Do Markets Care About Trump’s Tariffs? | Macro Monday with Andreas Steno and Mikkel Rosenvold

Macro Mondays: Tariffs, AI, and Market Dynamics - A Detailed Summary

Key Concepts:

• Sector 301 Tariffs: US trade law allowing tariffs on countries with unfair trade practices.
• IEPA Tariffs: Previously existing tariffs, now deemed illegal by the Supreme Court.
• Capex (Capital Expenditure): Investments made by companies in fixed assets.
• Max 7: Refers to the Magnificent Seven tech stocks (Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, Meta).
• LLMs (Large Language Models): Artificial intelligence models designed to understand and generate human language (e.g., Claude).
• Bricks: Economic grouping including Brazil, Russia, India, China, and South Africa.
• TGA (Treasury General Account): The US Treasury’s main operating account at the Federal Reserve.

I. Tariff Developments & Geopolitical Implications

The discussion centered on the recent US Supreme Court ruling deeming certain IEPA tariffs illegal and the subsequent reaction from the Trump administration. The ruling prompted the issuance of broader, sector 1-22 tariffs at 10%, potentially rising to 15%, impacting global trade dynamics.

• Winners & Losers: Initial analysis suggests Brazil, China, India, and the BRICS nations benefit, while European and East Asian partners face disproportionate impact. Canada and Mexico are also positioned as winners.
• Preparedness vs. Reaction: Andreas questioned whether the new tariffs were strategically planned or a knee-jerk response to the Supreme Court decision. He believes the initial tariff rates varied by country (higher for China and India) due to specific geopolitical pressures (energy purchases from Russia, pressure on Lula’s administration in Brazil).
• EU Concerns: The EU expressed dissatisfaction, arguing that the new tariffs invalidate existing trade deals, raising questions about ratification and future cooperation.
• Congressional Approval: The legality of the tariffs hinges on Congressional approval, which is uncertain, particularly nearing the midterm elections. Trump’s desire for unilateral control over tariffs clashes with the need for legislative backing. Trump publicly stated his belief that Congressional approval is not required, citing previous rulings.
• China’s Position: The discussion highlighted China’s potential to retaliate, potentially through supply chain weaponization (specifically rare earth elements), mirroring past actions. The absence of a clear US response mechanism to such actions is a concern. Chinese state media signals a strengthened negotiating position ahead of the April meeting with the US.
• Fiscal Impact: The new tariffs are expected to have a negligible impact on overall US GDP (approximately 0.1-0.15 percentage points), and the impact on inflation is considered minimal, despite market anxieties.

II. Macroeconomic Outlook & AI-Driven Capex

The conversation shifted to the broader macroeconomic picture, focusing on the current capex (capital expenditure) cycle and the role of AI.

• Capex Buildout: Current capex levels are comparable to those preceding the year 2000 dot-com bubble, but unlike that period, market returns on this investment are currently weak.
• Market Reaction: The market is exhibiting a conservative approach, with Max 7 stocks underperforming and a lack of speculative frenzy. Margin debt relative to market capitalization is significantly lower than in previous bubbles.
• Value Trade in Max 7: Andreas argued that the Max 7 stocks now represent a value trade, given their current valuations and potential for future growth. He noted that 493 of the 500 S&P 500 stocks have outperformed the Max 7 in 2024.
• AI Commoditization Concerns: The consensus view is that AI will become commoditized, limiting potential profits. However, Andreas believes the market is overly focused on the downside risks and neglecting the potential upside.
• LLM Accuracy & Implementation: Discussion centered on the practical application of Large Language Models (LLMs) like Claude. The point was made that expecting 100% accuracy from LLMs is unrealistic, mirroring the expectations for human performance. The focus should be on leveraging LLMs for initial tasks, with human oversight for verification.

III. Treasury Dynamics & Liquidity

A brief discussion touched upon the potential impact of potential tariff refunds on the Treasury General Account (TGA) and the anticipated influx of liquidity.

• TGA Impact: Potential refunds of $151 billion could reduce the expected liquidity boost from the TGA drawdown.
• Timeline Uncertainty: The timeline for processing refunds is uncertain and could take considerable time.

Notable Quotes:

• “The market keeps expecting this [tariffs] to have a big impact on macro and it doesn't.” – Andreas
• “You’re completely missing the train if you think this [LLM accuracy] is supposed to have a 100% hit ratio.” – Miguel
• “I actually think it’s a strong value trade to be long the Max 7s now.” – Andreas
• “The market is extremely conservative…and in my opinion also too conservative.” – Andreas

Technical Terms & Explanations:

• Sector 1-22 Tariffs: Broad tariffs imposed by the US administration.
• Weaponization of Supply Chain: Using control over critical resources (like rare earth elements) as a geopolitical tool.
• Thematic Investing: Focusing investments on specific trends or themes (e.g., AI).
• Margin Debt: Borrowing money to invest in the stock market.

Logical Connections:

The discussion flowed logically from the immediate impact of the tariff ruling to its broader geopolitical implications, then transitioned to the macroeconomic context and the role of AI. The conversation highlighted the interplay between trade policy, market sentiment, and technological innovation.

Data & Statistics:

• Tariffs related to the Supreme Court ruling accounted for over half of the total US tariff intake.
• Current capex levels are comparable to those preceding the year 2000.
• Margin debt is currently 25% of market capitalization, significantly lower than in previous bubbles.
• 493 of the 500 S&P 500 stocks have outperformed the Max 7 in 2024.

Synthesis/Conclusion:

The Macro Mondays discussion painted a picture of a complex and uncertain global landscape. While the tariff developments sparked immediate market anxieties, the speakers argued that the direct macroeconomic impact is likely to be limited. The more significant concern lies in the potential for escalating trade tensions with China and the impact on supply chains. Despite the current market skepticism, Andreas believes the AI-driven capex cycle presents a compelling value opportunity, particularly in the Max 7 stocks. The overall message was one of cautious optimism, emphasizing the need for vigilance and a nuanced understanding of the evolving macroeconomic environment.