Three surprises that might spook the markets

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Pushkin.

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.

Now, 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 deck hand, Aiden Reiter, or 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.

It was not working today.

So it was a rough commute.

It was a classic July New York commute.

yikes the odors katie the odors

aiden if you're trapped in a small room with rob right now then i see the start

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 first of all aiden 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 enshrines 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.

It 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.

Aaron Powell, I think sometimes people on this side of the pond don't realize, but it's literally called

the one big beautiful budget act.

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

ah so 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 go ahead

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.

That 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 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 4% on top of that is non-trivial.

It's pushing it by 10%.

Yeah, over the course of 10 years.

And 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.

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 out.

Pitters.

I don't know what pitters are.

Pitter pattern is, right?

No, pitter bread.

What's wrong with Peterbread?

Public budgets.

Here's the thing, guys.

So

the truest thing that people say in markets is that deficits don't matter until they do.

And it's so true.

Like, you know, deficit levels in major economies around the world, the amount of borrowing that big governments around 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.

Like, right now, it strikes me that there is at most a very moderate freak out going on around US deficits.

As I said, there was this freak out in April, and it was notable, and everybody thought it was all over.

U.S.

exceptionalism is finished.

Foreigners don't trust the dollar.

In 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 is not with you right now, Katie.

It'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 it's the trading pattern it's been for three months they 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 panic 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 bond land, but it's not disastrous.

For a week, but it's not a lot, you know.

Anyway, there's other things.

I'm not trying to justify.

I'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.

Yep.

Stock markets are doing okay.

Yeah.

Kathy Woods ARC Fund doing quite well, thank you.

For listeners who are lucky to not know what the ARC 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.

I mean, the explanation for the market's indifference 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.

Because 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 will go through.

You could argue that, yes, this is significantly increasing the U.S.

debt 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 niche 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 gonna put was it 20% or 25% on Korea and South Korea

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,

already covered.

Already covered.

Are electronics, already accepted.

The effective tariff rate is, I believe, goes from like 15.5 to 16%.

Like, 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 like 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.

I mean, how do we get to the...

And let it be noted, Katie, it's worse than that because Scott Besant, the Treasury Secretary and theoretically the adult in the room in Trump economic circles, he keeps mentioning Labor Day, which is the 1st 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, and listeners will know that I think they will be just the kicking will never stop.

Yeah.

That I think the deadline extensions, the tacoing, 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.

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's 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.

It 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 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.

I mean, of course, we've talked a lot on this show about taco, right?

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.

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.

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.

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.

But 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 mindset.

Yeah, that's reasonable.

Aiden, Rob selfishly grabbed two there, but what would you go for?

A weak treasury auction.

And 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 suggest that Taiwanese central bank and Taiwanese life insurers have turned away from treasuries.

There's little things around the edges like that that could add up to something concerning.

Aiden, that's not going to happen.

Secret.

Treasuries are going to be fine.

I'm team Aiden 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 like 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.

It 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, a little bit sticky and the 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 long short.

Bonds are back.

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Right, 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.

Aiden, why don't you go first?

I'm short regressive tax policy.

You know, regardless of your 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.

It seems just a strange political proposition.

So woke these years ago.

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.

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-footera thing.

And 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.

They'll blithely put their brands at risk getting involved in projects that just look awful.

Where is the moral compass, man?

Listeners, if you haven't read this stuff yet, read it.

Read it.

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.

This is wrong on all fronts.

First of all, yoga, no.

Hot yoga, hell no.

Hot yoga networking, like sort of organized fun with like colleagues or clients, whatever,

triple damn nation, hell no.

I'm here for like sporting networking.

So I went to the JP Morgan corporate challenge, like a five-ish K run around Battersea Park.

That's fine.

But hot yoga, you draw the line in 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 Topa 4hex.

Cheryl Brumley is the FT's global head of audio.

Special thanks to Laura Clark, Alistair 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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