This is an audio transcript of the Unhedged podcast episode: ‘Make America Gyrate Again’
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Katie Martin
¡Hola! Buenos días. Bienvenido. El podcast Unhedged del Financial Times y Pushkin en Madrid. (Applause) (Laughter)
Regular listeners will note that this sounds different to how the usual Unhedged podcast sounds. I am still Katie Martin and I’m joined as so often by Rob Armstrong, who’s flown in all the way from New York City from the Unhedged newsletter to do this podcast today. Rob, say hola.
Robert Armstrong
Hola. (Laughter)
Katie Martin
So we’ve been let out of our office for good behaviour. I’ve escaped from the grey audio studio in the basement of FT towers and travelled to Madrid to record this podcast in front of students, lecturers, a whole bunch of people at the IE Business School in the capital of beautiful Spain. And we can see out the window it’s a beautiful place to be and we’re really, really happy to be here. So why are we in Madrid? It’s really very simple. These people asked us nicely and we said yes. (Robert laughs) There’s really nothing . . . There’s nothing more to it than that. But I will say we thought to ourselves, Madrid, you say, in March? Yes.
Robert Armstrong
Blazing sunshine.
Katie Martin
I packed my gafas, my sunglasses. I’m wearing canvas shoes. And listeners, I must tell you, it is pouring with rain. Like, not precisely now, but the weather is terrible.
Robert Armstrong
Yeah, terrible.
Katie Martin
I feel like we’ve been . . .
Robert Armstrong
It’s British weather in Madrid.
Katie Martin
Yeah. I feel like we’ve been brought here on false pretences.
Robert Armstrong
You brought it with you. We blame you, Katie.
Katie Martin
Yeah. So Barney Jopson from . . . The FT’s man in Madrid, he wrote a big piece recently in the FT about how Madrid is a big destination for Americans who are fleeing the chaos of Trump’s America.
Robert Armstrong
That was true yesterday. We had a real Trump day yesterday.
Katie Martin
But my question to you, Rob, is how big of a suitcase have you brought? Are you staying here now?
Robert Armstrong
I have my passport in my pocket and I’m ready to do a runner at any time. I think Monday’s market was a good metaphor for how it feels to be an American right now, which is down violently, but sometimes up violently, sometimes sideways, up in surprising places. And so trying to figure out, this is a . . . It is a job. It is an employment plan for financial journalists, the first of this last month or so.
Katie Martin
The chaos of the Trump administration is precisely what keeps financial journalism alive. So thank you Donald Trump for that. But so let’s . . . That’s what we’re gonna talk about today — is like markets, US markets are all over the place, and we were told a couple of things at the start of this year. One of them is the only investment theme that matters is American exceptionalism. Buy US. Don’t buy anything else. You’d be an idiot if you bought anything else. That is working out extremely badly at the start of this year. But also we were told — and in fact, we said it on this very podcast — that if markets go bad, Donald Trump will backtrack and not carry out some of the many threats that he’s making. So everyone got this wrong.
Robert Armstrong
Yes. Well, what we know is they say they won’t backtrack. So you wanna understand why markets were so extraordinarily horrific yesterday, you have to look at the comments from Scott Bessent, the Treasury secretary, and Donald Trump over the weekend. Donald Trump says I’m not even watching markets. Scott Bessent says we care about Main Street, not Wall Street. And then they go on to say the equivalent of no pain, no gain. You know, it’s like when your doctor says to you, you might feel a little bit of pressure here, which means something awful is about to happen to you.
And on Monday, I think the market tried to digest the fact that they didn’t have the so-called Trump put, that no, the cavalry was not coming to the rescue. Now that may turn out to be wrong on Tuesday. One feature of this market is what is conventional wisdom on Monday is out with the trash on Tuesday. But for now, we do not believe in a Trump put.
Katie Martin
So this idea of a put is the idea that, you know, if bad stuff happens, don’t worry. Either the president or the central bank or someone else will come in on a white horse and solve the problem.
Robert Armstrong
They’ll pull the . . . And we got some indication that would happen with Trump serially threatening in withdrawing tariffs. It gave us the pleasing sensation that it wasn’t for real. It was all rhetoric. And suddenly it feels very much real.
Katie Martin
So let’s just go through what markets have actually been doing recently. Monday. So if you’re listening to this we’re recording it on Tuesday is going out on Thursday. God knows whether it will still hold.
Robert Armstrong
There’s a great FT headline this morning or a great FT moment that journalists will appreciate, which is there was a headline on the FT that instantly became obsolete. Like the first headline in the morning was markets stabilise after Monday’s rout or something like that. And that headline worked for about 15 minutes. And then you could hear the sound of the eraser being dragged across the paper and it turned markets resume fall. And who knows what the headline will be this afternoon. But those of us who work in newsrooms know what those days are like, where you just write one story again and again and again in different forms.
Katie Martin
Yeah, it’s like nailing jelly to a wall.
Robert Armstrong
But what is for me the most interesting about Monday, where the Nasdaq was down 4 per cent, the S&P 500 was down 2.7 per cent. What’s interesting about both that day and some of the days that preceded it was that it was not a general sell-off. The biggest losers were Big Tech. It wasn’t economically sensitive stocks that had the worst of it, which is very interesting. If we were just having a growth scare, right, if the economists were just downgrading GDP growth for America, downgrading consumption expectations for America but Apple was down 5 per cent on Monday, Nvidia was down, Amazon was down, Microsoft right down the list. And so what’s that all about? Those aren’t the first companies you’d expect to fall. They’re not economically sensitive companies in relative terms. What’s going on? And my best guess is this is an example of selling what you can sell.
You know, we’ve talked about this a bit on the podcast before. You’ve made a zillion dollars on Nvidia. You’re now overweight in your portfolio. It’s time to sell something. Why not Nvidia? In other words, what’s the easiest way to take risk off the table? And it’s where you’ve made the most money already.
Katie Martin
So is your view then that actually, the US economy itself is fine?
Robert Armstrong
OK. That’s a hard question to answer, but I’ll screw it up as follows. There’s two kinds of economic data. There’s hard data and there’s soft data. Hard data is when you observe something happening — someone getting fired, someone buying something, a company reports its results, it made money or didn’t. These are just hard facts.
Then there’s soft data, which you ask one of these good people, how are you feeling? And they say, I feel great, I feel lousy, whatever. We’re in an interesting situation in America where the soft data is terrible and the hard data is fine. So not that many people have been fired. The reporting season we just had, companies had great profits. Things are kind of ticking along OK. But you ask people how they’re feeling, they say I feel like crap so eventually, feeling like crap turns into not spending money. But you don’t know kind of when that happens or how do you really feel. Is now special? So which do you believe, the hard data or the soft data, because they disagree?
Katie Martin
One thing though, is precisely because of tariffs we are seeing downgrades to US growth forecasts from some pretty serious people.
Robert Armstrong
Goldman Sachs.
Katie Martin
So Goldman Sachs’ Jan Hatzius, chief economist I believe is his title at Goldman Sachs. He’s a pretty serious guy. Goldman Sachs is a pretty influential investment bank. They’re doing two interesting things. They are cutting their US growth forecasts. I think they are below consensus on US growth.
Robert Armstrong
2.7. And they’ve been bullish for a long time, which is interesting. And they’re going at 1.5. That’s a huge cut.
Katie Martin
Yikes!
Robert Armstrong
That’s 1.2 percentage points of GDP growth, right? And what’s interesting is they agree the hard data is good. It’s all because of tariffs. Their justification for that huge cut in their forecast is all because they think tariffs are gonna be such a big drag on growth.
Katie Martin
So they’re cutting US growth forecasts and they’re also simultaneously, which is quite interesting, raising European growth forecasts. Not by a lot, like not by the same sort of degree, but nonetheless you don’t see this very often.
Robert Armstrong
I thought European growth forecasts only went one direction, (Katie laughs) so it’s nice to see if they can go up too.
Katie Martin
They can go up as well as down. Yeah. Look, you’re surrounded by Europeans here, Rob. You gotta, like . . .
Robert Armstrong
I know. That’s true. I mean, they know better than I do.
Katie Martin
You got to watch yourself.
Robert Armstrong
They’re on the pointy end of the European economy.
Katie Martin
Yeah. But I guess one thing that I think is gonna get really interesting in markets and in the real economy pretty soon is that . . . So one thing that people say about markets when they don’t know what to say is markets hate uncertainty, right? I’ve heard a lot of people saying that over the years. Most of them don’t know what they’re talking about. However, markets hate uncertainty.
Robert Armstrong
Yes, it is true.
Katie Martin
And one thing. So as you say, we’ve just had the reporting season, but pretty soon we’re gonna get round to the next corporate reporting season in the US. How on earth are you supposed to give guidance to investors about what’s going to happen to your income, your revenue over the next quarter if you literally do not know if you’re getting tariffed or not?
Robert Armstrong
Yeah. And I think you’ve already seen that in the fourth quarter reports when the big American companies came in, said we had a great quarter. And then the analysts say, what about next year? And the company said.
Katie Martin
It’s a podcast, Rob, you can’t just shrug. You have to.
Robert Armstrong
OK, that was me shrugging. And that . . . This was kind of . . . (Laughter) And so Walmart had a wonderful quarter. They’ve been doing great. And they said, we don’t know. Next year is weird. And look, you can use the term markets hate uncertainty. But what a company is nothing else but a big planning mechanism. That’s the reason companies exist, is to plan. Otherwise, we’d all work for ourselves and there would be nothing but freelancers. A company is a planning machine, right? And if you take away their ability to plan, they can’t company any more, right? And so even at the margin, a downgrade in certainty means less investment. So that is the risk to not, you know, Trump’s tariffs are one form of risk. But there’s an independent form of risk, which is you diminish the planning horizon, companies spend less money. And that’s when the soft data becomes the hard data, right? And will that happen? You know, I feel like we’re manic in America. Moods are up and down. It’s really difficult to say.
Katie Martin
So broadly speaking though, the hard data is kind of OK. So what we’re seeing in markets with some really . . . So as you say, 4 per cent on the Nasdaq on Monday, 2.7 per cent came off the S&P. These are . . .
Robert Armstrong
Another per cent today.
Katie Martin
Another per cent today, which is Tuesday. These are big numbers. This is a substantial pullback in US markets. But so . . . But it’s more of a kind of vibe session than it is a recession at the moment.
Robert Armstrong
Correct. I would frame the question even slightly differently. The US, as you alluded to at the beginning of the show, was an immensely overcrowded trade. Everybody knew two months ago that all you had to do was have exposure to the US and in particular to US big equities. This was 100 per cent consensus. Or as we say, everybody on one side of the boat. And what we might be seeing is not a true bear market, but really just everyone shifting to the other side of the boat. This doesn’t have to be the beginning of the end of the world. It could just be everyone realising we had too much over here and we need to correct. And at some point, that process works itself out, the boat rights itself and you keep sailing. We don’t know yet whether we have a disaster on our hands, but it’s an open possibility.
Katie Martin
But so one stock that’s having a particularly bad time at the moment is . . .
Robert Armstrong
You can’t keep the smile off your face when you say this. (Laughter)
Katie Martin
(Laughter) . . . Is everyone’s favourite electric vehicle maker, Tesla. Tell us what’s going on there, Rob.
Robert Armstrong
You think I understand Tesla? So its lost half . . . Is that . . . It’s lost half its value?
Katie Martin
Since December, yeah.
Robert Armstrong
Since December. What is Tesla? It’s a very good car company attached to Elon Musk. So you have Starlink, which has been in the news. You have a robot venture. You have an artificial intelligence venture. You have whatever Elon Musk is gonna think up one day in the future.
So one question we might ask is what is, of those things, what is the thing in Tesla that’s changing its value? Is it the car company? Well, some people . . . They are buying less Teslas, whereas the future value of the robots company or is it the future value of Elon Musk that is going down? Like it’s literally the net present value of Elon Musk’s life? Is he putting that at risk right now? Because it was a bet on him. That stock was a bet on his brilliance. And I would say he’s playing a dangerous game. He’s become a major political figure in America, and maybe that will work out brilliantly for Starlink, for Tesla, for artificial intelligence venture, or maybe it all explodes — the wheels come flying off and it goes off the side of the road. So there’s a risk premium on the future value of Elon Musk is what I think is happening.
Katie Martin
Because what you can definitely see is that the more involved he gets in US politics, the more people don’t want to buy his cars. Like sales are falling off a cliff in Europe. Maybe this will turn out to be a blip, but you know, it’s clear that consumers don’t like this stuff, right? So he’s making himself the story, which is the problem.
Robert Armstrong
Which is the problem. And that’s even bigger problem for investors, right? Investors don’t like political risk. You’re all at a business school and you are learning how to assess business risk or financial risk or funding risk. And you have a spreadsheet and there’s little numbers in the spreadsheet. Everybody’s very happy. There’s no spreadsheet for politics. So the people who tend to be in charge of our investments don’t have a machine they can plug this kind of thing into. And so unquantifiable risk is very often simply not taken, right? You just leave it alone. And I think Elon Musk is to the upside — and the downside, maybe — increasing the unquantifiable risk in Tesla with his political activities.
Katie Martin
Yeah. Now one thing that you mentioned in your newsletter today that caught my eye is that stocks were getting fried on Monday but Treasuries, US government bonds, were not particularly obviously picking up in price. Now that could tell us two things. One is this is not . . .
Robert Armstrong
I just wanna interrupt here for a second. This is Katie setting herself up to say something mean about America. (Laughter) I’ve heard this before, and it’s gonna happen here. So go ahead. I’m right here.
Katie Martin
So it could mean one of two things, or maybe both. One thing it could mean is that Treasuries are not picking up particularly quickly in price because this is not a proper recession.
Robert Armstrong
So traditionally, what you would see is as stocks go down, the price of bonds, bonds are safe. The money goes running out of stocks, screaming across the road and leaps into bonds. And that isn’t happening quite to the degree one would have expected.
Katie Martin
So is that saying to you, huh, this is not a proper recession, or is it saying to you people don’t want to buy Treasuries as much as they previously did. Maybe Treasuries, which are supposed to be this shining beacon on the hill — they’re like your safe room, they’re where you go whenever the brown stuff hits the fan. Anything bad happens, you go and run into the warm, comforting arms of Treasuries. Maybe the market is saying, actually, we think that Treasuries are more political than they should be and Treasuries are more risky than they should be and we don’t want to go there for safety. We want to go somewhere else. How do you plead?
Robert Armstrong
I plead not guilty. I think Treasuries are still, in a certain way, the only game in town. There’s no global substitute for a safe asset. They are, however, inflation-sensitive. And if the economic problem is tariffs, the obvious economic problem risk is inflation. And you’re not gonna buy a 10-year Treasury, or you’re not gonna be as many 10-year Treasuries if you’re worried you’re gonna lose your . . . they’re gonna lose their value and inflation goes up.
So this is why the combination of low growth and inflation is so terrible. It’s because it leaves you nowhere to hide, right? The place to hide in investing is the fact that bonds and stocks under most conditions go different directions. In inflationary times they go the same direction. So there really is nowhere to hide. That’s the horror of stagflation, is there’s nowhere. Gold, maybe? Can you go? I’m not gonna say bitcoin. I should say just to see your eyes pop out of your head. (Katie laughs) But, you know, there’s nowhere to go. And so I think that the stagflation risk is not here, but it’s at the corner of the room scaring everyone.
Katie Martin
Yeah. OK, that makes sense. So I wanna go back to something that I mentioned right at the top of this show, which was we were all told, and in fact, we said on this very podcast that don’t worry if bad stuff happens, Donald Trump will back away. The stocks vigilantes will act as a controlling mechanism on Donald Trump. Why is that not happening? And do you think at some point he will blink?
Robert Armstrong
I have the following deeply insightful thing to say about Trump. I think he does like to be popular. I think he likes to be liked more so even than the average person. I think it is easy to say I don’t care what markets are doing when they’re down 10 per cent from the top now? I think we’re at about 10 per cent as of today.
It’s a lot harder to say when they’re down 25 per cent. When they’re down 25 per cent everybody in America who has a pension is noticeably poorer. And that is . . . It’s one thing to say we have to do the brave thing. We have to take the pain now. Let’s be brave. That’s easy, relatively easy to do now. If current trends continue, it’s gonna be very hard to do. And people are gonna get fired, in the White House there’s gonna be blame. There’s gonna be a general freakout and we’ll see what will happen. You know, all I will say, my prediction is if it gets bad enough, he will blink because he likes to be popular.
Katie Martin
But it’s not bad enough yet because as you were saying, like Scott Bessent from Treasury is saying, we don’t care what markets do, which is an extremely weird thing for a Treasury secretary to say.
Robert Armstrong
Yeah, that’s a very strange thing to say, but I will resist the idea that this is all Trump’s fault. He’s an easy guy. He draws our attention. But remember the bad set-up he came in with? He came in with every risk asset in America nailed-to-the-ceiling expensive.
And when that is the situation, there’s only one way to go and that is down. And so that’s a terrible set-up. He also came in. And he says . . . When he talks about, oh, it’s the Biden economy. This is his big excuse. Oh, the Biden economy is turning bad on US. Bessent said that over the weekend. We inherited this.
There is an element of truth to that, in that the United States was growing above a sustainable trend growth rate, and it was doing that because it borrowed a lot of money. And that can’t go on forever. That is true. And at some point when you have very, very expensive assets and an economy that is growing faster than it can grow forever, things that can’t go up any further tend to go down, you know. And that’s the situation that the Trump people inherited. So I think what they might be thinking is this has to happen sometime.
Katie Martin
Let’s get it out of the way before midterms.
Robert Armstrong
Yes. And if it must be done, let it be done quickly. That’s a very bad quotation of Shakespeare. I can’t remember exactly. I don’t even know what play that is. I want to sound a little bit literary.
Katie Martin
So things go up and then they go down again. That’s the kind of insight you get from the Unhedged podcast.
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So on that note, we are going to go to a very short break and then we’re gonna be back with questions from the audience.
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Listeners, welcome back to Unhedged here at IE Business School in Madrid. We’re taking questions from our lovely audience. So lovely audience, who’s the next question from.
Lee Newman
Lee Newman, dean of IE Business School.
Robert Armstrong
Oh, hi.
Lee Newman
Thank you for being here. There is economic thinking that being the predominant currency reserves of the world confers certain economic advantages on the country that controls that currency. So the US has, I think, roughly about 60 per cent of the currency reserves globally. So that’s largely based on trust. And you mentioned the word safety. So my question is, how do you see the current situation in the world with the Trump administration affecting trust in the US dollar as the reserve currency and how might that affect (inaudible)?
Robert Armstrong
Katie and I disagree on this, so I’ll let her talk first because I’m the bigger person.
Katie Martin
(Laughter) I wrote a column recently about exactly this, about the idea that big long-term investors could start to lose trust in the US dollar as a major reserve currency. And I thought when I put that story out that I was gonna get a barrage of emails from big Americans telling me I was a huge idiot and I got it all wrong. And not at all. I got a lot of correspondence from people who I consider to be serious academics, serious investors saying, no, I think this is genuinely happening. I think the dollar, I think the US administration is undermining the full faith and credit in the US, and this could snowball very easily. I know you disagree because you’re a large American.
Robert Armstrong
I just think there’s anything else. There’s no replacement asset that has the liquidity of the dollar. There’s no replacement asset that has the liquidity of the . . . and the relative stability of the US Treasury.
What I will say to your excellent question is that the Trump administration is completely all over the place on this issue. So on the one hand they have this view that it’s actually an economic disadvantage to be the kind of default reserve currency because that means people buy your currency for financial reasons, so your currency can’t fall as it normally would because of supply and demand and as a result of that, your exports are too expensive and you develop a deficit and they fire everyone in Ohio and you know the rest of the story, right? Whether that’s true or not, that’s one branch of Trump administration thinking.
The other branch of Trump administration thinking is anybody who doesn’t use the dollar is a traitor to America, is a threat to our security. He’s threatened any company, any country that dares replace their reserve assets. So you tell me which is the real Trump administration. And I’ll be better able to answer your question about what is gonna happen. But I have no idea which of those two views will prevail. So best of luck to us all.
Katie Martin
Next question.
Luis Miguel
Thank you very much. My name is Luis Miguel. I’m in the international MBA. You were mentioning about the sentiment of the US companies about not knowing what’s coming in the future. And also, Katie, you mentioned about the bond market, about, you know, how the equities are falling and it’s not, you know, the same movement of what’s happening, what should happen in the bond market. So my question comes how would a movement in the Fed’s rate, can this like, revert the situation of more spending and a movement in the bonds or . . . But what do you think about this?
Robert Armstrong
It all depends on inflation. Does inflation trap the Fed? The next few inflation reports are everything. Because if inflation stays above 3 per cent, which a lot of those same analysts who are cutting their growth forecasts are putting up their inflation forecasts, if the number is above 3 per cent, I don’t think the Fed can cut. They’re trapped.
And, you know, they have a dual mandate. They have employment on the one hand and inflation on the other. But when those two mandates are in conflict, inflation wins historically, especially after a major inflationary incident like we’ve had. So will the Fed be able to do anything at all? Depends on inflation, because the policy rate is restrictive right now. Bonds are expensive right now. That is restraining growth right now. I don’t know how restrictive they are, but the policy rate is restrictive. But maybe the Fed can’t do anything.
Katie Martin
OK. We’re gonna have to wrap it up there, but just really, really quickly. It would not be an Unhedged podcast without Long/Short, that part of the show where we go long a thing we love, or short a thing we hate. Rob, what do you love or hate today?
Robert Armstrong
I’m long the city of Madrid. I haven’t been here in like 25 years. There’s a good feeling here. The vibes in the city just walking around talking to the people here. You don’t get a feeling of old Europe here. There is some electricity in the air in the city. And so that vibe check has gone quite well. I don’t know if things might be different in Barcelona or Berlin or some other European city starting with B, but here it seems good.
Katie Martin
Yeah. Similarly, I’m going to be long eels. We just had a very nice lunch of scrambled eggs and eels.
Robert Armstrong
Yeah. Not a dish I’ve had. Delicious!
Katie Martin
Which is not something I would eat if it was in the FT canteen. (Laughter)
Robert Armstrong
(Laughter) But yeah, here you would eat the eels.
Katie Martin
Here, very happily eat it. It was very nice.
Robert Armstrong
All right.
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Katie Martin
OK. We’re gonna have to wrap it up there. Listeners, we will be back in your ears on Tuesday. So muchas gracias. And listen in again then. (Applause)
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.
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