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April 02, 2025

After the market close, the President revealed details on broad-based tariffs.
 
It starts on April 5th, with a blanket 10% on all countries.  
 
And if no movement, the escalation would be on April 9th where largely the "reciprocal" tariff plan calls for an amount that's about half of what's currently being charged on U.S. imports.
 
Excluded from tariffs are copper, pharmaceuticals, semiconductors, lumber, bullion, energy and other critical minerals.
 
So, as Trump said in the Oval office a couple of days ago, the tariffs wouldn’t be of equal scale, but rather they would be “very nice by comparison,” and “lower than what they’ve been charging us."
 
Even so, not surprisingly, the tariffs are toughest on China.  China gets 34% and it seems to be on top of the existing 20% (the blanket China tariff was doubled from 10% to 20% early last month) — so, 54% for China.
 
Given that these details were delivered AFTER the market close, you get a reaction in thin, after-hours markets.  That means big moves.  And in this case, it was stocks down, yields down, dollar down.
 
Now, following the announcement event, Scott Bessent said this would be the high-water mark, assuming no retaliation.
 
So, we should expect plenty of countries to come to the deal table between now and April 5th, and more into the April 9th escalation date.  And with the "high-water mark" in mind, the incremental news should be in the direction of lowering tariffs. 
 

 

 

 

 

 

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April 01, 2025

As we head into the initiation of broad-based tariffs tomorrow, let’s take a look at the chart of the U.S. trade balance …

We can see the dramatic trade deficit that developed from the early 90s, driven by China’s economic plan to corner the world’s export market (by manipulating a persistently weak currency).   And it sharply widened leading up to the Global Financial Crisis. 

Then we had Trump 1.0.  And core to the Trump agenda was “structural reform,” meaning balancing global trade.  That came with a multi-year negotiation on trade with China, which resulted in a “phase one” trade deal, but has ultimately delivered an even deeper trade deficit

And this recent collapse in the chart is the front loading of trade over the past two months, in efforts to get ahead of tariffs.

Now, if we look back at the trade war of 2018-2019, it was even admitted by Trump that getting any movement on trade (with China) could be considered a success, given the history of the prior twenty-five years. 

This time around?  If we’re wondering if the bark might be worse than the bite, we can look no further than Trump’s Secretary of State selection. 

Marco Rubio wrote a book in 2023 titled Decades of Decadence, which probably got him the job to run the State Department. 

In his book, he has a chapter on China

He called the Chinese Communist Party “a totalitarian regime bent on world domination.”  He said the rise of China was the result of “a series of extremely bad decisions, almost all of which were made by the elite political class of the United States.”  And as China rose, “the US government helped them at every step of the way, failing to see the threat that was right before their eyes.”

Also remember, the race for AI supremacy is a two horse race (between the US and China).

And the winner will be the difference between AI that serves humanity and AI that controls humanity (serving the interests of the Chinese Communist Party).  

So, we should expect Trump to leverage tariffs on China to the fullest extent.  

 

 

 

 

 

 

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March 31, 2025

As we discussed last week, the launch of reciprocal tariffs on Wednesday will widen the reach, but the big bang already happened earlier this month, with tariffs implemented on the three biggest exporters to the U.S. (China, Canada and Mexico).

And keep in mind, it has now been nearly two months since Trump’s blanket 10% tariff on China (addition to any existing tariffs).

So, the exasperation over April 2nd has seemed overdone.

And we may have seen that play out in today’s sharp rebound in stocks.  Add to that, later in the day, in an Oval Office press conference, Trump indicated that the reciprocal tariff plan wouldn’t be of equal scale, but rather they intend to be “very nice by comparison,” and “the numbers will be lower than what they’ve been charging us.”

Maybe more important than tariff week, its jobs week.

And we should begin to see DOGE job cuts reflected in this March report on Friday.

As a clue, remember the report last month from the recruitment firm Challenger, Gray showed the biggest layoffs in February since the covid lockdown era, and the depths of the global financial crisis.

It seems obvious that a labor market shock is coming, it’s a matter of when.  The consensus view for Friday is around 140k jobs created and no change to the 4.1% unemployment rate.

It’s an optimistic view.

The question is, will the job market over the next couple of months force the Fed into a more dovish stance on interest rates?

Remember, the Fed has been telling us for the past year that signs of “cracks” in the labor market would be a condition to “react” (i.e. with rate cuts).

With the government job cuts well telegraphed, one would think that Jerome Powell would have acknowledged this labor market inevitability in his last post-FOMC press conference.

Here’s what he said about jobs …

First, he was asked about the Treasury Secretary’s observation that a large amount of the job growth under the Biden administration was government or “government adjacent” jobs.

His response, a dismissive “employment is employment.”

Well, now we have a rightsizing underway of government jobs, which makes this next commentary from Powell’s Q&A of interest:  He said, “what we have is a low firing, low hiring situation,” so “if we were to see a meaningful increase in layoffs, then that would probably translate quickly into unemployment … because it’s not a big hiring market.”

 

 

 

 

 

 

 

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March 27, 2025

Yesterday we talked about tariffs and Trump’s objective to rebalance global trade.  

It’s about China, and the multi-decade economic war it has waged using its currency as a weapon.  That’s led to a wealth transfer, from the West, to China.  And that has led to a structurally fragile global economy.

That said, a weak yuan has been the go-to strategy for manipulating economic advantage, and the formula for its rise to global economic superpower status.  And we should expect China to counter Trump’s tariffs by … weakening the yuan.

If we look back at 2016, in the seven weeks surrounding the election, the Chinese central bank made the largest seven week devaluation of the yuan in a decade — in anticipation of tariffs. 

This time, for Trump 2.0, the yuan is already set around the weakest levels vs. the dollar since 2007.

And if history is our guide (from trade war 1.0), we should expect China to create some leverage in trade negotiations by threatening a big one-off currency devaluation.

What leverage would that create?

A sharp yuan devaluation would (very likely) trigger global financial market instability.  A small one-off devaluation in 2015 sent global stock markets into a sharp fall, on the fear that a bigger Chinese currency devaluation was coming, which could have led to a global currency war, as export competitors devalued to stay competitive.

A currency devaluation threat from China could either 1) put pressure on Trump to negotiate more favorably to avoid a bigger economic fallout, or 2) it could embolden his effort to end China’s economic warfare — perhaps by rallying allies to coordinate sanctions (to put China in the penalty box).   My bet would be on the latter. 

 

 

 

 

 

 

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March 27, 2025

Let’s revisit the coming tariff escalation …

Rebalancing global trade has been a well telegraphed cornerstone of the Trump economic and national security agenda.

April 2nd will widen the reach (with reciprocal tariffs for all trading partners) but the big bang already happened earlier this month, with tariffs implemented on the three biggest exporters to the U.S. (China, Canada and Mexico).  And remember, in just his second week in office, Trump kicked things off by putting a blanket 10% tariff on China (addition to any existing tariffs).

On the latter, as we’ve discussed here in my daily notes, this “trade war” is really all about China. 

And it’s reflected in this chart (and post) …

In short, China is the global producer (the blue bar), we are the global consumer (the light blue bar), and that dynamic has over the past three decades led to the rapid gain in China’s share of global GDP (the light gray bar). 

Why does that matter? 

It matters because this imbalance has persisted (and continues on that path) only because China cheats on its currency (keeping it cheap).

Currencies are the natural balancing mechanism to prevent the bubbles and global imbalances from forming.

If China’s yuan were freely traded, the aggressive growth in the economy over the past three decades would have come with a rise in the value of the yuan (rise in demand of yuan-denominated assets), making its exports more expensive

The Chinese would have consumed more with a more valuable currency and richer asset values, and produced less. 

And the global pursuit of cheaper goods would have shifted demand to weaker economies in the world, with weaker currencies, and cheaper assets, which would result in foreign investment, economic development and export-driven growth.  And so the rebalancing cycle would go.

It all goes bad when a major trading partner is deliberately manipulating its currency (keeping it cheap).  But only if its trading partners keep trading with it. 

And Western world politicians have done very little over the years to disrupt the spiral, for a variety of reasons (it’s politically unpalatable … constituents like cheap stuff, governments like cheap credit, and politicians like political and financial favors).

With that, we’ve had a multi-decade wealth transfer

China sells us cheap stuff.  We send them the world’s most valuable currency, U.S. dollars.  They offer those dollars back to us in the form of cheap credit (buying our Treasuries), which has fueled more consumption of cheap Chinese products.

This is how China has grown its economy from $300 billion in the early nineties to $18 trillion, and the U.S. debt load has gone from $4 trillion to $36 trillion.

It’s a multi-decade economic war (driven by its currency manipulation).  They have extracted from the world, the largest pile of foreign currency reserves, which they have wielded to exert influence, and expand their economic warfare into hybrid warfare (economic, psychological, biological, information, political and cyber). 

So, dealing with China is priority number one.

Here’s another good visual (U.S. Consumer Durables) that highlights the imbalance timeline.  

 

 

 

 

 

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March 25, 2025

This morning, Moody's warned that U.S. fiscal strength has "deteriorated further" since they assigned a "negative outlook" on the U.S. credit rating back in 2023.  
 
What does that mean? 
 
They define a negative outlook as a signal of increased risk of a rating downgrade over the next one to two years. That puts us in that time window.  And with that, this note today from Moody's looks like a setup for a downgrade. 
 
And it comes as Congress is nearing a deal to raise the debt ceiling and continue Trump tax cuts.  So, it's fair to assume that Moody's is telegraphing its move here.
 
That would follow the S&P downgrade back in 2011, and the Fitch downgrade in 2023.
 
Keep in mind, the U.S. administration is actually expressing the desire and articulating ideas to balance the budget, reduce interest costs and grow out of the debt.
 
On the other hand, in Europe they're dealing with fiscal fragility by adding more debt (massive debt). They want to explicitly rip up fiscal discipline rules, relax budget deficit limits and spend over a trillion euros (including euro zone and German commitments) to "rearm" Europe.
 
And Germany, the most rigid fiscal conservative in the euro zone, and the economic engine of Europe is already running the highest debt ratio among Fitch triple-A rated sovereigns
 
 
With the above in mind, we'll hear from the Chancellor of the Exchequer tomorrow in the UK.  
 
Rachel Reeves is due to deliver an annual statement on the UK's economic situation/outlook and the government's fiscal policy and spending plans
 
The UK economy is weak and getting weaker, and the fiscal situation is fragile (with debt service and deficit constraints).  And Reeves has very little ammunition to right the ship. 
 
That makes the UK bond market a spot to watch tomorrow. 
 
The 10-year gilt is already trading at a higher yield than it was in late 2022, when the Bank of England had to intervene (buy UK bonds/push yields down) to prevent a financial meltdown.  And that spike in yields was surrounding the Liz Truss budget plan.
 
So, the vulnerabilities of global sovereign debt seem to be bubbling up.  And that aligns with the discussions we've had on both the European Central Bank and the Fed in recent weeks — likely, more QE and a new wave of debt monetization to come. 

 

 

 

 

 

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March 24, 2025

In my last note we talked about the recent Fed meeting, and the announcement they made on the quantitative tightening program.

Beginning next month, they will sharply slow the pace that they have been shrinking the balance sheet.

For perspective, let’s step through the history of the Fed’s balance sheet response to the crises of the past 15 years.

If we look back at the housing bust and Global Financial Crisis (GFC) response, the Fed slashed rates to zero.  But they couldn’t stabilize the financial system, until they started outright buying government and mortgage bonds (quantitative easing — QE).

It took not one round, not two rounds, but three rounds of QE to stabilize and promote enough confidence in the economy, to stimulate hiring, investing and spending again.

All along, rates were at or near zero.

Still, the economy stagnated, propped up by Fed life-support for the better part of eight years, and teetering on the edge of a deflationary bust and depression.

Then we had Trump 1.0.

He came in with a pro-growth agenda, and immediately the Fed began raising rates — mechanically taking rates from near zero to 2.5% over the next two years.  And simultaneously, they shrunk the size of the Fed balance sheet (reversing about $700 billion of QE).

So, they pulled the monetary policy life support.

What happened?

The economy grew one percentage point faster than the growth rate of the prior eight years (average annual growth rate), despite the headwinds of tightening monetary policy.

But, by late 2019, the Fed’s attempt to “normalize” policy broke the overnight interbank lending market.

This chart …

 

Remember, the Fed described this as: “strains in money markets that occurred against a backdrop of a declining level of reserves, due to the Fed’s balance sheet normalization and heavy issuance of Treasury securities.”

And they saw it coming — enough to start slowing QT earlier that year, and cutting rates that summer.

But by late September the dam broke (the spike in the overnight lending rate).

The Fed was forced to slash rates, and go back to expanding the balance sheet (QE).

How does this all relate to the current situation?

This time, the Fed has been shrinking the balance sheet for the better part of the past three years — to the tune of about $2.2 trillion.

They slowed the pace of QT last June.

And last week, they dialed it down again from $25 billion to $5 billion a month.  That’s a sharp reduction, to a small amount, which means they have effectively ended QT.

And once again, it was attributed to stress in money markets: “signs of increased tightness in money markets.”

Is this a clue that something in the financial plumbing is breaking, and a Fed response is coming (including QE)?

As we’ve discussed many times in this daily note, we’ve yet to see an example of a successful exit from QE.  Until proven otherwise, it’s Hotel California — “you can check out, but you can never leave.”

On that note, as Bernanke once said, QE tends to make stocks go up.  Stocks went up close to 20% over four months following the Fed’s 2019 response.

 

 

 

 

 

 

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March 19, 2025

We heard from the Fed today.

They held rates steady at 4.25%-4.5%.

Stocks went up.  Yields went down.  The dollar went down.

But if we look at the Fed’s updated projections, they revised growth DOWN and inflation UP.

And while the “median” projection for rate cuts by year-end was unchanged at 50 basis points, the weighted-average target from the 19 Fed officials came in 17 basis points higher than the last time they did this exercise, back in December.

So, in this summary of economic projections, the Fed sees a worse economy, higher inflation and fewer rate cuts than in December.

None of that warrants the market reaction we had today.

But the Fed did something else today.

Beginning next month, they will sharply slow the pace that they have been shrinking the balance sheet — from $25 billion a month, to $5 billion a month.

Why?

As Jerome Powell said in his press conference:  “We have seen some signs of increased tightness in money markets.”

That sounds familiar.

Remember, back in 2019, the Fed spent eighteen months shrinking the balance sheet, draining liquidity from the financial system, and they created a cash crunch (a scramble for dollars in the interbank lending market).

This happened …

The Fed described this chart above as: “strains in money markets that occurred against a backdrop of a declining level of reserves, due to the Fed’s balance sheet normalization and heavy issuance of Treasury securities.”

What does that mean?

The pendulum swung from too much liquidity, to too little liquidity.

This was the Fed’s unforeseen consequence of balance sheet “normalization.”

They were forced to put it all in reverse, to pump liquidity back into the financial system, and at a record rate (i.e. it was a return to QE).

With that, clearly Jerome Powell is highly sensitive to signs of stress in money markets.

 

 

 

 

 

 

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March 18, 2025

Jensen Huang delivered his keynote at Nvidia's annual GTC developers conference today.
 
Before we get into the key takeaways, let's revisit what’s changed since the launch of the Chinese DeepSeek model earlier this year.
 
Remember, the "breakthrough" from the DeepSeek model, was the ability to enhance existing foundation (large language) models.  And do so at a low cost
 
This innovation slashed the barriers to AI model development.  That means broader AI adoption and more AI consumption.

 
With that, more AI models mean more inferencing.
 
More inferencing means more data creation (by the models), which leads to … more inferencing.
 
This is all a formula for more and more demand for computing capacity — and that further cements Nvidia's leadership role in the technology revolution.
 
Add to that, today Jensen showed how the entire AI ecosystem is coming together, and Nvidia is involved in every part of it — from the hardware that powers AI, to the software that makes it smarter and smarter, and the systems that will bring it to life in products like autonomous robots.
 
That said, at this stage, AI advancement is being limited by computing capacity.  We've seen it in Nvidia's quarterly earnings.  
 
Remember, the growth (in new revenue dollars) in Nvidia's data center revenue has been on a rhythm of about $4 billion a quarter since the second half of 2023.  Taiwan Semiconductor, Nvidia's manufacturing partner, is clearly maxed out. 
 
And yet, Jensen said today that he expected the global data center buildout to reach a trillion dollars by 2030.  We can only assume new advanced chip making capacity would have to come on-line for that to be fulfilled. 
 
The next "limitation" to the speed of AI advancement, noted by Jensen today:  Energy.
 
The future of AI isn’t just about making more chips. Eventually, the ultimate limit will be how much power you can deliver to these systems.  Faster inferencing, means higher performance, which translates into more revenue.  And revenue will be determined by your access to energy. 
 

 

 

 

 

 

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March 17, 2025

It’s a big week.

Nvidia kicked off its annual developers meeting today (called GTC, “GPU Technology Conference”).

And tomorrow afternoon Jensen Huang will give the keynote speech, where he will educate the world on the state of the AI revolution.

Earlier this year, he said the theme of 2025 would be physical AI.  This is where AI systems integrate with the physical world.

And Jensen has said in the past that physical AI will reshape $100 trillion worth of global industry.

Physical AI is about robots.

And ahead of this week’s GTC event, Nvidia’s head of research said “this is the year of humanoid robots” — the hardware capabilities are rapidly improving, so are the foundation models (the AI brain), and the costs are coming down.

Keep in mind, Jensen has equated this combination of robotics and AI (“general robotics“) to the launch of ChatGPT, which he described as the defining moment that “crystallized” how large language models would translate to a product and service.

And two months ago, he said the general robotics “moment” was “just around the corner.”

With that, we head into this event with the S&P having hit official correction territory last week (-10.6% peak to trough in the S&P futures), and the Nasdaq having retraced back to this big trendline that represents the rise from … the “ChatGPT moment.”

So, we should get some optimism on the technology revolution for markets to digest this week.

And we’ll also hear from the Fed on Wednesday.

Heading into this meeting, the interest rate market is now back in-line with the Fed rate outlook for the year (2 cuts) — pricing in a June cut and one in September.  So, market expectations have trimmed rate cut expectations over the past week.

With that, anything more dovish leaning in the Fed commentary should be taken as a positive for stocks, even though it would likely come as a condition of anticipated weakness in the labor market (i.e. DOGE job government cuts).   Why a positive?  It would communicate to markets that they are paying attention, and ready to react.