on gold futures years ago two decades ago i had something like 10 or 20 gold futures quite a chunky position although the gold price at the time was about 200 and something dollars an ounce and if you have hold those futures into the delivery months like let's say the expiration is 16th of june but if you're holding futures at the start of that delivery month you can be delivered on which means

you get an invoice for the gold which is going to be held on your behalf in a warehouse in New York and you have to pay the financing costs for that gold. And if you want to get out of position, you then have to short the futures and deliver your gold into the short. But what is happening at the moment is people want the gold in New York because they're concerned about a tariff being imposed on gold, which is sitting in London.

so that you wouldn't be able to take delivery of it in New York. So there's a spread between the prices. If that spread gets wide enough, people will take the gold bars out of London, send them to Switzerland to be melted down and recast into, I'm not sure what the standard is, 100 ounce bars. I think they're in metric standards in the UK and certainly Europe.

So they'll be cast into 100-ounce bars and sent across to America if the arbitrage gets wide enough. But right now, what's happening is there's all this buying of gold futures in the US, and it's driving up the price. I don't know if that's going to end or how it's going to end. Yeah, that's fascinating. It's not the exact same, but certainly the headline of

you know, gold flooding out of England and London and headed to New York. It seems like a headline from, you know, 1925 or 1930 instead of 2025. But you have a view on gold or do you? So I said that again? Do you have a view on gold? I think the way things are, it's aligned with my view on inflation that, you know, we're not going to go back to that pre-pandemic period of very low inflation. And

It's a shame I haven't got the chart in the pack. But if you look at the total return from Treasuries over the last ten years compared to gold, compared to equities, I mean, the total return from Treasuries is negative in real terms. Well, in real terms, just because the CPI has just been going up and up and up and up. And Treasuries have well, even if you're getting your money back in nominal terms, you're losing in real terms.

Gold has just massively outperformed. The S&P 500 has massively outperformed the CPI. Cryptocurrencies, I mean, they're just off the chart. So there is this trend away from cash-like assets like fixed income products towards anything else that might preserve the value of the investment. And you've got the other factor, which is the Chinese market.

Not just the Chinese, the central banks of other countries don't want to hold treasuries anymore. They're diversifying their holdings out of treasuries into gold. And the Chinese have been big buyers of gold over the last year. They're the ones, I think, most responsible for driving the price higher. And Johnny, what, if any, market consequences do you think there will be to end to the Russia-Ukraine war? Well, the first...

I think it would be great for Europe, actually. I mean, the first thing would be European natural gas prices. They got massively squeezed when that war started. They've come off. They're still two or three times as high as they used to be. I mean, you know, natural gas is just everywhere in Russia, in the US. You know, it's not expensive. So turning on the natural gas supplies again to Europe would be great for German industry. There's a lot of

chemicals and a lot of manufacturing that depends on low-cost energy. So that would be great for German industry, which has struggled, really struggled over the last few years. So you have that peace dividends. I think if it really does end, if we really do see an end to it, I think it would be most beneficial for Europe and European stocks and the economy.

Johnny, a pleasure as always to have you. I really enjoy reading your note at Super Macro. Tell us what is your process for Super Macro and also what's the work you're doing with Fortum Capital? Yes. Well, I manage a macro portfolio for Fortum Capital, but I found over the last few years that by writing my thoughts about what's going on in the macro economy really, really helps me understand

everything that's going on, understand the economics, understand the dynamics in markets and so on. If you can articulate your view on paper or verbally, it requires such an in-depth amount of research and understanding to be able to do that, that if you can, if you can,

It really helps your trading. And I remember reading about this years ago. Traders said, oh, I always write about, you know, trades, why I'm doing them and the reason and everything. And I never really understood it until I started writing the super macro note, which goes out every day. And then on the weekend, there's a more in-depth analysis of markets and a summary of what's happened over the week.

And I find that by writing the note on the weekend, that's where I get my inspiration. That's where I get my trading ideas. It's the discipline needed and the research that's needed to be able to put your thoughts into words that really does clarify your thoughts. So... Go ahead.

So, yeah. So if anybody would like to get an example, please have a look on the website. It's super-macro.com, www.super-macro.com. You can follow me on Twitter at Super Macro. You can see it at the bottom of the screen there, I think. And you can, you know, take a one month trial subscription, see if you like it. I certainly like it. People should check it out.

People for watching this interview, they can find it on YouTube, Apple Podcast, Spotify, everywhere. If you're watching this on YouTube, please subscribe and like it. It does make a difference. And I don't say it nearly enough. I don't like to be too promotional, but a lot of people, we get some views here, but a lot of them come from people who don't subscribe. And if you're watching...

If you're watching a lot of the videos here, why not subscribe? Just keep us in mind. Johnny, thanks again. Thanks, everyone, for listening. Thanks for watching. Remember to check out vanek.com slash NLRJack to learn more about the VanEck uranium and nuclear ETF. Thank you. Just close this door.