{"id":1532738,"date":"2025-04-27T20:20:00","date_gmt":"2025-04-28T00:20:00","guid":{"rendered":"https:\/\/bugaluu.com\/news\/?p=1532738"},"modified":"2025-04-27T20:20:00","modified_gmt":"2025-04-28T00:20:00","slug":"deep-breaths-whats-next","status":"publish","type":"post","link":"https:\/\/bugaluu.com\/news\/deep-breaths-whats-next\/1532738\/","title":{"rendered":"Deep Breaths: What’s Next?"},"content":{"rendered":"

Deep Breaths: What’s Next?<\/span><\/p>\n

\n

By Peter Tchir of Academy Securities<\/em><\/p>\n

Deep Breaths \u2013 What\u2019s Next?<\/h3>\n

Markets got a reprieve this week, as the administration seemed to back off the idea (which was supposedly never an idea) to fire Powell. There were also more statements about backing off on some of the tariffs already in place.<\/p>\n

Beyond that and more importantly, there seemed to be some progress on deals. We discussed the possibility last weekend in Dealpalooza<\/a>. What we are hearing is that \u201cterm sheets\u201d are being circulated. Fairly basic outlines of deals, similar to what China seemed to agree to during Trump 1.0, but failed to consummate or live up to. I am even hearing that the U.S. might just attempt to negotiate memorandums of understanding. Basically, an agreement to work on an agreement with some parameters outlined. The good news is that it seems like the administration is shifting away from harsh, possible lose-lose negotiations. The bad news is that the market may be expecting more.<\/p>\n

Getting tariff reductions will be easy<\/strong>! Getting reductions in tariffs will be easy and always would have been.
\n\tImport quota agreements<\/strong>. It will be easier for some countries than others. Easier for some products than others (commodities versus finished goods). Some will be able to be included in commitments for military purchases. I expect some success here, but it won\u2019t be overwhelming and will be clouded by some questions on enforcement.
\n\tRestricting trade with China<\/strong>. I\u2019m not sure if this is being included, but at this point it is unlikely to get much traction given the actions, geopolitically and economically. See If We Could Turn Back Time<\/a>, for thoughts on how prior actions are impacting future deals.
\n\tNon-tariff barriers<\/strong>. Very real, but very difficult to calculate an exact figure. Despite their importance, it doesn\u2019t seem like the term sheets will focus on them (which leaves a major obstacle to trade in place).<\/p>\n

What I also liked was a lot more focus on taxes and some sort of \u201cbig deal\u201d via Congress<\/strong>. We have argued about the need for a Policy Pivot <\/a>for the prior few weeks. Policies that can achieve our goals of domestic production without creating an explicit zero-sum game with other countries.<\/p>\n

There is so much that can be done domestically, that backing off of tariffs to focus on other things makes sense <\/strong>(Peter Navarro, a key advocate for the tariff policies, has taken a greatly reduced role, at least in terms of public facing announcements).<\/p>\n

India First?<\/h3>\n

Based on the latest chatter (which can change at a moment\u2019s notice), it looks like India will be the first to strike a deal<\/strong>.<\/p>\n

According to Grok, India\u2019s tariff rate on the U.S. was about 12%, versus 2% the other way<\/strong>. Given India\u2019s per capita income of about $3,000, it would seem that India can lower many tariffs, and it might not change the trade dynamic very much.
\n\tIndia has relatively strict currency controls<\/strong>. That should be part of a broad trade agreement as it can act as a non-tariff barrier, but my understanding is that it won\u2019t be addressed (making a deal more likely).
\n\tIndia can buy military equipment from the U.S<\/strong>. That will help solidify a deal.
\n\tApple announced moving production of phones for sale in the U.S. to India from China. It\u00a0seems likely that this announcement provided some insight into how the deal with India was progressing.<\/strong><\/p>\n

Markets are likely to respond positively to any deal, though a lot is already priced in, and the actual terms and conditions will matter (especially as stocks surged with the U.S. de-emphasizing tariffs).<\/p>\n

It is unclear how a tariff deal will impact revenue generation from tariffs (it won\u2019t, but not sure that was ever a real thing) or how many jobs will be brought to the U.S. (presumably some, but if the deal primarily encourages manufacturers to move from China to India, it hasn\u2019t accomplished much).<\/p>\n

Freight Slowdowns and Inventory Concerns<\/h3>\n

I\u2019ve seen a lot of charts showing slowdowns in shipping and domestic freight. I\u2019ve seen so many of them that I have to assume you have too, so I won\u2019t try to recreate the charts (but just in case, here is one).<\/p>\n

<\/a><\/p>\n

The big question, like everything else, is how quickly can those flows be reversed?<\/strong><\/p>\n

As deals are announced, will this reverse course, or have we already set in motion a chain of events that might be difficult to reverse?<\/p>\n

Ultimately, a lot comes down to what is agreed to with China. <\/strong>While I want to bask, for a moment, in the sun of deals and a pivot, it is time to at least start considering that there is a lot more to think about on the tariff and trade front.<\/p>\n

More Tariff Complexities<\/h3>\n

As deals are negotiated, corporations will be looking to optimize the amount of tariffs they pay.
\nOne common example, which will likely gain traction once there is some certainty of deals, will likely be exploited (as it is incredibly difficult to verify).<\/p>\n

ABC Corp has two parts manufactured in Country X.
\n\tThose two parts get shipped from Country X to Country Y. Any tariff between country X and Y would be paid.
\n\tABC Corp makes a part in Country Y and then assembles the 3 parts into a finished product that gets shipped to the U.S. to be sold.
\n\tWith strict country of origin policies in place (which is likely to be the case), ABC Corp, when it imports the finished good, will pay tariffs on Country X\u2019s rate for the two parts, and Country Y\u2019s tariffs on the residual amount.<\/p>\n

If Country X is a high tariff country with the U.S. then ABC Corp is highly incentivized to reduce the value of the two parts coming from country X. If the finished good is worth $10, the overall tariff paid will be lower if the value is largely ascribed to part C and the \u201cfinishing process.\u201d<\/strong><\/p>\n

Even with efforts to ascribe \u201cappropriate\u201d values it is extremely difficult to do for 1,000s of goods, with 100s of parts, and a myriad of \u201cprocessing\u201d steps.<\/strong><\/p>\n

We will see how the deals come out, but there are so many workarounds that even good deals might take a long time to have the desired effects <\/strong>(better than no deals, but again, I\u2019m not sure the process we\u2019ve gone through was the most efficient way to get to this point).<\/p>\n

Smartphones, the U.S., China, and India<\/h3>\n

We have already mentioned the announcement that Apple will move production for phones destined for the U.S. market from China to India.<\/p>\n

Seems good for India.<\/strong><\/p>\n

Seems bad for China.<\/strong><\/p>\n

But I spent some time with my good friend Grok on smartphones:<\/p>\n

Apple sold 43 million iPhones in China in 2024. <\/strong>I have no idea what the margin is on these sales. They don\u2019t count as U.S. exports to China as they were made in China (presumably), but an American company benefited from these sales. I haven\u2019t heard if China has agreed not to retaliate against companies moving production out of China, but that does seem to be a risk.
\n\tChinese brands sell very few phones in the U.S.A.<\/strong>
\n\tIn 2024, according to Grok, Apple had about a 28% share of the global market.<\/strong> Samsung came in at 23%. But Xiaomi, Vivo, and OPPO combined for a 33% share of the global market. Primarily in China, India, and Emerging Markets, with some penetration into Western Europe. Huawei has also apparently being growing. By all indications, the Chinese phones serve the lower to (at best) mid-price markets and presumably are less profitable than what high end companies like Apple and Samsung can generate.
\n\tI find it at least curious that 2 companies, with 18% share of the global smart phone market, probably need to be searched for by many people reading this. <\/strong>I had to double check this and only vaguely remembered Vivo and OPPO from work I had done on Chinese phone sales in India.<\/p>\n

It is very easy to say, \u201cthey need us more than we need them,\u201d <\/strong>and it may be completely true, but every time I dig into the details, it doesn\u2019t seem as clear cut as you would expect.<\/p>\n

The U.S. is by far the biggest, richest market in the world. Companies can generate the most profits by tapping into U.S. demand for the highest quality items and our ability to afford them.<\/p>\n

The U.S. Consumer<\/h3>\n

Let\u2019s repeat the last sentence from the prior paragraph. The U.S. is by far the biggest, richest market in the world. Companies can generate the most profits by tapping into U.S. demand for the highest quality items and our ability to afford them.<\/strong><\/p>\n

Maybe that will be enough to win the trade war?<\/p>\n

Credit card debt <\/strong>outstanding has been spiking much higher in the U.S. Delinquency rates are rising to normal, or worse than normal, in virtually every category of debt that I checked out.<\/p>\n

Can the U.S. consumer \u201cwin\u201d the trade war?<\/strong><\/p>\n

We have all learned never to bet against America\u2019s desire to consume, but it seems stretched at the moment \u2013 which is why I think it is so important to pivot to policies that focus on domestic growth. <\/strong>Yes, we will get some \u201cwins\u201d in trade deals, but if that is the primary source of job creation in the U.S., I think we will all be sadly very disappointed.<\/p>\n

Bottom Line<\/h3>\n

A lot to cheer about! Whether markets have already cheered too loudly or not will be determined as\u00a0details start emerging.<\/p>\n

On Google trends, searches for the U.S. deficit recently increased.<\/strong><\/p>\n

For all of the wild gyrations hitting the Treasury market in the past few weeks, the deficit has been low on the list. With DOGE receding from the headlines, with what looks like less than $150 billion of savings found (as opposed to the trillions hoped for), and focus shifting to some \u201cgrand deal\u201d or \u201cbig package\u201d (which I think is good), we could see yields pressured higher on debt and deficit concerns.<\/p>\n

I remain extremely concerned about the American Brand and the damage done to U.S. business interests across the globe, even as we get deals announced.<\/p>\n

I expect the hard data to start reflecting the damage done to corporate spending\/orders\/responses to tariffs in the coming weeks.<\/p>\n

Can that be reversed by good deals? Sure.\u00a0<\/strong><\/p>\n

Is it possible that the market has been so focused on the domestic back-and-forth in terms of policy that we haven\u2019t noticed shifts that will impact us negatively down the road? <\/strong>I think so.<\/p>\n

The administration seems to have reversed course on many things that I (and many others) didn\u2019t think would work. That is great! The ability to pivot and shift away from losing strategies is powerful and as I\u2019ve argued, I think it dramatically reduces the scale and scope of any recession we get (which I still think is coming).<\/p>\n

But as we all get some relief from the headlines we will need to realistically digest what impact there has been that will be felt in the coming months. <\/strong>Each headline seems to have less influence, as negative headlines get dismissed since the view is that we will backtrack from them anyways and at current levels, positive headlines help less than when the market was much cheaper.<\/p>\n

Beyond that, we will need to start assessing deals and the likely path of future policy (which is harder than it has ever been, since things like \u201cIt is Time for Main Street versus Wall Street<\/strong>\u201d seem incredibly well messaged, but lasted less than a month, at least in its initial form).<\/p>\n

Many people will argue that the worst of the policy risk is behind us, which seems valid.<\/strong><\/p>\n

That does not mean the worst of the economic or market risk is behind us, as markets seem to have priced in a lot of optimistic outcomes at this stage.<\/strong><\/p>\n

Hopefully things remain quiet and positive, but I think we are stuck trying to sell big moves to the upside and buy big moves to the downside, because things are never as good or bad as they seem with an administration that has some aggressive goals (rebuilding the middle class) and seems quite willing to be aggressive, even if they shift course when it is clear that it isn\u2019t working smoothly.<\/p>\n

Kind of a long bottom line, but it is difficult to have conviction with so many moving parts, and a market where 1% in stocks or 5 bps in bonds seem like normal intraday moves, let alone over a week\u2019s worth of trading.<\/strong><\/p>\n

I guess my single biggest fear is that we are playing to a narrative, <\/strong>and the details won\u2019t support that narrative. Take the recent reprieve as an opportunity to take some deep breaths and prepare for the next round of tough decisions that we will likely face on the investing and corporate fronts!<\/p>\n<\/div>\n

Tyler Durden<\/a><\/span>
\nSun, 04\/27\/2025 – 16:20<\/span><\/p>\n

\u200bhttps:\/\/www.zerohedge.com\/markets\/deep-breaths-whats-next<\/a>\u00a0<\/p>\n","protected":false},"excerpt":{"rendered":"

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