Are markets ahead of themselves over interest rates?

Whilst the massive disruption to the global economy caused by Trump will be a source of immense pleasure for Putin, one wonders just what else Trump’s tariff dance will achieve. At a time of extreme crisis in Europe, due mainly to the Ukraine war but also affected by the long economic hangover from the Covid pandemic, Trump has decided that now is the perfect time to start a trade war with every country except Russia. What on earth is he doing? There are so many economic oddities in Trump’s behaviour that we shall only lightly touch on some of them here. The world’s free press and leading economic figures, like former Federal Reserve chair Janet Yellen, have highlighted many of these. Janet Yellen says that Trump’s tariffs are the worst self-inflicted wound on a well-functioning economy that she has ever seen. Another point highlighted by many is the glaring deceit of Trump’s convenient decision to omit the global US surplus in services, instead only focusing on the US deficit in goods. Trump even sees fit to apply new tariffs to countries that have goods deficits with the US. That he is willing turn his own argument upside-down when the facts don’t suit him reveals that his actions might be more accurately seen by some as opportunism or plain greed. Plain greed is indeed possibly in evidence in the mineral and other “deals” that he has been seeking to inflict on Ukraine, exploiting its extreme vulnerability in perhaps the worst way possible. Are all these actions simply about achieving fairness - or is it just a case of using opportunistic threats to exploit others for your own nation’s enrichment? The Trump cryptocurrency launch is an equally brazen parallel at the personal level. Global trade is a vast area for debate. There is nothing wrong in Trump standing up for fairness in global trade, if that is his intention. No commentator would dispute that there are always areas of bad trade practice like dumping and that these need to be addressed. Disrupting the current world order in trade is not necessarily a bad thing, even if dramatic moves like Brexit have shown how apparently bold actions may cause more problems than they solve. However, there are ways of doing it. The “madman” strategy is well known but it is not popular and is not the only way to do things. This is especially true when dealing with countries that are allies not enemies. It is claimed by Trump's team that the main focus is meant to be China, cast by Trump as the great villain. Yet isn’t Trump seeking to replicate China’s strategy? China allowed BMW, Mercedes and Tesla to enter China only if they built large factories there and allowed equity stakes by Chinese companies. These and other Chinese companies then proceeded to “absorb” the foreign expertise and draw on the freshly trained workforces to boost home-grown vehicle brands like Byd. Trump has just tried to do something very similar with Nippon Steel. He wants the Japanese company to invest in US Steel to improve it, without it gaining ownership. No doubt Nippon Steel's skills will also be absorbed. The previous US administration encouraged TSMC, the Taiwanese semiconductor giant, to invest heavily in the US after the likes of Intel failed miserably to lead the way in semiconductor fabrication. TSMC's skills will doubtless be absorbed and its US workforce will be significantly up-skilled in the process. But is that villainy? Large markets deserve some kind of quid pro from foreign companies that enjoy their business. So why is Trump behaving so aggressively with China by raising tariffs, if he wants to do the same thing? The goods deficit with China is not a crime in itself. If China had a goods deficit with the US, would the US expect tariffs from China? Of course not! There may well be Chinese abuses and there may be US abuses too; but US outrage looks hypocritical. If Trump wants to rebuild US domestic manufacturing, he can simply do it, rather than try to stuff both China and the US economy to force it through. There is another issue: treating friend and foe alike in Trump’s tariff tirade has not simply alienated the United States’ most loyal allies, it has also shaken up the leadership of the free world in complex ways that may be pointless, good or bad. Encouraging more autonomy in defence spending by Europe and other major US allies is arguably a good thing. Arguable because the risk of duplication may lead to unnecessarily high costs. Trump’s tariffs also play a wrecking role, as seen in higher costs that may now be imposed on the AUKUS submarine deal. The risk of fracture in the free world alliance is clearly a bad thing in view of the expansionist aims of Russia and China. Trump’s deliberate decision to talk about annexing Greenland and the Panama Canal, in advance of encouraging Ukraine to cede territory, was an astonishing own-goal. This unprecedented US, expansionist war-mongering was music to the ears of Putin and Xi - just as it is musical torture for the free world. Antagonising China in trade might perhaps lead to improvements in the US goods deficit but the zillion percent tariff blunderbuss approach is fraught with risks of the opposite: shutting down swathes of US businesses that simply cannot afford the huge tariffs. It may also push Europe and many other nations into doing much more trade with China, as Chinese exports are diverted from the US. This in turn would remove from the US the huge benefit of lower Chinese costs of production, driving up US inflation. Why is Trump doing this? Is it ego, earnest stupidity or a secret genius enacting chaos theory? The answer doesn’t actually matter! What does matter is that Trump is a democratically elected leader who is being given a chance - but one who cannot be allowed to remove the democratic structures that put him into office. His behaviour on losing to Biden was to say that the election was stolen from him, as we know. Aside from indirectly praising Putin and Xi’s expansionism, Trump has already talked about altering the US constitution to give himself the chance of a third term or more. That echoes Putin and Xi, who have installed themselves as leaders for life. US democracy has allowed Trump to apply his personal economic theories; but he cannot be allowed to seize the chance of a third term and delay a successor. Trump’s US protectionism might lead to greater US prosperity and sustained US global leadership – or he might just be a Pied Piper. Right now, “Making America Great Again” looks like the least likely outcome to many. Now, where exactly are those MAGA baseball caps made, by the way? By Tim Green © 11 April 2025

US equities have rallied but government bond markets are jumpy - Trump 2 is certainly gripping

After another rip-roaring run of outperformance for artificial intelligence (AI)-related stocks on Monday 4 March, with Nvidia’s share price scaling new heights, the US market opened on Tuesday with a severe bout of indigestion from its recent overindulgence. For perhaps the first time, increasingly frequent press talk of market bubbles may finally be starting to gain some traction with investors. AI-market darling SuperMicro started Tuesday down 6% to $1005 or an arguably amazing 20% or so off its peak the previous day. That peak was driven by news of its inclusion in the S&P 500 index, the shares rising 18% that day. Indeed, AI-loving investors have pushed the shares up around 1000% over just the last year, so they don’t yet really mind the wild gyrations. Nvidia itself – surely the epicentre of AI investment – nevertheless managed to stay relatively firm at $844, only 1% off in early trading. Indeed, both SuperMicro and Nvidia actually managed to finish the day around 1% up. Yet another impressive acrobatic feat of genius, as true believers stepped in yet again to support the share prices of these two leading AI superstars. So where was the real AI indigestion? Tuesday brought some major selling of hyper-large caps in the AI space with Microsoft down 3% at the close ($403) and Broadcom down 4% ($1343). ARM ($134), ASML ($969), Qualcomm ($161) and Adobe ($545) also closed the day down 3% each. There will always be a lot of noise in daily moves as short-term traders do their pirouettes and longer-term investors fidget or fine-tune; but every day is an opportunity to reassess valuations and hunt for turning points. If one looks at valuations, it is always a matter of opinion. However, there may come a point where growth assumptions need to be quite extreme to justify some current share prices. One conservative investor’s extreme may be a go-go growth investor’s low-case expectation; but there are moments when things really can overheat. We only need to think back to the enthusiasm for tech stocks in 2000 to see that: markets crashed after a heady bull run for internet stocks that were distinctly lacking in revenues, let alone earnings. In terms of the discounted cash flow approach to investing, terminal growth multiples may need to reach record dizzying heights to produce target prices that are still 20% or more ahead of current share prices. Conservative investors may refuse to countenance such multiples. On the other hand, there is more common ground on the view that in a gold rush situation like this, the early winners will be – or have been – the ones that make the AI picks and shovels. Namely, Nvidia, SuperMicro and others. Some investors have correctly identified these as sure winners to date, even if AI gold does not present itself in the desired quantities as time unfolds. So will there be enough to sustain the high terminal growth rates implicit in bullish valuation models? For those making the case for caution, there is the additional feature of every gold rush: the rush bit! A lot of current demand is from China. The country is a very obvious panic buyer, as it awaits further tightening of AI-chip supply due to US and EU sanctions and very possibly a Trump White House. Is there a risk that markets are swamped with excessive amounts of expensive, low-returning AI compute? Then again, if China is edged out, demand might be sustained at current rates from the huge reshoring trend as countries re-engineer and localise their supply chains? Added to this, the demand case could be more durably supported if major US customers like Google, Meta and Microsoft actually do start monetising AI at scale. All this could offset enforced restrictions on China. There was another undercurrent to trading yesterday and in recent weeks. We have seen much more caution building up around the outlook for Apple and Google. Apple has struggled after the announcement just over a week ago (27 February) that it was ceasing its car manufacturing project, called Titan. Perhaps the self-driving and car manufacturing challenges for AI-loaded cars were a step too far for Apple. Vast capital expenditure requirements for such a project may alone have taken Apple out of its comfort zone. Its shares also fell 3% on Tuesday – to a new, recent low of $170. Apple clearly needs to show it has more AI credentials. This is not just due to Titan: Apple’s faltering performance related to intellectual property disputes over medical applications for Apple Watch have been painful to see. More of that in our forthcoming Apple research note. Similarly, Google ($134), a much more mainstream AI beneficiary, has seen its shares fall as it has bungled its early AI demonstrations. There is even a new technical term for these AI mess-ups: hallucinations! Although Microsoft may have struggled to challenge Google in Search, Perplexity, a new AI-driven, search start-up with a $1bn valuation, is just one company that may start snapping at Google’s heels. So is the market hallucinating about prospects for AI? Investors will have to make up their own minds. AI certainly has potential but this is not easy street - as Apple and Google have so far shown. AI clearly needs expert design and implementation - no one can yet claim leadership. Or could AI do that itself? No way! Now you are hallucinating! - Or am I? Tim Green, CFA