This is an audio transcript of the Unhedged podcast episode: ‘Surveying the wreckage’
Katie Martin
Boys and girls, are you not entertained? Markets have gone properly loopy since Donald Trump’s so-called liberation day, when he dropped trade tariffs on every non-American man, woman and penguin on earth.
[MUSIC PLAYING]
Stocks got fried, there’s weird stuff going on in bonds and the dollar, we’ve got it all. Now today is Tuesday and it’s calmed down a fair bit, but if you think it’s all over then you are braver than me. Today on the show we’re asking: are we there yet? Is it safe to dip a toe back into stocks? This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I’m Katie Martin, a markets columnist at FT towers in lovely, sane, sunny London. And I’m joined down the line by that guy off of the Unhedged newsletter in New York, the Reverend Robert Armstrong.
Robert Armstrong
Peace be upon you, my sister. (Laughter)
Katie Martin
(Laughter) I mean, are you guys over there OK? ’Cause, like, I turn my back for a week, I had Covid number six, goddamn it. It really took me out.
Robert Armstrong
I just can’t believe it. But the takeaway is that Covid has tried to kill you six times, and six times it has failed. Katie Martin, undefeated, untied. Unbelievable.
Katie Martin
One of the Covids that I had really took me out. This latest one was also not pleasant. Anyway, it’s very boring, but in my absence, first of all, markets completely lost the plot.
Robert Armstrong
They did.
Katie Martin
And secondly, you opened up this podcast last week by reading from the Bible: Revelations 9.
Robert Armstrong
Things got worse after I made reference to the apocalypse. So that reading turned out to be prescient.
Katie Martin
Well, I was sort of, you know, lying around, suffering with Covid, thinking: have I overdone the codeine? What is going on here? Rob is reading from the Bible. Did I miss a memo from on high saying all FT podcasts must now (inaudible) with a religious reading?
Robert Armstrong
Things fell apart while you were gone.
Katie Martin
Yes. Let’s sum up the way in which things fell apart. So if you have been suffering with Covid or perhaps living in a cave for the past 10 days or so, then you will be unaware that Donald Trump did what he has said very clearly for like 40 years that he wanted to do, which is he brought in massive trade tariffs against every other country on earth, much higher tariffs than everyone was expecting, and markets no likey. Markets no likey at all. Like, there were some days, you know, Thursday, Friday, last week, the start of this week, where some of the moves lower in stocks, particularly US stocks, were brutal.
Robert Armstrong
And the volatility was unbelievable, which is the whole ’nother risk factor you have to think about. Back in religious mode, Katie, I am entering the booth to make my confession, which is, as you’ll remember, I committed a grave sin weeks or months ago, which was to predict that from a markets and economy point of view, the Trump presidency would be a bit meh. And I think I confess now on my knees that the meh hypothesis has been disconfirmed by the last week.
Katie Martin
I mean, in retrospect, I don’t know what on earth led you to this hypothesis in the first place. Nonetheless . . .
Robert Armstrong
Because the first presidency was kind of meh at the end of the day. And let me just say, it may get more boring from here. There may be backing down. We can discuss that later. But we may revert to the meh mean as weeks pass. I wanna keep that possibility open.
Katie Martin
But so, like, the past few days really have been pretty wild. I heard a good little nickname today. So you know Treasury Secretary Scott Bessent.
Robert Armstrong
I do.
Katie Martin
A nickname for him that I stole off the internet earlier is “Stock Descent”, (Robert laughs) which I think is quite good value. Nicked that off Bluesky.
Robert Armstrong
Yeah. I mean, this is one of the factors, I think, that markets are honestly dealing with. Like, so we’re thinking about . . . You think to yourself, why are stocks going? The most obvious explanation is tariffs will hurt earnings. Stocks are priced on the earnings of companies. Stocks go down.
Second thing that might be happening here: tariffs slow down economy. That’s very simple. And when the economy slows, there’s a general hit to demand. That hurts earnings and therefore, stocks. That’s point number two.
The third thing is your point about Stock Descent. The rollout of these tariffs was so amateurish, so jejune, so nonsensical, so in contradiction with what the administration had said up to this point, that to borrow a term from, I believe it was Dario Perkins of TS Lombard who coined this term, the market has to put a “moron risk premium” on American assets because it’s like, if these guys are gonna do this. We talked on the show last time about how the formula for calculating the tariffs is just silly, ’cause there’s no other way to describe it. When people first saw it, they thought it was a gag, right? (Laughter) You know, they’re like, oh, ha ha, but what is it really? And it really was that thing. So at that point, you’re like what are these guys gonna do now? And I really think the market is struggling with a separate form of risk, that policy uncertainty is just very high right now, because these guys will do anything.
Katie Martin
It’s interesting isn’t it? I think we’ve talked about this before, but there’s this idea that there simply must be an intellectual framework here. There must be a kind of rational, academic way of understanding what this administration is doing and when. And if you know that, then you can make some reasonable educated guesses about what it might do next. And so you can go through this whole exercise of trying to figure out what it is they’re trying to achieve and the finer points of this tariff policy. But then, on the other hand, they are tariffing penguins. So this says to me that there is no intellectual framework here that makes any sense. Oh my God, you’re dying.
Robert Armstrong
(Clears throat) I think you gave me Covid over the line, Katie. There is something that did become clearer. If there was any doubt, what these guys hate is trade deficits. They think trade deficits are bad, and they want them to be closed. And they’re not gonna have any subtle discussions about the various reasons trade deficits can often make sense or be beneficial or la la la. They want the trade deficits closed. Fine.
We’ve now gone on to another form of uncertainty, which is when and under what conditions will these guys negotiate the announced tariffs down? And there, we come back to the moron risk premium, or your point about uncertainty, whatever you wanna call it. We just don’t know how to think about that. So there was . . . I think the market is very happy today, in part, because they announced they were using the word negotiations more in the White House in the last 24 hours. And in particular, they’ve said, we will open negotiations with our trade partner Japan. That is a reassuring sound the market is clearly glad to hear.
Katie Martin
It is, but there’s been some really weird stuff going on with the side of the market that is supposed to be your nice, safe retreat that you go to when horrible things happen for whatever reason. So you look at gold, you look at bonds, you look at the dollar: weirdness. Weirdness has been occurring. Tell us about the weirdness.
Robert Armstrong
One thing in the last couple of days that has got a lot of attention is Treasury yields, in particular the 10-year Treasury yield, has actually risen. A few days ago, it was well under 4 per cent. Now we’re at 4.25. That’s a big move.
Katie Martin
So that means for people who don’t get what yields are, that US government bonds have been weakening. They’ve been falling in price. Now this is not the way that you and I and anyone who’s been around in markets for a few years understands that the world works. Bad things happen, US government bonds go up in price, Treasury yields fall. This is just how it always works. Why is that not happening now?
Robert Armstrong
OK, well, it’s been fun watching the different hypotheses kind of fly around the market in the last few days. One hypothesis, the simplest one of all, is look, in a crisis, especially in the early days, there are a lot of players in markets who just wanna be in cash. And whether they hold gold or baseball cards or US Treasuries or stocks or whatever else, they’re just liquidating because they wanna have more cash. Cash is the lowest-risk asset with the highest optionality, and that’s just where you wanna be. So maybe a lot of traders had big leveraged bets of one kind or another on the Treasury and they were like, look, we just need to unwind this a little bit and get liquid quick. So I think that’s theory number one. You want theory number two?
Katie Martin
I’ll give you theory number two, which I keep bashing around the head with and you keep telling me I’m wrong, but I still think I’m on to something, which is that investors are treating Treasuries, like US government bonds, differently to how they used to because suddenly it’s a riskier proposition lending money to the US government than it was before. Suddenly, again, because you’ve got tariffs on penguins and extremely unorthodox economic policy, just there’s a note of Treasuries not quite being treated as the risk-free asset that they always were. And so there’s a bit of a retreat, I think, on the margins from US risk, and this is starting to come through in Treasury yields. I know what you’re gonna say, which is . . .
Robert Armstrong
No you don’t.
Katie Martin
Yes, I do.
Robert Armstrong
No, you don’t. OK, tell me.
Katie Martin
You’re gonna say there is no alternative and Treasuries are still the deepest, most liquid market in the world. There’s no way of getting around that. And I hear you, but the price action that we’ve seen over the past few days does tell you that there’s a little note of, hmm, are Treasuries really my safest place to hide in a crisis? That was what you were gonna say, wasn’t it?
Robert Armstrong
Katie, although it makes every cell in my body scream out in agony, I’m going to concede that you may have a point here. (Katie laughs) I would phrase it slightly differently. I would say if the world trade system that has worked pretty well for many decades, or depending who you talk to, anyway, it existed for many decades. If you are gonna throw a spanner in there and see what happens, then you might expect that rate volatility would go up. And when the expected volatility of an asset rises, a lot of investors out there in the world have a risk budget. It’s not like they have a dollar budget. They can take only a certain amount of risk. If you think rates are gonna be volatile, you can’t put as many dollars into them because you violate your risk budget, because whatever model you’re using suggests, gosh, these things might be up and down. So you’re like, you gotta pull back. The asset, you know, the future volatility of the asset’s gone up, risk budgets to it go down. I think that’s a way of restating what you said there, but it’s not like someone is in a room saying, I hate America now. Press the sell button. (Laughter)
Katie Martin
Dude, are you sure? Have you, like, read the room at all? (Laughter) The other piece of slightly tangential evidence that I’ll bring to bear to support my theory that actually some people don’t like the United States of America is: so you’ve seen US government bonds weakening a little bit. At the same time, you’ve seen the dollar weakening quite a lot. Now again, as anyone who’s been in the markets more than five minutes will tell you, bad things happen, dollar goes up. Look at March 2020 if you want a really good example of that. People love . . .
Robert Armstrong
Dollar’s only gone down a little bit, I should say. I have written a lot about the dollar. I agree with you. It’s spooky that the dollar hasn’t gotten stronger. Tariffs in theory are supposed to strengthen the dollar. That does not seem to be happening and that is important, but it takes a little time. There’s a lot of stuff. There’s lot of rearranging of the deck chairs, to use the metaphor we used in the last show, going on right now. I wanna see how the numbers look in a week before I concede that Katie Martin is right about something.
Katie Martin
God, it’s gonna be a beautiful day. The other really interesting thing that I think about how US government bonds but also gold would have been performing recently. So the third thing that always goes up in a crisis is gold. What has gold been doing? Falling.
Now, I think there’s a little part of this that is around. There are hedge funds and investment firms out there. Let’s face it. Everyone’s had the same bets on going into this year, right? It’s all been about American exceptionalism. America has turned out to be exceptionally bad. And so everyone’s got the wrong trade on. Lots of people are getting margin calls from their banks, which is where the bank calls up a hedge fund and says, you’re in trouble here. You need to give . . .
Robert Armstrong
We’re taking your line of credit away.
Katie Martin
Yeah, you need to send me some money, like, right now if you want to continue trading with us. And so there are a lot of hedge funds out there that are suddenly, desperately needing to get a hold of money to hand over to their banks. In that situation, what do you sell? You don’t necessarily sell the thing that you want to sell. You sell the things that you can sell easily. And that again is US government bonds, because they’re very liquid, very easy to trade, but it’s also gold, which is very easy to trade and also has had a fantastic run over the past few years. So you might just think to yourself, I’m just gonna look in and just sell a little bit of this stuff. I’ve had a good run on it.
Robert Armstrong
I would especially emphasise that second point you made. The run of gold from sort of $2,100 to $3,100 has been like an amazing thing to behold. And I think it became a little bit of a momentum trade. It didn’t have to do with safety or anything else. It was like, gold is the thing that goes up. Let’s own some of that. Well, that can happen with any asset. And I did think it did happen with gold. And, you know, momentum is great until it stops, which it sometimes does, and maybe we just had a little bump in the momentum there.
Katie Martin
And this is what I was writing about yesterday, which is just keep your eye on these things, because when the safe stuff starts selling off, that’s generally a sign that someone out there is in trouble and they’ve got a horrible position on their books that is really not working out very well for them at all. I am not shouting fire in a crowded cinema by any stretch of the imagination. I’m just saying there’s gonna be some big investment houses out there that are really having a very bad time. And this will all kind of come out in the wash. Well, you know, we’ll hear about it soon enough, but this is quite dangerous. This is like, to me, the US administration is like running with scissors here, because things can go wrong when markets are volatile like this.
Robert Armstrong
One more leg down, and we’re gonna see. If the damage is contained to whatever we have seen since liberation day, 10 per cent down, I think this market can handle 10 per cent down. And historical examples of crises. You know, I wrote today, look, we had in the fourth quarter of 2018, we had a 20 per cent drop in markets and . . .
Katie Martin
That was weird. Markets lost it.
Robert Armstrong
It was weird, but markets just got back off the ground, dusted themselves off, and kept right on chugging. But you get much more than what we’ve . . . The decline we . . . And the decline we’ve seen from the top is now, you know, 15 per cent or something like that. You get much more, it gets dangerous. And I think some of the retrenching and sales of safe assets you might see might be pre-emptive rather than panicked. People are like, OK, new world, new world, we’re changing. We’re taking a more cautious stance here. We’re gonna build a more liquid position. But, you know, the further this goes, I agree with you. You are running with scissors, and it could get scary.
Katie Martin
Because we’ve already seen the . . .
Robert Armstrong
The administration. Hopefully, the market wears the pants here, right? I think at some point, every knee bends before the market, you know. Peter Navarro and Trump and all of these guys can make big talk all they want. But you get an equity market that’s down 30 per cent. You get panicky bond markets. Everybody comes around, right? It’s the horse’s head in the bed. It becomes an offer you cannot refuse from markets. And, you know, they’ll change tack. I fearlessly predict that if markets get . . . Take another leg down, you will hear a different tune from this administration. That is another political prediction we can look forward to being wrong. (Laughter)
Katie Martin
Given the success of your other predictions, you know, take that as you will.
Robert Armstrong
Everybody breaks. Everybody has a point where they break.
Katie Martin
So you can tell that things are bad in markets because I get asked to do, like, normie media about these things. And I was on BBC Radio Ulster yesterday talking about what’s going on in the stock markets. And the first question they asked me was, what is a stock market? And I’m actually kind of glad that they asked that because I think, you know, when you’re doing media about markets for the general public, I think you have to remember that you’re starting from a completely different base. But anyway, one caller, Graham from Portadown, rang in to say when stocks are cheap like this, you’ve always got to buy. I’m buying the dip. And I was like, good luck, Graham from Portadown. I don’t know if you’re right. Do you think it’s right?
[MUSIC PLAYING]
Robert Armstrong
Let’s talk about that in Long and Short.
Katie Martin
Fair enough.
[MUSIC PLAYING]
Okay, now it’s time for Long/Shorts, that part of the show where we go long a thing we love or short a thing that we hate. And we’re gonna make this pretty much about do we follow Graham from Portadown? Do we buy this down dip?
Robert Armstrong
I do not. Katie, I do not buy it. Now, let me just say, I don’t think we should have sold this panic ever. You know, for most investors, you’re hanging in there. I take your question to be, do I pile in? Do I shift my allocations towards stocks right now to like, an overweight position, as it were, even more than where I would usually have my allocation of stocks?
And having gone through the numbers for the newsletter today, I think the answer is no. Stocks were wildly expensive a week ago. Now they are on a path towards sanity, in a certain way. So I’m not rushing to dive all the way into the deep end here. I just don’t think it’s time yet. You know, I’m not saying people should hold zero stocks now. That is almost, that is never the case that you should hold zero stocks.
Katie Martin
And I should remind listeners, this is not investment advice and we normally get things wrong.
Katie Martin
Yeah. But for me, you know, just looking at, you know, I’m like a middle-class person with two kids who are gonna go to college soon, etc. I’m not leaping into the deep end here. I don’t think stocks are screaming bargain right now.
Katie Martin
No, me either. And part of the reason for that is, OK, so we’ve had these tariff levels that have come out from the administration, but, you know, Peter Navarro, one of Trump’s closest trade advisors, is saying, you know, this is just the beginning. Trump is saying I’m not gonna back down. Yes, there’s sort of hints of negotiations, but what’s to stop Trump turning a 20 per cent number on a bunch of penguins or whatever, into a 40 per cent number on a bunch of penguins? Like, why do we think that, you know, the kind of calibration has to be lower? It could equally be higher. I don’t think any of us has any real insight into what Trump is going to do next. So I’m with you on this. I normally like to kind of have an opposing view in Long/Short, but I also am not rushing to get into this.
Robert Armstrong
Let me just make a final point though. The world we’re heading into is not a world where I’m in love with bonds either.
Katie Martin
Mm-hmm, because it’s inflationary.
Robert Armstrong
It’s an inflationary . . . It feels like a bit of an inflationary world. As we talked about earlier, it’s a bit of a volatile world for bonds. So I don’t think you can switch to fixed income here as a long-term strategy, right? So equities are still the core of the strategy. I just don’t think you want to push risk hard at this point.
Katie Martin
No. The nightmare scenario is that we have a rerun of 2022, right? So bonds didn’t work out because of inflation, stocks didn’t work out pretty much because of inflation, everything was awful everywhere.
[MUSIC PLAYING]
Let’s hope that’s not the case and that we have something more cheerful to bring to our listeners. On Thursday, listeners, we will be back then, hopefully. In the meantime, be careful out there.
Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. Special thanks to Laura Clarke, Alastair Mackie, Gretta 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/unhedgedoffer.
I’m Katie Martin, thanks for listening.
[MUSIC PLAYING]
