Trade Update
Trade Update In this week’s Beat The Market, I indicated that I would buy TOL using some of the cash in the portfolio. I duly did so, getting filled at 131.38. #TOL
Trade Update
Trade Update In this week’s Beat The Market, I indicated that I would buy TOL using some of the cash in the portfolio. I duly did so, getting filled at 131.38. #TOL
Will Trump Save Bitcoin?
https://youtu.be/xeXMAtlZOgA Video Transcript The revelation of the full scope and scale of Trump’s new trade war shocked the world this week Stock markets plunged as investors were reminded of the Smoot-Hawley Tariff Act of 1930 and the collapse in global trade that followed With the US unemployment rate at just 4%, it is hard to believe that Trump is willing to risk so much just to revive American manufacturing Is there more to it than meets the eye? How should you be investing your money right now? ….. Globalization means different things to different people. But if we were to measure globalization in terms of whether world trade is growing faster or slower than world GDP, it would be correct to say that globalization peaked during Trump’s first trade war in 2018. (Chart 1) Even though globalization has gone into reverse gear over the past few years, Trump’s new trade war is a reminder that we are still living with its consequences, especially political consequences. Trump is right that globalization has not been fair. Globalization was a windfall for some and a curse for others. Globalization created winners and losers. While it is too early to say what Trump’s new trade war means for the losers of globalization, especially in the short-term, we can safely assume that it is bad news for its winners. Possibly very bad news. …. The biggest winners of globalization were US corporations and Chinese workers. Globalization helped US corporations to break into new foreign markets and increased their wage bargaining power at home. In other words, globalization allow US corporations to sell more and make stuff more cheaply. Corporate profits as a share of US gross domestic income have been going up steadily over the past 20 years, hitting a new high in the fourth quarter of last year (Chart 3) Chinese workers were no doubt also big winners. As China’s share of global trade increased four-fold since China joined the world trade organization in 2000 (Chart 4), China’s per capita income has increased from less than $1000 to close to $13,000 in the space of just 25 years (Chart 5). Trump says he wants US and foreign companies to produce more of what they sell in the US in the US This does not bode well for Chinese workers and US corporations from Apple to Walmart. …. I said last week that China hawks around Trump are on the ascendancy while China doves like Elon Musk are on their back foot. Coincidence or not, we heard this week that Elon Musk could be soon on his way out. It was widely reported that Trump informed his close circle that Elon will be leaving soon. I said last week that if there is a grand strategy behind the seeming chaos of the Trump presidency, all signs are pointing to the containment of China. I don’t know if Musk’s pending departure has to do with Trump’s China policy, but the biggest take-away for me from what Trump unveiled on his Liberation Day is that his entire trade war may be ultimately directed at China. To what end? To inflict a blow to China so big that China will no longer pose a threat to the US hegemony? ….. Trump’s first trade war was not a success This is evidenced by the fact that since 2019, exports as a share of US GDP have fallen while imports have increased (Chart 6) What’s more, China’s share of global trade is higher now than at the start of Trump’s first trade war (Chart 7) If Trump first trade war failed, it was because Chinese companies were able to circumvent his tariffs by relocating their supply chains elsewhere (Chart 8) They were able to continue to export to the US via backdoors such as Mexico, Vietnam, Thailand and Indonesia Trump’s new trade war is designed to close these backdoors, to leave Chinese firms with no place to hide (thumbnail). In Trump’s new trade war, Vietnam will be hit by a reciprocal tariff of 46%, Thailand of 36% and Indonesia of 32%. If Mexico has been spared from Trump’s reciprocal tariff, my guess is that it has a lot to do with the fact that it has agreed to adopt the same high US tariff on Chinese imports. (Chart 9) Then Trump hit China with a tariff of 34%, on top of the 20% that he imposed two weeks ago. That is a combined tariff of 54%. With a tariff of 54% and an average profit margin of 5%, it is difficult to see how Chinese manufacturers can make any profit exporting to the US. The message cannot be any clearer: Trump has decided to close the access of Chinese manufactured goods to the US market completely. 54% is a death sentence. ….. How bad will Trump’s trade war be for China’s economy? Exports account for about 20% of China’s GDP. Direct exports to the US account for 15% of total Chinese exports. It is difficult to estimate exactly how much China exports to the US via third countries, but let’s assume for argument’s sake that direct and indirect exports to the US together account for 25% of total Chinese exports. This means total exports to the US could be as much as 5% of Chinese GDP. With the industrial sector making up about 40% of China’s GDP, this means exports to the US may be more than 10% of China’s total industrial production. These are big numbers. What they imply is that Trump’s trade war will
Close Cut
There are signs that Trump is starting to panic about the market. Further selling of AI stocks will force an undecided Fed to cut. Homebuilders will benefit most.
Trade Update
Trade Update Strong earnings from NVDA were not sufficient to arrest the decline in Bitcoin, and my small position in IBIT has now breached my wide stop at 50. It is time to exit. I was filled at 50.14 and left the proceeds in cash. #IBIT
Trade Update
Trade Update In this week’s Beat The Market, I indicated that I would exit my position in TLT and use the proceeds to buy KO. I duly did so, getting filled at 89.08 in TLT and 71.22 in KO #TLT #KO
The Devil You Know
Relevant new data won’t arrive for a while. In the meantime, affordability, as reflected in September CPI, is driving policy. Consumer staples to benefit from electricity subsidies.
A Macro Roadmap for the Midterm Elections
https://youtu.be/LraAOK026uE Video Transcript VIDEO TRANSCRIPT: The campaign for the US mid-term elections is about to kick off in earnest History does not bode well for the Republicans but we have a president who doesn’t think the rules of history apply to him What will Trump do avoid the fate of becoming a lameduck? What should you be doing with your money right now? …. Trump is either very lucky or a chess master. How else can we explain the decision of 8 Democratic Senators to support the Republican stopgap bill to re-open the government this week? One thing is clear enough though The Democrats are much less united than the Republicans right now. The internal tensions between the moderate Democrats and the progressives cost them what should have been an easy victory in the shutdown fight And do not let anyone tell you that this was about the mid-term Among the 8 Democratic Senators who defected, two are retiring and not a single one of the rest is facing re-election in the mid-term next year This is how I see it: Chuck Schumer had Trump exactly where he wanted him but his team scored an own goal to lose the game. As much as Schumer would like to forget what happened this week, it will have consequences. … What does Trump’s victory in the shutdown fight mean for financial markets? First, the market will be much less concerned about another potential shutdown in February when the stopgap bill expires. For a shutdown to instill fear on Wall Street, markets have to believe that both sides have the stomach for a long, drawn fight even if it inflicts pains on the economy and voters My hunch says that Schumer will think twice before playing the same game again This removes a major downside risk for the US economy in 2026 Second, Trump’s grip on his party is likely to tighten further. With his brinkmanship having paid off, he will face even less internal dissent in the months ahead. My guess is that he will have an even freer hand in 2026 than in 2025. But what does this mean in action? What will be Trump’s policy priorities in 2026? ….. The mid-term elections are only a year from now. Campaigns will soon start to ramp up Trump is well aware that if he loses his majority in either the Senate and the House, it will bring an abrupt end to the legislative phase of his second term Moreover, he knows that Democrats are already gearing up for an oversight onslaught if they win the mid-term They will likely start with an impeachment trial of the crypto dealings of Trump affiliates that have netted Trump and his family billions of dollars of new wealth. A tidal wave of Democratic subpoenas and depositions would be enough to bog down Trump for the rest of his administration. Trump’s name will not be on the ballot in the midterms, but we can assume that he has an overwhelming incentive to help his party retain its congressional majorities. The problem Trump has is that he will be going against history: in 20 of the past 22 midterm elections, the president’s party has lost seats in the House. But if there is one thing we know about Trump, it is that he does not think history applies to him. His victory over the Democrats over the shutdown has likely strengthened his self-confidence Trump likes beating the odds My bet is that he will throw the kitchen sink at the midterms He will stop at nothing But he will have his work cut out for him For one thing, he will need a much higher approval rating that he has right now to have even a fighting chance in the midterm The Republican victory in the 2002 midterm owed much to the popularity of George W Bush who enjoyed an approval rating of 63% on election day The Democrats picked up 5 seats in the midterm of 1998 only because Bill Clinton had an approval rating of 66% Trump began his presidency with a respectable approval rating of 50 But it has been sliding since, reaching just 42 this week And 42 is not far from his approval rating on the election day of the 2018 midterm. In that election, the Republicans were given a drubbing, losing 42 seats in the House. So how might Trump try to pull out what seems like an impossible feat? Whatever he might do to improve his rating will have a huge impact on the outlook for financial markets in 2026 ….. Trump’s biggest problem is affordability His approval rating for his handling of inflation dropped to 35 this week (Chart 2) Trump of course blames this on the Democrats, accusing them in an interview on Fox this week of manufacturing the inflation narrative. But there are some signs that he is coming around to reality Last week he admitted that American consumers “might be paying something” for his tariffs Scott Bessent said yesterday that “substantial relief” in tariffs for coffee and bananas is coming soon Besides inflation, the job market is clearly slowing (Chart 3) Even if the Fed were to keep cutting rates, which is a big if, it is not a given that hiring will be ramping up before the midterm There is no question that the midterm will be a referendum on inflation and jobs The Trump administration has been highly activist on the economy. We should assume that Trump won’t be able to resist tinkering with the economy ahead of the midterm.
Cash Before Crash
https://youtu.be/QLIBh2UDp3Y Video Transcript Hello everyone and welcome to beat the market. Ahead of the vote on Elon Musk’s pay package last week, the reason he said it was necessary was that he didn’t feel comfortable building an army of robots if he didn’t have control of them. I think that logic is backwards. What is true is that in order to get his trillion dollar pay package, Musk needs to build an army of robots. He is arguing that in order to build an army of robots, he needs to get a trillion dollars. So what is the real reason? It shouldn’t be the money since he is already the world’s richest man. What this pay package essentially entails is a massive set of deep out of the money call options on TSLA. Do you know what kind of stocks have massive open interest in deep out of the money call options? Meme stocks. I think that Musk just wants to feel the same way that his army of meme stock trading followers do. A recent entrant to the meme stock club was OPEN. On Friday, this was hit with a dose of earnings reality, which sent it crashing below 5, before staging a recovery. Retail demand to buy dips has been an important source of support for the market. The question is whether that support is still there. I’ll come back to that, but first, let’s review David’s latest macro views. First, India stands to benefit from the looming US-China showdown. Modi has played Trump like a chess master, securing India’s strategic autonomy. The Modi premium for Indian stocks will go up in 2026. Next, the AI bubble aside, the stock market is going up because companies are laying off workers, and a reflexive wealth effect. The pushback from Powell on a December cut means that the US economy is in trouble, and the Fed will have no choice but to come to the rescue. Finally, the election results this November suggest that the Democrats have gained the upper hand in the shutdown. This means no compromise as Trump chooses to double down, and a prolonged shutdown. Last Sunday I thought the reality of the jobs market would hit, sending rates lower and creating demand for safe havens. To some degree that was true, with weak alternative jobs data on Thursday contributing to the fall in equities. This didn’t look so much as demand for safe havens as just a desire to take profit in AI trades though. Rates were little changed on the week in aggregate, but the long end underperformed as the prospect of the Supreme court striking down tariffs looms. The performance of commodities looks like growth pessimism. The systematic model doesn’t like these mixed signals, and wants to stay neutral, but what do I think? I think that no matter how hard Elon Musk tries, TSLA isn’t going to become a meme stock. TSLA may be widely held by retail investors, but with short interest at minimal levels, it is no longer in a position to get squeezed higher by aggressive purchases of calls. While GME and OPEN were rallying back sharply on Friday, TSLA struggled. What this says to me is that while meme stock traders are alive and yoloing, the broader retail universe is turning bearish. In my groups post on Friday, I discussed the reason why I think retail sentiment towards AI could be shifting. The bottom line is that the low hanging fruit in AI is to produce large volumes of material to compete for the scarce rewards of creative output such as music and video, or for scams. This high volume approach could explain why demand for computing is so high even though the evidence of success in using it from corporations is limited. I’m not the only one to have noticed that AI generated scam ads are flooding social media. If regulators do their job properly then META should get smoked on this. I’m not holding my breath on that. A simpler reason for a shift in retail sentiment could be valuation. You might disagree with the predictive power of the CAPE ratio, but if you are nearing retirement and have seen your assets balloon to a level that will allow you to do so comfortably, taking some cash out of equities looks like prudent long term risk management. Especially from a stock like TSLA, which will need to take significant risk to meet its long term targets. On Friday afternoon though, the sell off in TSLA was something of an exception. It looks to me like stocks started rallying once Europe went home for the week, which often happens. While retail sentiment has turned negative, this suggests that institutions are ready to step up. Korean equities have been a favourite trade this year. The Korean ETF EWY rallied by 100% from 50 to 100 before seeing profit taking last week. A 10% correction may have encouraged some dip buyers. Bitcoin also rallied from the open having dipped below 100k again. After nearly going negative, the premium for 3m to 1m volatility on bitcoin increased through the week. This suggests that hedges are in place and the panic is over. The rally was given a boost by the
This Fight is Different
https://youtu.be/8e3BL-JpueU Video Transcript Will the Democrats’ off-year election victories this week help end the government shutdown—or prolong it? Markets have only known the TACO Trump in his second term What if Trump the warrior shows up suddenly? What should you be doing with your money right now ….. As expected, Democrats did well in the off-year elections held this week. In Virginia, Democrat Abigail Spanberger defeated Republican Winsome Earle‑Sears to become the first female governor in the state In New Jersey, Democrat Mikie Sherrill won the governorship, defeating the Republican Jack Ciattarelli In New York City, Democrat Zohran Mamdani won the mayoral race, becoming the city’s youngest mayor in more than a hundred years In California, voters approved Proposition 50 to redraw congressional maps that will boost the US house seats held by the Democrats What was not expected was just how well the Democrats did. Abigail Spanberger won by 15 percentage points and Mikie Sherrill by 13 points Proposition 50 passed with a margin of 30% Off-year elections typically see lower turnout, but Spanberger drew a vote count in Virginia that was nearly 85% of Kemela Harris’s total last year There is no beating around the bush about what all this means: Democratic voters were fired up But fired up by what? In Virginia, New Jersey and California, polls suggest that more than half of the electorate sees their vote as sending a message to Trump (Chart 1) Whether we should view these elections as a referendum on Trump or not, their results are consistent with Trump’s rising disapproval rating. His national disapproval rating has increased by 10 points since the inauguration and by 2 points over the past week alone (Chart 2) The economy appears to be the main reason why Americans are souring on Trump The disapproval of his handling of the economy has increased by 20 points since the start of his presidency (Chart 3) Trump said this week that his second term has been the greatest nine months of the presidency Voters apparently disagree For the financial market, the million dollar question is whether the election results will force him to change course regarding his economic policies. ….. It is not an exaggeration to say that US consumer confidence has collapsed since the start of the second Trump presidency The University of Michigan consumer sentiment index has fallen 18 points since January (Chart 4) Drop of this magnitude happens usually only at the start of a recession, and not at the start of a new presidency (Chart 4) The only precedent in recent history is the first year of the second Bush presidency in 2005 (Chart 4) The major driver behind the dive in consumer confidence in 2005 was a 60% spike in oil price between January and August that year (Chart 5) In contrast, the sharp drop in consumer confidence this year is in spite of falling oil price, falling mortgage rates, and a booming stock market (Chart 6) What happened? Trump campaigned as the voice of the forgotten working class He says his trade war will help the working class. But so far tariffs have only pushed up inflation and increased layoffs (thumbnail from last week) Trump says his tariffs will lead to a resurgence in American manufacturing. But the ISM manufacturing index has been in contractionary territory since March (Chart 7) According to ADP, manufacturing shed another 3000 jobs in October Trump owes his 2024 victory to a surge in youth votes But people under 35 have been the hardest hit by the slowdown in the labor market this year Younger people also have less savings to profit from the rise of the stock market Consumer confidence among people under 35 fell sharply in October, even though that of those from 35 to 54 rose (Chart 8) The mid-term elections are still a year from now But things are not looking good for Trump and the Republican party What will happen to party unity, I wonder So far in his second term, Trump has, at least so far, maintained a firm grip on his party. Any dissent, including from Elon Musk, has been crushed This was why his Big Beautiful Bill managed to clear Congress so quickly. After the election setback this week, will Trump still be able to rule unopposed? And will the defeat prompt a quicker end to the shutdown — or cause him to dig in even further? ….. Bill Clinton famously said, “In politics, there are no permanent victories or defeats.” Nowhere is that truer than in American politics. Only a few months ago, political obituaries were being written for the Democratic Party. Suddenly, not only they are back from the dead, but the momentum appears to be on their side. Trump no doubt helped them, but this comeback is one the Democrats earned. Unlike during Trump’s first term, Democrats have steered away from personal attacks on Trump and concentrated on issue-based contrasts. This has served them well The election results this week support the view that the Democrats have gained the upper hand in the shutdown that is now the longest in US history This means they are even less likely to compromise Democratic Sen. Chris Murphy from Connecticut was quoted as saying this week that “it would be very strange if on the heels of the American people having rewarded Democrats for standing up and fighting, the Democrats surrendered without getting anything for the people we’ve been fighting for.” What about Trump? Is he more likely to compromise? In my view, the answer is no. To compromise is to accept defeat. Trump hates losing His political identify is built around winning I could be wrong but I don’t see him backing down What about the TACO Trump of the last 9 months? I think the shutdown is a very different fight than Trump’s trade war It is a much more public fight Trump can’t control and dictate the narrative like he does in his negotiations
