Three surprises that might spook the markets

0:06Pushkin. You know what? The Rolling Stones had a point when they sang that you can't always get what you want. The supposedly all-powerful Donald J. Trump is figuring this out too. What he can get is his big, beautiful budget, which managed to get through Congress a week or so ago, warts and all. His radical rewiring of global trade is taking a little bit longer, though. Right about now is supposed to be the end of the delay on the super-aggressive trade taxes he outlined back in April. And yet now we have, surprise, surprise, another delay. albeit with some very punchy tariffs outlined for Japan and South Korea.

0:49Now, listeners, if you feel like you're losing your marbles and you're trapped in Groundhog Day going round and round in circles, then I hear you. I'm exactly the same. So today on the show, we're asking, what ties these two major policy platforms together? And crucially, for nerds like us, what markets make of it all? This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist here at FT Towers in London, the world's greatest city. And I'm joined down the line from the inferior New York City by Admiral Robert Armstrong from the Unhedged Newsletter and his able deckhand, Aidan Reiter.

1:30Or what is left of him after losing all the moisture in his body on a roasting hot train this morning. It's true. The good ship unhedged is in New York waters, and it is on fire because the temperature here is enough just to have wood spontaneously combust. And Rob and I are on opposite sides of the same train line, and that same train line was not working today. Was not working today. So it was a rough commute. It was a classic July New York commute. Yikes. The odors, Katie. The odors. Aidan, if you're trapped in a small room with Rob right now, then I sleep as high. Yes. So listen, you two, for those of us who are blissfully unaware of what Uncle Sam is up to, get us up to speed here.

2:18First of all, Aidan, tell me about this budget. Yeah, the U.S. Congress recently passed Trump's big, beautiful bill, which was kind of his all-in-one big budget package. It was signed into law by the president on July 4th, American Independence Day. And it is a big whopper of a bill. Essentially, the main component is it keeps Trump's tax cuts from his first term on the books and shrines them into law. And then it adds other random tax cuts he promised on the campaign trail. No tax on tips and those types of promises. It also slashes other programs that the government had given out. So it makes changes to how the government pays for health care for poor people.

2:59It changes the government's previous electric vehicle subsidies and various electric manufacturing subsidies. And then on top of that, it also raises the U.S. debt limit. So it's just like all the things you could imagine a bill would do are squeezed into this package. I think sometimes people on this side of the pond don't realize, but it's literally called the big, the one big beautiful budget act. Like, what's the exact name of it? Like, this isn't just an exaggeration or just hyperbole. This is literally the name on the piece of paper. It is the BBB, the big, beautiful bill, which is also what the Biden administration had their own BBB, which was build back better.

3:37So they're copying a little bit. I do like a bit of alliteration. I will say that in defense of the bill. Yeah. And, you know, it's also a really great allusion to what America's credit rating will be in the future. Hey. So the most important thing is that it increases the deficit just a few months after we had what might be described as a kind of fiscal scare. And now we're making the link to the tariff policy. After Trump announced the Liberation Day tariffs on that weird piece of poster board in the Rose Garden, markets suddenly had a little panic about the fiscal future of the United States and bond yields rose and the dollar fell.

4:27That has since subsided, that scare. And the Republican Party, by a hair, has passed a bill that pretty significantly increases the deficit and the debt in the future. So we're going for it, man. We did not, as a country, get scared straight. Yeah. To put this in context, this bill is expected to add$3 to$4 trillion in debt over the next 10 years on top of already the U.S.'s pretty shaky debt trajectory. What is our total debt right now? Do we know that? Our total debt is$36.1 trillion. Yeah. So another four on top of that is non-trivial. It's pushing it by 10 percent. Yeah, over the course of 10 years.

5:14And we should note that a lot of that spending is grouped in the next four years because the tax cuts like no tax on tips, no tax on overtime are just bunched into the Trump administration. And they also they phased out more of the cuts to be later on. Yeah. So you're really spending a lot in the next couple of years. And then it pitters out over 2028 to 2034. I think you mean Peters out. Peters. I don't know what Peter is. Something. Like pitter bread. What's wrong with Peter though? But with budget. here's the thing guys like so the truest thing that people say in markets is that deficits don't matter until they do and it's it's so true like you know deficit levels in major economies around the world the amount of borrowing that the big governments around the world are doing it's just been ratcheting higher and higher and higher for years and every now and then like investors have a bit of a freak out about it.

6:08Like right now, it strikes me that there is at most a very moderate freak out going on around U.S. deficits. As I said, there was this freak out in April and it was notable and everybody thought it was all over. The U.S. exceptionalism is finished. Foreigners don't trust the dollar. in the last month or so, there is absolutely 0.00 evidence that that America is dead trade continues. The world, you know, the correlations are back in place. I know you love it when America has trouble, Katie. I know this about you. You are an America hater, but the rest of the world not with you right now, Katie.

6:55It's just not. Well, you know, reasonable people can disagree about this. There's definitely a backing away from the dollar going on here. But I will grant you that U.S. government bonds are not on fire. I mean, there has been a bit of a pickup in yields since the big beautiful bill was passed. That means that prices are going down, but it's not dramatic. No. And if you look at a one-year chart, it's not even there. Like the 10-year bond and the two-year bond are right in the middle. The 10-year bond is right in the middle of the trading pattern it's been in for six or eight months. The two-year, the trading pattern, it's been for three months.

7:37They did tick up a bit, but from the perspective of a mile up, you can't even see this thing. Yeah, I mean, there was a 13 basis point increase over the last, what, four days since this bill was passed. That's not nothing. I mean, the market has registered it. It's just not panicking. But yields are still lower than they were in the middle of June, and they're still a lot lower than they were in January. So 13 basis points to humans, that's 0.13 percentage points. And I know that doesn't sound very much. It's quite a lot in Bondland, but it's not disastrous. For a week, but it's not a lot. Anyway, I'm not trying to justify.

8:14I'm not saying the market is telling us none of this is a problem. What I'm saying is, and maybe we need to try to explain this, the market doesn't much care. And risk appetites for kooky stuff like equities say are quite good. We've had a couple of sort of sluggish days on the market, but they're quite good. Yeah. Stock markets are doing okay. Yeah. Kathy Woods, ARK Fund, doing quite well, thank you. For listeners who are lucky to not know what the ARK fund is, it is a very speculative, tech-heavy, very volatile fund. People love it. It's full of, like, wackadoodle tech, you know, mad punts, and it's doing fine.

8:56I mean, the explanation for the markets in difference may be as simple and dumb as this. Markets that go up tend to keep going up. and the momentum just turned out to be more important than the news out of the budget and the news out of the tariffs. I guess we haven't really talked about the tariffs yet. I think on the budget point, and I think it just fits into this broader theme, is investors and other people don't really know what to make at this moment. We're not really sure where tariffs will be. We're not really sure what we'll go through. You could argue that, yes, this is significantly increasing the U.S.

9:30debt trajectory, But there's A, so much baked into this bill and B, so much uneasiness and uncertainty about the other parts of the U.S. economy that it's very hard to make a judgment on how much this debt will actually play into the broader economic outlook going forward. Similarly on tariffs, I would argue. We're sitting there and look, tariff inflation has not, except in a few nichey cases, tariff inflation doesn't seem to be rearing its head. And we don't know where it will. And indeed, we don't know how much of it will rear its head. So when Trump comes out, as he did yesterday, and said, we're going to put, was it 20 % or 25 % on Korea and South Korea?

10:08It was about 25, yeah. 25. the market's like, well, maybe that won't happen. And maybe if it does happen, it won't matter that much. And there is something to the maybe it won't matter that much point. I mean, there is for Japan and Korea specifically, there is the argument that it doesn't matter that much already. I mean, the sector specific tariffs, autos, pharmaceuticals, et cetera, are in place and unchanged by those new Trump tariffs on the two countries. And most of the U.S.'s imports from Japan and Korea are cars. Yeah. So already covered. Already covered. Electronics already accepted. The effective tariff rate is, I believe, goes from like 15.5 to 16 percent.

10:48Like it's really nothing. That's from Paul Ashworth. Yeah. That calculation comes from Paul. At Capital Economics, who did some quick math on that. That's what he found. Got to love a bit of math. So, yeah. So there was a moment yesterday where, I'll be honest, I was watching the tennis on the telly where all of a sudden this news broke about these new tariff levels. that Trump is threatening or doing, I don't even know, against Japan and South Korea. But the main point is that he was supposed to kind of end the pause on the really aggressive tariffs like tomorrow, July the 9th. And now, surprise, surprise, it's been pushed out to some time in August.

11:29I mean, how much? And let it be noted, Katie, it's worse than that because Scott Bessent, the Treasury Secretary and theoretically the adult in the room in Trump economic circles. He keeps mentioning Labor Day, which is the first of September. So it may not even be August, maybe September. There'll be a nip in the air. We'll be drinking pumpkin lattes by the time any of these Trump tariffs get resolved. At best. Down with pumpkin spice drinks. I know it's early in the year to be getting exercised about this, but they are bad and wrong. Anyway, we digress. So anyway, it seems like these deadlines just get kicked on forever.

12:11And listeners will know that I think they will be just the kicking will never stop. Yeah, that I think the the deadline extensions, the taco in the can kicking, this is going to be an infinite game. And there was this Politico article yesterday, that basically made the point that for Trump, this is fun. Why would he have a hard deadline? You know, people, he keeps the camera on him and he's just noodling around with these numbers. I'm going to get this country or that country. And he gets to write, frankly, semi-literate letters to the president of Korea and Japan and with weird capitalization throughout.

12:55Such strange capitalization. It's all good fun for him. And why would he come to a decision when he could be fiddling around and having a good time instead? I think there's something to that thesis, frankly. Also, I think it's just part of his character. One of his former aides said that haranguing the president to talk about policy was like gathering a bunch of squirrels. Like he's just a guy whose mind wanders in a lot of different ways. You can see it in the way he speaks. So why would he stick to a deadline? That's not how he plays. Yeah. Someone put it to me the other day. It's a bit like, you know, like a kind of game show where there's a kind of wheel and you spin it and you see where your tariff level ends up based completely at random based on a spinning wheel.

13:37It sort of feels a little bit like that. It does. But let me ask you, you mentioned that all this inflation that was supposed to come from tariffs is kind of MIA, right? It's kind of like missing in action. We don't know where all this inflation is, but it could hit like kind of any minute. in addition you've got so trump outlined some reasonably aggressive tariffs like we were just saying against japan and south korea and the market's gone yeah yeah whatever whatever i feel like that kind of level of yeah yeah whatever and the fact that the the damage isn't yet coming through in the data is actually potentially a little bit dangerous because that really emboldens trump to say see told you doesn't matter doesn't bring inflation doesn't trash the markets i'm going to double down.

14:23I mean, of course, we've talked a lot on this show about taco. Trump always chickens out, but there's nothing for him to chicken out about. In other words, so long as the market doesn't really believe or credit the thing he says, it won't challenge him. Right. The point about the early days, going back to April again, is he made a policy pronouncement, The market freaked. He folded. Now the market's not even freaking anymore. So there's no folding. So he pushes the game further. Right. So it's kind of almost a game theoretic argument. I agree with you. It does put us in a dangerous situation because it's almost like the two sides, meaning the administration and the market, are almost searching for where the boundary is, where trouble actually starts.

15:12They're going to, you know, they're kind of feeling around for where there's actual, you know, where the electric fence is. It's out there somewhere. And if we keep groping around, we'll put our hand on it eventually. This is by definition a ridiculous exercise because you don't know where shocks are going to come from until they do. But Rob, if someone did ask you a stupid question on a podcast about where you think the summer shock is going to come from, then what would you say? Katie, as you know to your sorrow, I've been saying every three months for five years that this coming earnings season is particularly important.

15:49But just because it hasn't been all that important the last 20 times doesn't mean I won't say it again. We know that profit growth in the S &P 500 is slowing. If it turns out to be slowing faster than we expected, I think that could put markets right on edge. That's candidate number one for me. candidate number two is I think there is a chance that the trade negotiations between Europe and the U.S., which I think are the big ones, like that's the big daddy of all these deals or so-called deals. If that turns ugly, suddenly all these larger questions, which we've managed to kind of press into our subconscious, will be at the forefront of our minds.

16:31Yeah, that's reasonable. Aidan, Rob selfishly grabbed two there, but what would you go for? A weak treasury auction. It doesn't even have to be that weak. It's just one where it looks like foreign investors have stepped away meaningfully. We sort of had that early on post-liberation day, and we had one other weak treasury auction since then. If we have another, especially now that this budget bill is through, I think that would be very concerning. And we've seen, again, some signs around the world that people might not want to buy what the U.S. is selling. So there's, you know, the movements in Taiwan's currency, which suggests that Taiwanese central bank and Taiwanese life insurers have turned away from treasuries.

17:07There's little things around the edges like that that could add up to something concerning. Aiden, that's not going to happen. It's just a secret. Treasuries are going to be fine. I'm Team Aidan here, and I think if your most likely candidate for causing some sort of upset like that is Japan, and let's not forget that last year's summer shock came from Japan pretty much at random. It does have form for sparking weird market flip-outs over the summer that correct themselves, but are pretty unpleasant while they last. Japan is the world's largest holder of US government bonds, and Donald Trump is going out of its way to annoy Japan.

17:45It doesn't take a genius to see how this can go horribly wrong quite quickly. If they were to suggest that, okay, maybe we don't want your stinking bonds if you're going to slap this horrible tariff on us. Then Rob's darling US Treasury market gets a little bit sticky and summer gets a little bit unpleasant. And let's hope that I'm sitting on a sun lounger when it all goes wrong. Leave you guys to it. In the meantime, listeners, we're going to be back in one sec with Longshot.

18:23Right, let's do this. 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. Aidan, why don't you go first? I'm short regressive tax policy. You know, regardless of politics, I think it's bad form to give massive tax cuts to the wealthiest Americans and to take vital services like Medicaid away from the poorest Americans. not just from a political equality standpoint, just from an economic growth standpoint. I think the evidence around trickle-down economics is very dubious and I think been fairly disproven multiple times. And I think especially when you have most of your political base is people in the lower quintiles of income.

19:01It seems just a strange political proposition. So woke, these young people. Someone who works on this show is kind of a nice person, Katie. I never thought that that development would happen. Yeah, we need someone nice and it's certainly not you. What have you got, Rob? I am short Boston Consulting Group. Oh. My colleague, Stephen Foley, who is a brilliant reporter, broke this story about how Boston Consulting Group was basically working on a project in Gaza that involved basically the relocation of people. Without going into the details, this is something that consultants should not have approached with a 10-foot pole.

19:43The Gaza Riviera. And yet they did. Yeah, it was the Gaza Riviera thing. And, you know, whatever you think about this situation, I am consistently surprised by the way that the big consultancies will blithely put their brands at risk, which is really all they have. Yeah. They'll blithely put their brands at risk getting involved in projects that just look awful. Yeah. Where is the moral compass, man? Yeah. Listeners, if you haven't read this stuff yet, read it and get yourself a nice strong drink before you do. It's a lot. On a much lighter note, I am short hot yoga networking, which my colleague Emma Jacobs has been writing about.

20:27This is wrong on all fronts. First of all, yoga, no. Hot yoga, hell no. So hot yoga networking, like sort of organized fun with like colleagues or clients or whatever. Triple damnation. Hell no. I'm here for like sporting networking. So I went to the JP Morgan corporate challenge, like a five, five ish K run around Battersea Park. That's fine. But hot yoga, you draw the line at hot yoga. Hot yoga is a bridge way too far. It's a huge no from me. listeners bear this in mind no hot yoga definitely no LinkedIn flavoured hot yoga bad so please avoid doing that between now and Thursday when we will be back in your ears if you're listening from New York in particular stay cool in the meantime 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 Special thanks to Laura Clark, Alastair 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

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