Fearless!

7 April 2025

This follows my January 6 post Fear, launched with this 2016 Trump quote:

“Real power is, I don’t even want to use the word, fear.”

The first week of April 2025 started with a fearless Trump telling the world that the richest country in the world will no longer accept to be abused and is now imposing huge duties for the privilege of doing business with it.

The house staff, all fearful of even hinting that this whole idea might, maybe, perhaps, be somewhat preposterous, came up with a fancy duty formula hoping that nobody would be smart enough to decipher how stupid it is.

Even the poorest people in the poorest countries found out they will no longer be allowed to take advantage of mighty USA.

There would be no exceptions, except for those fearful enough to come beg for mercy and feed the “art of the deal” legend.

 

(KKR)

Hopeful equity markets had only lost 8% prior to the Rose Garden event. Another 14% followed when investors realized that this was no reality show.

Suddenly, it’s a bear market!

Fear everywhere.

As equities tanked and bond yields cratered, few people were bold enough to speak their mind, fearing to get pilloried on some social media platform and/or lose some rights, a license, even a Congressional seat.

Then, China spoke.

China will fearlessly reciprocate with like for like duties. Bring it on Trump! Titan vs Titan. How fearless are you really?

China is taxing all imports from the U.S. (only 6% of China’s total goods imports), mostly agricultural/chemicals/energy that can be sourced elsewhere, against the U.S. taxing all Chinese goods that most Americans households and manufacturers need or use cheaply and which would be taxed anyway if they could be sourced from another country.

Reciprocal?

China added several other annoying measures. And some have not been mentioned just yet:

• Blackrock buying Panama Canal port assets:
• TikTok:
• Help in Ukraine:
• Taiwan:

Meanwhile, China is talking with Japan and Korea to unify their replies, presenting itself as a stable, reliable, pro-trade partner.

What kind of moment will that prove to be?

I dare to say, a “Oh! My God!” moment, but what kind?

Investors, often the first to react, blindly or not, are saying “OMG, the world will sink into a recession” as the two largest economies fight it to the end.

Trump would normally say “OMG, somebody is stupid enough to resist me, I’ll show them”. Indeed, early Friday, Trump fearlessly shouted: “CHINA MISMANAGED THE SITUATION, THEY PANICKED – THIS IS SOMETHING THEY CAN’T AFFORD TO DO!”

For good, or bad, measure, he added: “TO THE MANY INVESTORS COMING INTO THE UNITED STATES, MY POLICIES WILL NEVER CHANGE.”

This weekend, after “a little disturbance” of 2 weeks ago:

• “sometimes you have to take medicine to fix something”.
• “HANG TOUGH, it won’t be easy, but the end result will be historic”.

So truthful!

Is this a kind of Volcker “hang tough” fight to the end that could take years and two recessions to resolve?

Or is it a “Stand Up!” moment, now that mighty and fearless China is leading the rebellion?

• Suddenly less wealthy CEOs, after having “generously” kneeled before him, are now telling Trump this is economic and financial nonsense.
• Ordinary investors are yelling their discontent seeing the Mag 7 coming down to earth, even “beautiful” Nvidia down almost 40% in 3 months to sell at 20x earnings.
• Some countries are lining up behind China, reciprocating. After all, Trump has shown that there are no treaties, no signatures, no friends anymore.
• Americans of all political colors are realizing that the emperor actually might have no clothes and might be leading them to an abyss. At least Volcker knew what he was doing.
• America’s middle and lower classes, often Trump disciples, seeing their discretionary income destroyed by surging prices, are saying “No, we’re not OK with that”.

Even Elon Musk has lost his superb having dunked $23 million in tiny Wisconsin, let alone much of his wealth after destroying the Tesla brand in but a few months. The doge (Venetian Italian word for duce, e.g. “Il Duce” Mussolini) needs to shed his political cape and return to his much more useful and sensible engineering works.

But how will Trump “analyze” the situation?

1. I am the smart and mighty King, nobody can be fearless of me. I’ll show Xi and all of them!
2. OMG, it’s me against everybody else. “Really smart” Elon favors no tariffs. Even Putin is resisting me. And I only have a slim majority in Congress …and so much more I want to achieve, perhaps a Nobel prize, even, maybe, a third term.

Can he actually be fearless enough to find ways to backtrack while he might still have some credibility left? He has enough people he can blame for this fiasco. They’re all so fearful, they’ll take the fall.

Wanna bet on that and buy equities here?

After all, the S&P 500 Index is down 20%. Its trailing P/E has declined from 25.7 at the end of 2024 to 19.7 on today’s pre-opening of 4900. Sounds cheap!

Let’s do some numbers first:

• The BLS reported a 228k increase in March payrolls but reduced January-February numbers by 48k. Q1 averaged 189k, up from 170k in Q4’24 and 113k in Q3’24.
• Better than consensus of 140k but dismissed because it’s backward looking, dated (the survey was made Mar-9-15) and prone to revisions.
• Indeed Job Postings are in free fall since mid-February (chart through March 28)

• The Challenger Report tallied 275k layoff announcements in March, up 60% from February and 205% YoY. Most of the cuts were government and DOGE related, so far.

• Aggregate weekly payrolls (jobs x hours x wages), the main spending driver, rose 4.9% annualized in March but Q1, distorted by weather in January and February, rose by a slow 3.9% annualized rate after +4.8% in H2’24 (+6.0% in Q4’24).
• Wages rose 3.7% a.r. in Q1, down from +4.4% in Q4’24, +3.0% in March. Slowing wages are not indicative of strong labor demand. Headline PCE inflation was 4.1% a.r. in January-February. Core PCE rose 4.5% a.r. in February. Real wages are now declining.

Tariffs will quickly hit consumer prices, before employment.

We could see expenditures accelerate in March/April as Americans rush to buy goods to beat tariffs. Boom-bust scenario developing.

Jay Powell, ditching factual analysis (remember “We don’t guess, we don’t speculate and we don’t assume”) and political neutrality, warned us Friday: “While uncertainty remains elevated, it is now becoming clear that the tariff increases will be significantly larger than expected. The same is likely to be true of the economic effects, which will include higher inflation and slower growth.”

The famous S word, dreaded by central bankers because so complicated to fight, especially when the “flation” part is self-inflicted with plenty of unknown repercussions.

There are a few mitigating factors to consider:

• oil prices, which peaked at $91 in 09/23 and started the year at $72, are below $60. Slowing wages and lower oil prices will keep services inflation (+3.8% a.r. in Jan-Feb) contained while goods prices (temporarily?) rise.
• bond yields closed at 4.0% Friday, down from 4.8% in January and lowest since October. Mortgage and other consumer rates should also decline.
• the U.S. private sector (corps and households) is not over-leveraged.

So, an optimist could say, probably not a recession, and maybe manageable inflation. KKR sees a risk of a mild U.S. recession:

The tariffs represent a U.S. fiscal tightening on the order of 2.5% of GDP (see chart above), which—all else equal—could take the aggregate U.S. federal tax rate to the highest level this century. Beyond this direct fiscal drag on growth,
one must also subtract a headwind from retaliation by trading partners on U.S. exports, which as a baseline, we are modelling as about half the rates that are imposed by the U.S.

As a basic rule of thumb in the U.S., we think every 10-percentage point increase in tariff rates equates to roughly a 1% drag on GDP and a 1% uplift to CPI (with the GDP hit spread out over about a year, and the CPI uplift spread out over about two years).

All-in, you get to close to stall speed (0.5%) growth in 2025, an elongated, modest recovery in 2026 (1.3%), before bouncing back to more normal average growth rates thereafter (2-2.5%).

In terms of U.S. inflation, we now expect CPI running in the 4.0% range in 2025 and 3.5% range in 2026.

I don’t doubt KKR’s numbers, I really doubt the expected normality post 2026.

The best we can hope for in 2025 is a very windy landing!

Speaking of winds, Canadian Prime Minister (and formal central banker) Mark Carney, warned of steady global headwinds for the USA, backtracking or not: “Our old relationship of steadily deepening integration with the United States is over.” Noting the end of an 80-year period of American economic leadership, Mr. Carney added: “While this is a tragedy, it is also the new reality.”

To buy or not to buy? An opportunity or a falling knife?

On a static data basis, the S&P 500 is at 19.7x trailing EPS of $248.66, the high end of its 70-year channel when excluding high inflation and bubble periods.

On forward EPS, the 17.6 P/E is on its historical median, justifying accumulation if one believes that the current $278.96 forward EPS will hold amid the prospective economic chaos.

Analysts have begun to more seriously review their still optimistic estimates last week but we can expect a meaningful rerating during April and May as companies report Q1 results and offer guidance, if and when they can.

Trailing EPS are seen hitting $252 when all Q1 results are reported. A 0-10% drop from there puts EPS at $227-250. Goldman Sachs’ top down estimates are now $220 (recession) to $253 (baseline).

At 4900, the P/E is 19.6-21.6, not in very safe P/E range.

Safer would be 17.5x $220-250 = 3850-4375, down another 10-20%. Realistic?

Only if you believe that a fearless Trump will keep fighting, against the American people, against Congress and litigations and against just about every business people. Does he really believe that a “little disturbance” will soon give way to a new era of prosperity? To the point of jeopardizing his slim majority and his place in history?

The Fed will get involved.

Powell has said that he’s more focused on the economy than on inflation which he deems to be only temporarily boosted by tariffs. Slowing wages and lower oil prices will give him breathing inflation room to try to prevent too much of a slowdown.

• Manufacturing is already scrambling and flirting with recession. Some 45% of U.S. imports are inputs for its own manufacturing production.

• Farming will be hit hard.
• Consumer spending will surely get impacted by rising prices and a negative wealth effect, aggravated by a subsequent rise in unemployment.

There will be tariff negotiations and face-saving off-ramps provided.

That said, we still have to deal with a tech-dominated market. Ed Yardeni’s MegaCap-8 stocks have seen their P/E drop 21% from 31 to 24.5. More reasonable but still above their 2018-2024 lows.

The rest of the S&P 500 stocks are still selling at 19x. A case can be made that their earnings will be more impacted than tech’s in 2025.

Tough call!

But, what’s the upside?

Assume the best, say $270 EPS. The high end of the “rational” range is 20 = 5400 but the median is 4725.

The Rule of 20 P/E is now 22.9, down from 29 last December. Fair value on trailing Q1 EPS of $252 is 4250 with 3.2% inflation. At the 24 high end of the range, 5250.

On $270 potential EPS: 20-24x is 4550-5600. We are right in the middle of that range.

FYI, Ed Yardeni now sees 2025 EPS of $260 on GDP up 1.5% but with 45% recession odds. His yearend target is 6000.

Don’t be totally fearless. Past relationships can no longer be trusted, can they?

TECHNICALS WATCH

The 13-34 EMA is crossing downward. Not to be dismissed. 2022-23 redux?

The correction was so sudden, we’re already well below the 200dma as Ed Yardeni shows:

About 23% of stocks on the NYSE are still above their 200 day moving average. Recent troughs were at 15%:

(allstarcharts.com)

Margin debt is up 20% YoY but is not the threat it used to be:

Easy forecast: it will be very bumpy for a while.

Considering Trump’s tectonic policies, even the fearless should be cautious.

FYI:

The White House said on Sunday that more than 50 countries called this weekend. Ed Yardeni: “The President wasn’t negotiating trade deals this weekend. He was too busy relaxing on the links”

From the FT:

• This week, just before the tariff chaos, 63% of Americans had a negative view of the government’s economic policy, comfortably the highest figure since records began almost 50 years ago.
• All-time records were also shattered for the share of people who expect the economy to further deteriorate over the next year.
• Just 25% of US adults said they expect their finances to look better in five years than today — lower even than at the nadir of the Great Recession.
• Only the MAGA disciples still keep the faith:

• “If you are going to fight a war against the world, then get the facts right. (…) how much of the exports of other countries could replace US exports excluding US imports. We would need 27% more skilled labor to replace the lost foreign products net of exports. Good luck on that one.” (David Blond, former chief economist for the Pentagon via David Kotok)

Source: X

• Check out what’s going on in anything related to private credit or private assets. Apollo is down 38% from its peak. Blackstone is down 38% from its peak. Ares management is down 41%. This is a cratering. And so just think about what’s going on at any other rinky dink private investing firm around the country right now.

Fareed Zakaria:

The world economy has grown to a size and scale that it will find ways around American protectionism, which is now among the world’s most egregious. (…)

Since Trump first took office in 2017, the United States has abandoned virtually all efforts to expand trade. But other countries have picked up the slack. The European Union has signed eight new trade deals, and China has signed nine.

As Ruchir Sharma, the chair of Rockefeller International, notes, “Of the 10 fastest-growing trade corridors, five have one terminus in China; only two have a terminus in the U.S.”

Countries around the world need growth, and that means trade. China will clearly be the big winner in this new world economy because it will position itself as the new center of trade. Add to this Trump’s hostility toward America’s closest allies, and you will likely see Europe, Canada and even some of America’s Asian allies find a way to work with China.