Declaring the Reciprocal Tariff Regime
Doug Nolan
February 13, 2025: For the record, the S&P500 gained 1.04% for the session, and the Nasdaq100 jumped 1.43%.
The Semiconductors rose 1.29% and the Russell 2000 1.17%.
The Goldman Sachs Most Short Index surged 3.4%.
The VIX declined 0.8 to a three-week low of 15.1.
The MOVE (bond volatility) index fell two to a two-month low 84.57.
Investment-grade CDS declined a basis point to 46.9, matching multi-year lows.
High yield CDS prices fell 3.5 to a two-month low of 292 bps (only 10-bps above multi-year lows).
Ten-year Treasury yields dropped 10 bps to 4.53%.
“Risk on” across the board.
The Ark Innovation EFT returned 6.4% this week.
February 14 – Bloomberg (Shawn Donnan):
“President Donald Trump is embarking on what may be his most disruptive action yet for the global economy by broadening his grievances to how other countries choose to tax and regulate.
Trump… ordered top economic officials to calculate new US tariffs based on the total tariffs and tax, regulatory, currency and any other barriers that US exports face.
The new ‘reciprocal’ duties would be calculated country by country.
They will be laid out in a series of reports due by April 1 that officials said would first examine the economies with which the US has the largest trade deficits.
‘The numbers are going to be very fair but staggering.
They’re going to be large,’ Trump told reporters in the Oval Office as he signed a memorandum ordering up the new tariffs.”
February 14 – Reuters (Susan Heavey):
“The Trump administration is looking beyond tariffs and non-tariff barriers to examine currency manipulation as it studies the issue ahead of an April deadline.
U.S. Treasury Secretary Scott Bessent said…
‘We’re also looking at currency manipulation,’ Bessent said…
‘The U.S. has a strong dollar policy, but because we have a strong dollar policy, it doesn't mean that other countries get to have a weak currency policy.’”
A few relevant headlines:
“Fearless Wall Street Traders Refuse to Panic as Tariff War Rages.”
“Tariff Man Strikes Again – And Markets Ignore Him.”
“Markets Shrug Off Tariffs Threat.
Tariffs, Schmariffs.”
“Mexico Peso Gains as Trump Tariffs Seen as Bluff.”
Bloomberg’s John Authers:
“This was the day many around the world had feared, when President Donald Trump summoned the media to the Oval Office and declared all-out trade war.
Then markets responded with relief and made clear they didn’t believe a word of it.”
New York Times Dealbook:
“‘Markets had to decide whether the president was being a protectionist or a pushover, and for now are erring toward pushover,’ Paul Donovan, the chief economist at UBS Global Wealth Management, wrote in an investor note...
‘The delay is seen as an opportunity to do ‘deals’.”
I’d believe him on this one.
Wouldn’t bet on President Trump being a pushover.
Of course, there will be deals, but there will be no negotiating away the President’s expansive reciprocal tariff regime.
Oval Office reporter question:
“Have you spoken to any CEOs directly about this (reciprocal tariff announcement)?”
President Trump:
“I’ve spoken to many.
Many love it.
And they say this is going to be the thing that makes our country really prosperous again.
And this is going to be what pays down the $36 trillion in debt and all the other things.
This is an amazing day.
I think this is going to be a very big day in a very positive way for our country.”
Question:
“On tariffs, are you concerned that the countries that would be most affected, like India, would shift their trading to China?”
President Trump:
“No. I’m not concerned about anything.
I’m just doing what’s fair.
This is a very fair thing.
This should have been done a long time ago.
I would have done it, but then Covid hit.
I was getting ready to do this years ago.
First term we had the most successful economy in history, and then Covid hit.
This was going to be the thing that I was waiting to do.
It was awfully hard to do this with Italy, France and Spain – all those people were dying, and then we put tariffs on.
I have a big heart.”
Question:
“How much money do you think you’ll raise from tariffs on an annual basis?”
President Trump:
“That’s the most interesting question.
I think it will be a staggering amount.
I call it the external revenue service…
I think it’s going to be a staggering amount.”
Question:
“We’ve heard the number one trillion floated with meetings with senators.
Is that a number you’ve thought of?”
President Trump:
“I don’t know.
Already the Senate is saying, wait a minute, they’re looking at some of the numbers and they’re saying, ‘whoa.’
I say America first; I say make America great again.
That’s what we’re doing.
I think this is the most important thing I’ve signed.
I’ve signed very important things…
A lot of important things.
Space force.
The biggest tax cuts in history.
This could be one of the most important things we’ve ever signed.”
Question:
“There’s been some nervousness on Wall Street about the impact (of tariffs).”
President Trump:
“I don’t think so.
There hasn’t been very much.
It’s going to make the United States stronger.
And in many ways, it could make other countries stronger too.
Other countries want to have a stronger United States.
They want to have a strong America.
I think it’s going to make us very, very strong.
Much stronger.”
Thursday from the Oval Office, President Trump introduced a broad outline of a monumental change in the U.S. global trading relationship with the world.
He’s ready to abandon the existing global trade framework, finish off the World Trade Organization and long-accepted trade practices.
Speculative market Bubbles are notorious for a short-term fixation and propensity to disregard less than pressing negative developments and risks.
Yes, markets are uniquely complacent at this point.
There is now a deeply ingrained view that the world’s most powerful leader shudders at just the thought of an unsettled stock market.
“Art of the Deal” bluff and bluster dovetails so nicely with today’s bullish narrative.
But I view Thursday’s reaction to reciprocal tariffs as consistent with trading dynamics in an acutely speculative marketplace.
The lack of immediate tariff implementation pushed out a potential major market catalyst a couple months.
This triggered an unwind of hedges and a decent short squeeze across global risk markets.
In general, those hedging and shorting these days have “weak hands,” quick to reverse bets for fear of having their faces ripped off.
Millions of presumptuous day traders are obsessed with buying the dip.
It's difficult for me to see a scenario where the administration’s new tariff regime is not highly disruptive.
But it’s unlikely to be immediate.
For now, a somewhat weaker dollar has taken pressure off the weak-link global “periphery.”
In one of the more noteworthy moves this week, emerging market CDS sank seven to 150 bps, the low back to June 2021.
European equities have been on fire.
Germany’s DAX index jumped 3.3% this week, increasing 2025 gains to 13.1%.
France’s CAC 40 rose 2.6% (up 10.8% y-t-d), and Italy’s MIB gained 2.5% (up 11.1%).
Curiously, European high yield (“crossover”) CDS sank 14 to 279 bps, second only to September 19th (275bps) for the lowest level in two years.
European Bank (subordinated debt) CDS sank to the low since February 2020 – and is only about a basis point from a seven-year low.
When I see such market inflation and risk embracement in the face of deteriorating fundamentals, my focus turns to identifying the underlying dynamics fueling the rally.
After trading up to 4.79% on January 14th, 10-year Treasury yields were down to 4.42% on February 2nd.
Yields surged 10 bps to an intraday high of 4.63% on Wednesday’s stronger-than-expected January CPI report.
Yields then reversed 9.5 bps on reciprocal tariff Thursday (disregarding higher PPI) - and then were down another five bps on Friday’s weak retail sales data, for the fifth straight week of lower yields.
The bond market’s recent rally, especially this week’s resilience in the face of unfriendly CPI, PPI, and tariff news, has been instrumental in underpinning “risk on.”
If the bond market had reacted harshly to the reciprocal tariff regime, a retreating stock market would have elicited a more discerning Trump tariffs discussion.
Probabilities are high that the world is now moving toward major trade confrontations.
There are clear inflationary risks, especially with the overheating U.S. economy already demonstrating elevated price pressures (i.e., CPI, PPI, wage growth).
The bond market is vulnerable.
In contrast to equities, the bond market tends to be more forward-looking.
There’s a scenario where a highly disruptive trade war slams global growth.
And with runaway speculative Bubbles (i.e., equities, AI, crypto, leverage lending) susceptible to destabilizing reversals, Treasuries might look beyond the horizon and find solace in waning growth, inflation, and policy rate prospects.
Perhaps a hopeful Treasury market is also discounting Elon cost-cutting and more forceful Republican budget hawks.
It's not unreasonable bonds rallied on dramatic tariff regime news.
But it's arguably highly problematic.
Bonds have their own serious Bubble issue.
Historic speculative leverage is running wild, generating the liquidity excess fueling asset inflation and speculation around the world.
And its liquidity-fueled excess in the face of trade wars, massive deficit spending, and myriad risks that are stoking late-cycle excess and resulting acute market vulnerability.
A system inviting vigilantism.
While this week’s growth ($5.5bn) was moderate, money market fund assets have expanded $789 billon, or 23% annualized, over the past 29 weeks to a record $6.923 TN.
This is indicative of a historic expansion of “repo” market borrowings used to finance leveraged speculation, with reports of massive ongoing growth in the highly levered Treasury “basis trade.”
It has become increasingly apparent that amped up speculative leverage is a global phenomenon.
February 13 – Bloomberg (Laura Noonan):
“Hedge funds active in Europe are running $219 billion of bets with just €12 billion of client assets, the European Securities and Markets Authority said as it warned about increasing leverage across alternative investments.
‘Hedge funds especially continue to be particularly leveraged,’ ESMA said in its semi-annual risk report.
ESMA said a group of hedge funds making ‘substantial’ use of leverage now had a total exposure ‘which represents a multiple of 18’…
In a more detailed report last year, ESMA said it was closely monitoring a cohort of hedge funds that employed leverage of more than 2,000% in their bets on mortgage bonds.”
February 11 – Bloomberg (Greg Ritchie):
“The rise of multi-manager hedge funds poses a threat to financial stability, according to Bank of England Governor Andrew Bailey.
Bailey said there are signs of correlated activity, which combined with often ruthless risk-management policies could see these funds rush to the exits during market shocks.
Multi-manager funds… have taken the lion’s share of investment flows in hedge funds in recent years.
That’s with the promise of steady and diversified returns from traders organized into distinct strategies, or pods.
‘Multi-manager funds can make individual ‘pods’ deleverage rapidly in stress conditions, which can exaggerate market moves,’ Bailey said…
‘There could be circumstances in which the means by which multi-manager funds protect themselves in this respect can create risks to the system.’”
February 10 – Bloomberg:
“Bond traders in China, desperate to boost their returns, are turning to a strategy that exploits small differences between spot and futures prices…
The lending volume of a bond maturing in September 2054 hit 177 billion yuan ($24bn) in January, more than triple the amount lent in November…”
February 11 – Bloomberg (Wenjin Lv):
“Chinese traders are the latest to embrace basis trades now bond yields there have sunk to epic lows.
That may underscore concerns that the relentless bull market in the country’s debt is getting overstretched, and that there’s the potential for investors to inadvertently take on excessive risks.
Remember that the proliferation of such trades -- leveraged positions to milk the arbitrage between cash bond and futures pricing -- have been pointed to as potential systemic risks in the US and Japanese markets.”
Under the headline, “The Secretive Hedge Fund Rewriting the Rules of $4.5 Trillion Industry,” Bloomberg Thursday profiled the quantitative multi-strategy QRT hedge fund that “has grown quietly into a $23 billion trading powerhouse, all from modest origins as an $800 million spinoff from the Swiss bank just seven years ago.”
“Multistrats are notorious for leaning on vast amounts of borrowed money to juice their bets.
QRT takes it to a whole new level.
As a firm, Millennium’s total amount of regulatory assets, which includes leverage, was 7.5 times its investor cash at the end of 2023; Citadel’s was roughly 7.2 times.
At Morlat and Laizet’s outfit, it’s been at least twice that.”
Of QRT’s two major funds, “Torus had regulatory assets of $191 billion, according to a US filing in March. Qube traded $121 billion.”
That’s $312 billion of assets for a highly levered “$23 billion trading powerhouse.”
It’s reasonable to assume that assets and leverage have continued to balloon over the past 10 months.
The dominant “basis trade” players operate with more egregious leverage (40 to 75 times).
With a hedge fund industry at $4.5 TN, along with scores of “family offices” and international operators, how many tens of Trillions of assets are controlled today by the global leveraged speculating community?
QRT is a good illustration of the proliferation of levered speculation, which is behind rampant market liquidity excess – operating at the epicenter of market fragility.
I saw evidence this week of both ongoing liquidity overabundance and latent fragilities.
I’m not the only analyst arguing that markets are broken.
Markets again this week demonstrated a precarious inability to discount and adjust to negative developments.
Moreover, there were unusual trading dynamics indicative of urgent position liquidations.
The Nasdaq100 had a 3.2% swing from Wednesday’s lows to Friday’s close.
Nvidia swung almost 8%.
From Monday’s high to Tuesday’s close, the Goldman Sachs Short Index sank 4.62%, only to then spike 6.5% from Wednesday’s low to Friday’s intraday high.
The dollar/yen traded at 151.2 early Monday, jumped to as high as 158.80 on Wednesday, before trading back down to 152 intraday Friday.
From Wednesday’s low to Thursday’s close, Germany’s DAX equities index surged 3.0%.
The highly synchronized drop in global CDS prices is indicative of the hasty unwind of trades – a powerful “squeeze” dynamic.
Is a major player unwinding positions, or is more systemic?
The week’s drop in EM CDS prices was the largest since November, while the decline in European Bank CDS was the second biggest back to August.
More extraordinary, the almost 11 bps collapse in China sovereign CDS was the most dramatic decline since September 2023.
China’s major bank CDS prices collapsed double digits to lows back to 2021.
Hong Kong’s Hang Seng Index surged 7.0% this week, South Korea’s Kospi 2.7%, Brazil’s Ibovespa 2.9%, and Mexico’s IPC 2.4%.
Major equities indices were up 3.8% in Poland, 3.3% in Hungary, 3% in the Czech Republic, and 3.6% in Romania.
Global market liquidity has turned highly unstable.
For a while, leveraged speculation has fueled destabilizing global liquidity excess.
More recently, rising Treasury and global yields were spurring deleveraging and waning liquidity at the “periphery.”
But the reversal in Treasury and global yields triggered short covering, the unwind of hedges, and resurgent levered speculation, all working to ensure the swift reemergence of liquidity overabundance.
Liquidity excess poses significant Treasury market risk.
For one, lower yields fuel ongoing manic stock and Credit market excesses, further elevating system overheating risks.
Months of excessively loose financial conditions have fueled stronger pricing pressures throughout the U.S. economy.
And it appears loose global financial conditions risk resurgent price pressures globally.
It’s worth noting that the Bloomberg Commodity Index’s 1.6% rise this week boosted y-t-d gains to 7.2%.
Gold traded to a record high of $2,943 this week, before ending the week up 9.8% y-t-d at $2,883.
A record $972 billion of monthly Chinese Credit growth didn’t hurt inflation prospects.
February 14 – Bloomberg:
“China’s credit expansion picked up far more than expected in January from a year ago, even as a record jump in new bank loans failed to reverse an entrenched slowdown in demand for financing.
Financial institutions extended 5.1 trillion yuan ($702bn) of new loans, the most for the month of January in data going back to 1992.
The start of the year is traditionally a peak season for lending activity, as banks rush to tap their abundant loan quota…
Aggregate financing, a broad measure of credit, increased by 7.06 trillion yuan.
That was higher than every forecast…
Credit growth also benefited from a surge in government bond sales, which reached 693 billion yuan — marking the strongest start to the year since 2020.”
My thoughts this week returned to a former Fed Chairman.
Ben Bernanke had a radical theory, one he was convinced was supported by history.
He had strong conviction and hubris.
His theoretical premise was shaped by a simplistic, myopic view of the nature of inflation.
Bernanke viewed $1 trillion of QE – vehemently arguing it was not “money printing” – as a temporary expedient to resolve a pressing national predicament.
But the actions of the world’s dominant central bank carried profound global ramifications.
When we ponder the introduction of the Trump administration’s radical protectionist regime, it’s important to appreciate that monumental policy experimentation is replete with great uncertainty and myriad unexpected consequences.
Importantly, Bernanke’s 2008 crisis response turned traditional central banking on its head, at home and abroad.
There was literally no turning back.
The course of history was altered.
For starters, any and all central banks could resort to monetary inflation on a whim, unleashing momentous global inflationary forces, certainly including historic asset Bubbles, wealth inequality, and resulting social, political, and geopolitical instability.
And each round of monetary inflation fueled more precarious Bubbles, followed by more outrageous monetary inflation.
It spiraled so out of control that a small group of unelected officials in Washington thought it was responsible to “print” a quick $5 TN.
There were no legal constraints to restrict such a consequential act, because it was never contemplated that the Federal Reserve would ever consider doing such a thing.
Traditional norms had been long abandoned.
No protest, only thumbs up.
Bernanke’s theory was deeply flawed: thinking he was rectifying a U.S. Bubble problem, he instead unleashed history’s greatest global monetary inflation and Bubble excess, along with attendant instability and mayhem.
It might have been twisting, uneven and murky, but the path from Bernanke’s 2008 experimentation to this week’s Trump experimentation is clear-cut.
Inflationism doesn’t create wealth; it destroys it – though these days at peak (Credit, financial, speculative leverage) Bubbles and manias (i.e., equities, AI/tech, crypto), the delusion is more all-encompassing than ever.
Who actually believes tariffs and protectionism will make our nation wealthier?
We shouldn’t downplay the enduring consequences of antagonizing our allies.
I don’t expect our Canadian neighbors to go out of their way to buy American products.
And it was a week that left European leaders livid and befuddled.
Along with reciprocal tariffs that will hit the EU (with large value-added taxes) especially hard, there was the specter of President Trump seemingly excluding Ukraine and Europe from his Putin war negotiation plans.
Providing an extra kick of sand in the face, vice president Vance’s lecture at the Munich Security Summit was heavy on MAGA and alarmingly light on alliance collaboration in a fraught environment that demands plenty.
There was a quote in a Friday article that included a phrase I fear we’ll hear a lot more: “Make America hated again.”
It's been less than four weeks.
The existing world order is being disrupted in record time.
But at least most tariffs aren’t to go into effect until April 2nd.
The stock market seems to believe this date was picked to allow ample time for a string of perfect trade deals.
Instead, this looks like the bare minimum needed to structure an incredibly complex tariff structure with thousands of products across our many trade partners, factoring in a host of national tariff and non-tariff levies and considerations.
I don’t see our emboldened President in a backing down mood.
He’s a believer, and he needs the “staggering” tariff receipts to offset his tax cuts.
He’s the man – a disrupter reveling in his element.
And, amazingly, his grandiose tariff experiment has received a big thumbs up from a dysfunctional stock market.
Reality, whenever it sinks in, will hit hard.
0 comments:
Publicar un comentario