The year ahead: tariffs, taxes and Trump

0:092025 has only just started, but it's demonstrating a pet theory of mine in markets, which is no one has the slightest idea what's going on. What larks? Shush. Do we get full fat President Trump 2.0 with massive trade tariffs and huge deportation programs? Or were these negotiating tactics and red meat for the voters? There's a lot hanging on those questions for stocks and bonds and all the other stuff in between. And really, truly, honestly, we don't know. So buckle up, listeners. It's going to be a lively year one way or another. This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin.

0:51I'm Katie Martin, a partied out markets columnist here at FT Towers in London. And I'm joined down the line from New York by Flight Lieutenant Robert Armstrong from the Unhedged newsletter division. Rob, we are back, baby. We're back. You're probably doing dry January. Aren't you a dry January girl? I'm one of those tedious people, yes. Did you drink like a damn pirate over the holiday season to get ready for your sobriety? I did. I prepared thoroughly. Now, that reminds me, at an extremely classy and in no way drunken New Year's party that I attended, someone told me that he thought you sounded like a man who drinks martinis.

1:32I'm glad it's coming through because this voice cost me a lot of martinis. Guilty as charged. Now, not necessarily when we're consuming martinis, but you and I talk to a lot of professional investors and markets analysts. And one thing that strikes me as funny at the moment is that everyone's got a really strong narrative around, you know, American exceptionalism, rah-rah US stocks, all that sort of thing. But at the same time, no one ever knows what's going to happen next. Yes. And importantly, the strong opinions we hear don't all agree. The strong opinions don't agree. And people really, really don't know how this year is going to shape up.

2:15I mean, what sort of level of kind of slightly frazzled uncertainty are you coming across? OK, so the main point where I hear question marks mixed in with divergent strong opinions is on tariffs. So there's two questions. What will they be? And on some wild guess on what they will be, how much impact they will have on A, the economy and B, corporate profits. The views you hear are all over the map. They're all over the place. But one thing that is definitely clear is that tariffs in some form are coming. So Donald Trump, one of the things that he's talked about for like as long as I've been alive is trade tariffs.

3:01You've got to tax imports. Yes. And so we know that something is coming. He cannot do nothing. That would look unbearably bad at this point. Yeah. So that's not going to happen. We know that we're going to get some sort of tariffs, but it's going to vary from one country to the next. It might vary from one sector to the next. It could be from anything from like 60 % tariffs on Chinese imports to 20 % on the rest of the world. On everything. On everything from coffee to carburetors to circuits. And that's just the thing starting with C. Markets people care about this because all things being equal, that cost will get passed on to consumers.

3:38And that has to be inflationary. And we had just got to the point where the inflation monster had almost been put back in its box. And this is a big risk to that, right? Okay. It's actually not 100 % clear how inflationary they are. That's an area of debate. It does increase prices. Somebody has to pay more for something if a tariff comes in. So question number one is how much does the producer pay? In other words, cut their prices to offset the tariff. How much does the consumer have to pay? And that mix will probably vary product to product. Are there substitutes? Can you switch to something domestic?

4:14So you have a whole set of questions there. But it may not be in the inflationary in terms of sparking a persistent rise in prices. It might be a kind of supply shock, one-time price increase. The Fed doesn't do anything in response. Central banks don't do anything in response because it's a one-time shock, which the theory says they're supposed to ignore. So I'm actually in the camp who says, yes, it makes things more expensive. But no, in the sense of persistent inflation, it's not inflationary, probably. Tariffs. That's my guess. The other thing that you don't know and I don't know and nobody knows is, is he like serious about this whole like mass deportations thing?

4:52Because we could be talking about targeted deportations of like particular individuals or we could be talking about really large numbers of people that would be really destabilizing for the labor market in the States, which again, all things being equal would be inflationary. Now, that might be more inflationary because in the sense of persistent inflation, for the simple reason that wage increases do have this feature where they can be self-perpetuating. A company has to raise wages to attract employees. The company raises prices. Workers at large see prices go up. They demand a wage increase.

5:33The cycle begins again, and off you go. So if he's serious about really changing the immigration picture in the United States, that feels more inflationary to me in the sense of persistent inflation than the tariff thing. But it's so different. You can write tariffs into a law, right? Yeah. Deporting people, you have to physically go get them and move them around. You can't do it with paperwork, you know? So I just feel like the deportation idea, the immigration limits idea, these are like real meat world problems. They're not digital. They're not legislative. Yeah, he doesn't need Congress for the tariffs.

6:16He can do that day one in office. So let's just spell it out a little bit. Why does this matter for markets? So all things being equal, heavy tariffs and large-scale deportations mean a stronger dollar, because that's generally what you get in inflationary situations. It means lower bond prices and higher bond yields. Again, that's just how inflation and the bond markets kind of interact. And we had a nice illustration of this the other day, Katie. Thank you. Washington Post and Donald Trump proving my point just on Monday, right? Because there was a piece in the Washington Post that was effectively saying these tariffs that are going to come through, everyone chill out a little bit.

6:58They're going to be targeted. They're going to be kind of sector specific. They're not necessarily going to be heavy handed. And the market liked that, or at least it responded to it. The dollar weakened. You said that tariffs and the dollar are linked and the dollar promptly fell 1 % when this story hit the wire, which was a lot. and then the president to be heard about it and declared it to be fake news. And the dollar recovered, but only some. So in addition to investors having literally not a Scooby, do you know what I mean by that? No. Scooby is a cartoon character here in America. You lived in the UK long enough to know what this means, I'm sorry.

7:36So haven't got a Scooby-Doo? Haven't got a clue? Ah, yes. Haven't got a Scooby. That's very clear. So investors haven't got a scooby how this is going to pan out. In addition, Donald Trump loves his phone. He loves his social media stuff. He loves making policy pronouncements in completely randomly timed points in the day. It's policy by tweet or policy by post or whatever. And that, again, just injects a lot more intraday volatility into what markets are going to do over the course of the next four years. eventually policy is going to get made, right? Sometime in the middle of next year, even in the early months of this year, I should say, somebody's going to make a policy or propose one and people are going to start.

8:27So the picture will become somewhat clearer then, but not entirely even then. There'll be a real fight. In your recent column, which I thought was very good, the year of investing dangerously, there's a fellow in there who's saying, I can see this turning out well, or I can see this turning out badly, but I can't see the meh outcome. The kind of, eh, nothing really happens. Meh. I'm a meh. I think meh might be the central forecast. I mean, it may not be likely. It may be the most likely outcome you can think of. Like the kind of middle 40 % of the distribution, 50 % of the distribution is meh.

9:09Here's the argument for meh. To begin with, the president-elect likes talking big, but he hates being unpopular, particularly with markets. So when he actually proposes some crazy thing, markets, and in particular the bond market, will scold him severely. and probably he will pull back in response. You can't tweet the bond market back into line. That's point number one. Point number two, he has thin majorities in both houses of Congress. And already we have seen members of the Republican coalition demonstrate willingness to make a pain in the ass of themselves. Right. So that is another constraint.

9:56It's hard to get this stuff done. So my main bet is that Trump 2 looks a bit like Trump 1. You get a tax cut of some flavor. You get tariffs of some flavor. You get immigration controls of some flavor. But all of it is pretty weak sauce. They are just strong enough to make it look like he's done something, but no stronger. I'm not ruling out bananas world, cats and dogs living together. and et cetera, et cetera. But I think the main hypothesis has to be we fumble through somewhat chaotically on a middle path. And we get some sort of meh outcome. Meh. The outcome is a bit meh. Yeah. The argument against meh is we are running into this field of upturned rakes with markets like but with markets in quite an interesting position right we've just had 20 gains for two years on the bounce in the main u.s stock index the s p 500 you've got corporate bonds that are paying out almost nothing more than government bonds and All those spreads are really tight.

11:15So the markets are already super happy. You could argue they've already priced in a lot of kind of deregulatory tax cutting Trump. But that means, as a point that came out yesterday from a Fed official, Lisa Cook, she's governor, who was saying that valuations are elevated in a number of asset classes, including equity and corporate debt markets. True. And she went on to say that means the markets are therefore susceptible to large declines, which could result from bad economic news or from a change in investor sentiment. And that's the point, right? There's not a lot of room for error. But there's a lot of potential for error here.

11:55And that's what to me means that 2025 is going to be quite lively. When you have valuations where they are and something bad happens, markets are more sensitive. And the period I think of that might be similar is, remember that terrible fourth quarter of 2018, Katie? I do. Where for no super special reason, stocks just came off. They recovered. It was fine. It was a one quarter event, but it was like the stock market had been on a long run. The rate situation was a little unclear as it is now. And it was just like, yeah, let's just chop 15 % off the price of everything here. Yeah. And, you know, there's no reason we couldn't have one of those.

12:45And that's not like, that's not 1999 or 2008. But it's like, you might have a little swoon here and there as people are like, do I really want to pay 23 times earnings for US stocks? I don't rule out meh. But I do think that that's a very narrow path that markets are going to have to sort of tiptoe along for the course of this year that feels unlikely to me. I think it's going to be a lively one. And I think there's going to be a lot of quite big moves that happen from one hour to the next or one day to the next or one week to the next that ultimately mean precisely nothing. It's just noise. And so I think whether you're a professional investor or whether you're just sort of hobbying around with some extra money that you've got, you're going to have to really hold your nerve here and be prepared to look through some stupid moments of just nonsense market moves.

13:44Right. I think the kind of fourth quarter 2018 moment comes. Here, I'm going to make a fearless prediction, which Katie, your familiarity with my predictions will tell you that me saying this means it won't happen. But, you know, the Fed in December told everybody that it was going to plan to be a little more hawkish, keep rates a little higher than people had anticipated before that meeting. The market adjusted, but still the market expects. How many cuts do they expect now? Two, one and a half, two and a half. One and a half to two. Something like that. Yeah, one and a half to two. But much further out into the year than they were priced, you know, a few weeks ago.

14:26But there could. You could. It's so easy with inflation still running above target to imagine the scenario where people realize one day that the Fed isn't going to cut at all in 2025. Maybe. And don't say this loud or we'll frighten people, but maybe it might have to raise rates again this calendar year. Yes. Unlikely, but I wouldn't rule it out. Yes, because there's some parts of the economy that are running pretty hot. so that could happen at which point and if that really becomes the consensus view no cuts in 25 it would be weird if there was not a risk asset readjustment upon that realization then we'd really be in a euphoric situation this kind of um oh you know there's lots of uncertainty in the macro outlook stuff look this is this is standard right this is like no one ever knows what the macro outlook really is.

15:19But just looking back over the period where you've been looking at markets really closely, how unusual does this current period feel in terms of the levels of uncertainty we're looking at? First comparison I would make is to the period immediately after Trump was elected for the first time. And markets were like, you know what, whatever else happens here, we're getting us some tax cuts. And the market just went straight up. Not wrong. And that happened for like a couple weeks after Trump got elected for the second time. You know, small caps went bananas and all this other stuff. And it's all kind of retraced.

16:00It is different from Trump one, notably different. Yeah. You know, where with a main feature of the policy package was well understood. and very importantly inflation wasn't in the picture valuations weren't as high all the stuff you went through weren't the case so that's the contrast what about you katie is there any moment that sticks out in your mind it's like that's when we kind of knew things no i don't remember ever knowing anything uh but yeah the obvious parallel is the first time trump came to power and this definitely does feel different. But so have you bought a tin hat? I think as a US-based investor, as I intimated before, the highest probability event is, I said, that we muddle through.

16:52But as I've said, I think on the show before, you know, I invest 100 % passively. And so, you know, all I can control is my allocation in kind of asset classes. I have more cash than I usually do right now. And I'm happy. Most of the times in my life, I end up regretting when I have more cash, but now I get a yield on cash. Squirreled away the safe stuff. Yeah. Yeah. No, that safe stuff has been a disaster for most of the last two decades or a decade and a half. But now I feel happy about that, right? Like I still have, you know, my main asset is still American stocks, but I'm holding a bunch more cash than I usually do or some more cash than I usually do.

17:34And I feel good about that. That is my tin hat. and I can earn 2 % real return on cash right now. So that ain't nothing. That ain't nothing. Okay, so I'm going to go and buy a tin hat. You're going to go and buy a red hat with meh written on it. And we will see how these predictions pan out over the next 12 months. But we're going to be back in a sec with Longshot.

18:05right now it's time for long short that part of the show where we go long a thing we love or short a thing we hate rob what you got i got a weird long for you i was thinking about this over the holiday season i think i am long jewelry on men as you know i'm a style columnist sometimes Yes. And I was looking at these Christmas parties on all these jewels that women were wearing, and I was thinking, it's nice. You know, it's nice to be decorated. And I have a wedding ring, a$20 watch, and some cufflinks. That is the Armstrong jewelry collection. You know what I mean? I'm thinking like 1990s, like massive gold chain.

18:46I don't know. Oh, this is why I like the idea of having a piece of jewelry that's not a watch, basically. I don't know what it is, but I think I want to become a man who wears a piece of jewelry. And I leave it to listeners to tell me what it should be. Mrs. Armstrong, you have your instructions. Mrs. Armstrong thinks this is a terrible idea, obviously. I'm generally team Mrs. Armstrong, I've got to say. but I hope that you've got your request. She thinks this is evidence of her husband becoming a little bit strange in his middle age. So I am short of and I wish everyone would shut up about air fryers.

19:32Everyone is going on and on about sodding air fryers and they're just like small ovens. It's not like a lifestyle. I just, people are going on about them too much. I'm over it. I was in Target over the holidays with a British friend of mine named Jonathan Jones, who runs a pub you might know called the Anchor and Hope over there in London. Yeah. You know, he's been the cook there for 20 years. And we're walking around Target and there is a big stack of air fryers there. Yes. And Jones just looks at them with the most withering look of disdain. I need to meet this man. He's like, it's just a small oven.

20:11It's just a small oven. You don't need to make this the main thing about your personality. Stop going on about air fryers. This has been bothering me for months and I finally snapped. So we're buying jewelry and we're selling air fryers. I like that portfolio for 25. Listeners, with this kind of lively debate and content essential for your life, we're going to be back in your feed on Thursday. So listen up then. Unhedged is produced by Jake Harper and edited by Brian Erstad. Our executive producer is Jacob Goldstein. We had additional help from Topher Forges. Cheryl Brumley is the FT's global head of audio.

20:51Special thanks to Laura Clark, Alistair Mackey, Greta Cohn and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Katie Martin. Thanks for listening.

21:14We'll be right back.