Stock market party but why?

If bonds are back today, why wait for tomorrow?

At PGM, our fixed income strategies help investors uncover hidden value and unlock opportunities.

Whether you're looking to enhance your income or diversify your portfolio, our broad range of strategies bring together local expertise and deep credit research to help you achieve your long-term goals.

PGM, our investments shape tomorrow, today.

Pushkin

Stock markets are in party mode.

May was the best month for the big US stocks index, the SP 500, in a year and a half.

We have gains of something like five and a half percent.

Now, not to be a massive Debbie Downer, but

people are really struggling to figure out why this is happening.

Everything on some level is pretty terrible.

In the past few days, that wise negotiator, President Donald J.

Trump, has threatened to double tariffs on steel and aluminium, aluminum, take a pick.

And he's pushing other countries for their best offers to avoid the other supersized trade taxes by Wednesday.

US debt was downgraded not so long ago.

Investors are worrying about deficits again.

And the world is waking up to the risk of additional taxes on foreign investments in the US.

But as I say, party party.

So today on the show we're going to try and at least attempt to figure out what is going on there and talk about what is actually happening with trade tariffs at least today.

This is Unhedge, the markets and finance podcast from the Financial Times and Pushkin, the pod that has infamously brought the taco trade directly to your ears.

Listen to last week's pod if you have no idea what I'm talking about.

I am joined down the line all the way from New York City by the big man, actually kind of a big deal these days, Mr.

Robert Armstrong from the Unhedged newsletter.

And I learned just moments ago, listeners, that he's not allowed to wear shoes while he's recording this podcast.

Rob,

what's that about?

I can't wear shoes because I kick the table and it ruins the recording.

And every time the producer, Jake, forces me to take my shoes off, and it's extremely infantilizing.

And so it's like every time I do this show, it starts with a small humiliation that keeps me in my place.

Rob, I'm delighted to note that you don't think you're too famous to talk to me anymore now.

But are you like wearing mirror shades indoors and like having assistants bring you yellow M ⁇ Ms and stuff these days?

That was my life.

for two days, 48 hours.

Last Thursday and Friday, I had a personal assistant and my own plane to take me from interview to interview.

But the plane and the assistant left me, and I'm just a normal guy again today.

No more interviews, nothing.

You're just a normal man.

The news cycle is just brutal, man.

They just chew you up and they spit you out, Katie.

Now, Katie, you said earlier that you don't want to be a Debbie Downer.

But is Debbie Downer not kind of your brand, Katie?

Bit of a misery, girls.

It has to be said.

No one's picking out yellow MMs for me.

So yeah.

Okay, fair, fair, fair, fair.

Why don't you spin the other side of that, right?

Why are markets so happy?

Great month in May in the US.

Now, I would say

US markets are still only just positive on the year when the rest of the world has gone off to the races.

Nonetheless, good May.

Okay, so let me just say, I did a little bit of mathematics this morning.

Always a dangerous proposition.

And I found that almost three-quarters of the gains in the S ⁇ P 500 since the 1st of May come from the following stocks.

And I'm going to list these stocks, and you tell me if they sound at all familiar or if they have anything in common.

The stocks are

NVIDIA, Microsoft, Meta, Broadcom, Amazon, Tesla.

and Alphabet.

I mean, it sounds like the old magnificent seven trade.

Mag7,

baby, it's back.

We've just gotten into a time machine and gone back to when was the Mag 7 everything, kind of like mid-last year, or maybe all of last year.

And it's once again, it's those stocks that are powering the S ⁇ P 500 forward.

And I don't know exactly what to make of that other than

that these are stocks that have worked incredibly well over the last five years and maybe people are just going with what works.

You know, they like that story again.

And potentially, that might have something to do with the taco trade.

Walk me through that.

So you think

that taco is good for Mag 7?

Well, you might have been worried that Donald Trump is going to pick fights with everybody all over the world on every available topic.

And the Mag 7 stocks have massive global exposures.

Tesla and China is the most obvious example of that.

But although they're not goods companies, as a rule, with the exception of Apple,

and it's interesting that Apple is not on that.

Broadcom's taken its place.

These are very global companies, and if you're starting to doubt whether Trump is going to get in these big fights with other countries, maybe the prospects for these massive American global companies are a little bit better.

Well, I don't know.

I mean, you know, lots of investors were already worried about market concentration before the tariffs went kind of gaga.

So

I guess if you were worried about that before, you should be doubly worrying about it now if this is the only sort of part of the market that's pulling higher.

Maybe that's right.

That on the Debbie Downer side of all this is we were complaining that it was a fragile market that depended so much on these things.

And now we're back into that pattern again.

So now another thing.

Well, I'm sorry.

Go ahead.

I feel like I have a terrible interrupting problem, or at least I hear that from my wife, and I'm trying to control it.

Me and Mrs.

Armstrong, we know the score.

To the extent that you are able, can you update me, please, on where we're at with tariffs at the moment?

I just, I'm almost getting bored of trying to track it because they're on, they're off.

He's going up again by 50%.

He's going down again.

The steel and aluminium thing is on.

I give up.

Steel and aluminium is on, and we just got the big manufacturers' survey results yesterday for May.

We did.

And the goods economy does not like steel and aluminum tariffs at all.

No.

The survey results weakened month to month, and the comments from the survey respondents were like, please, please don't do this, basically, about steel and aluminum tariffs.

So this is a survey that goes out to kind of, you know, business executives and

companies, yeah.

Yes.

And some of them were saying, just this, the mere uncertainty over these tariffs, on again, off again, up again, down again, is creating as much

sort of is throwing as much sand in the gears of supply chains as COVID did.

Even though a lot of these tariffs have never actually seen the light of day, this sounds ungood.

Yeah, this is bad.

And you saw inventories spiked a bit in the last couple of months.

And that is very easy to understand.

If you think big tariffs are coming down the pike, then you buy inventory before the tariffs get on, and so you have it in the warehouse.

That has now leveled off.

So either the warehouses are full or companies don't think the tariffs are going to come or

they just don't know what's going to happen, so they've given up ordering ahead.

That is a slightly ominous sign.

Inasmuch as if the warehouses are now full, we have now bought ahead of the tariffs as much as we can, if that is what is going on.

Then at some point that inventory that was bought ahead gets sold through,

and then they have to order at the new tariff prices, and they have to pass those prices through to consumers.

In other words, once this inventory bump we've seen gets consumed, then the inflationary rubber hits the road.

But

again, not to be so down about it, The goods economy is not that big a part of the American economy, right?

It's a third or or less.

Services is where the action is in America.

So while we have not a terrible, by the way, but a slightly wobbly looking goods economy because of tariffs, the main story is the services economy.

And with a few exceptions, that economy still looks okay.

So

there is a fundamental economic story that is pretty good in America.

It's all about the inventories, which is a bit like when I stockpiled toilet paper before COVID.

I was right.

I was right about that.

And, you know, when there was the famous story of how, like, when they discontinued TAB, which was this unbelievably disgusting diet beverage in America, I don't know if you got that.

But like, people were filling their driveways with cases of tab so that they would have enough for the rest of their lives.

Tab and bog roll.

Now,

again, not being Debbie Downer, but I tell you three little numbers that are bothering people in markets at the moment are 899.

There is a little bit of the one big, beautiful bill, the big budget package that Trump is trying to get through on page like 110 million and 26, because this is like a huge document.

There's this little thing called section 899.

And we kind of touched on this in the pod the other day, but all of a sudden it's really bugging people.

And what it would do is it would say to foreign buyers of U.S.

financial assets, you're going to be subject to an additional tax if it is deemed that you as a country have a tax regime that's unhelpful to the US in some other way.

That sounds

not ideal in terms of, you know, the US needs foreign money.

There's a lot of foreign investors who are saying, hold up, wait a minute.

I do not like this.

I am not comfortable holding US assets with this sort of thing in the background.

Like, how worried should we be about this?

I think it would be good at this point to take a step back and just note how sort of structurally or philosophically Section 899 is similar to the tariffs on goods.

So the king fact here, the ruling kind of reality is

America spends more than it earns.

This is something we're famous for, and this has become extreme in recent years, and that expresses itself in a huge trade deficit, which means we buy more stuff than we sell to the rest of the world.

And it also expresses itself in what mathematically has to be the same thing, which is a current account deficit, which is basically more money comes in than goes out, because you need to finance all that buying with someone else's money if you're not earning it, right?

And so everybody has decided, seemingly all at once, that this very imbalanced American economy, where we spend more than we earn, is a bad thing.

And one way you might try to do any harm, like looking from over here, but like whatever.

It felt okay to me, but you know, nobody asked me.

So

you can do two things.

You can say, let's put a tax on imports, and that way perhaps

we'll change the balance that way.

Or you could go to the other deficit and say, let's put a tax on inflows of capital, right?

And it kind of amounts to the same thing in a way.

So I don't know that either one is a good policy, but they have deep similarities.

But there is an important addendum here, which is that this section 899,

a number which I feel is intrinsically ominous for some reason.

I don't know why.

It does not say we are just taxing foreign capital inflows to the United States.

It says instead, instead, if we don't like you for whatever reason, we're going to tax you a lot, right?

We're going to say you have a VAT tax or you have some naughty thing we think is unfair, and we're going to single you out in ways as yet unspecified and tax you.

And is the list of affected countries going to appear like on a sort of whiteboard on the rose garden, like the

penguin tariff?

Yes.

Who is thinking of the penguins?

The penguins are sending remittances from that island to the United States, to their relatives who live in zoos in the United States.

And now these remittances are going to be taxed at a swinging level.

So foreign investors are saying, look, I'm not a penguin and I don't think I've done anything wrong here.

And I think I've been lending my money to the US, which, by the way, it needs because it issues so many bonds and needs so many buyers.

This, like, no fair.

Why am I facing a potential tax on this?

Now, my guess is this is a sufficiently disruptive idea that it will fall the way of taco, that Trump always chickens out, and that this will somehow get scrubbed from the documents and will never happen.

But we have to assume at this point that it's a serious possibility.

So given that, it's really difficult for me to justify how

relatively buoyant compared to, say, the start of April US markets are.

So what it sounds like the chain of events here is

the markets puked at the start of april retail investors in the states did what they have always done for the past few decades and they bought the dip yes and god love them it's worked out fantastically for them that that's been an amazing trade but institutional investors

particularly in Europe, but even in the States, are saying, nope, I'm not playing.

I'm not playing until I know, first of all, what's going to happen at the end of the 90-day pause of the reciprocal tariffs.

I'm not playing until I know what the score is with this 899

thing.

So I feel like there's a bit of a kind of David and Goliath formation in markets.

Do we really know that, Katie?

I agree with you this far.

The weird thing we've seen, not quite in the last month, but in the last three weeks or so, is this pattern of

dollar weakening while treasury yields go up, which is a very rare circumstance because usually a currency's strength is determined by the differential between its interest rates and other available sovereign interest rates.

So usually

when you would see treasury yields going up, you'd see the dollar going up with them, right?

But the fact that you see treasury yields going up and the dollar going down is strange and alarming and is suggestive of the fact, as you say, that foreigners are not feeling comfortable with dollar assets.

Fine.

But I just, given how strong U.S.

stocks are, is it a lot of talk from the money managers?

Oh, we're not going to buy U.S.

stuff anymore.

Like, do they even have a button in their office that buys anything else?

Do you know what I mean?

Like, these people are so habituated to being overweight the U.S.

and buying American fixed income and equity assets.

I'm just slightly skeptical.

that while they might tell someone who asks them in a survey, how do you feel about America?

They might say, I feel bad, but I wonder if they've really changed the composition of their portfolios.

No word of a lie here.

I get emails from people saying, Please tell Rob Armstrong

that he needs to understand that us foreigners, we are not mucking around.

We really are going to pivot away from U.S.

assets.

And the sooner Rob and the rest of the U.S.

can get this idea through their head, the happier we'll all be.

Yeah, but the SP 500 says,

buzz off, foreigners, with your strange languages and your nice clothes.

You know, we're doing fine without you, pal.

Now, look, and treasury yields, look, the 30-year Treasury is not looking great.

The yields are high.

The prices are falling.

But God knows America can live in a 4.5%

10-year Treasury yield.

If it's 5.5%,

it's a bit, we're going to get the flop sweats.

You know, I just think it's like, you know, the yields get much higher than right now, it becomes really burdensome for the United States to support its debt, and it starts to really dominate, the interest payments start to dominate the budget.

But I think we can at least agree that we're getting some really mixed messages from markets here, right?

Correct.

Stocks doing pretty well.

Not as well as the rest of the world, but doing pretty well.

And it's mostly those big tech stocks.

Yep.

The government bond market is saying, ooh, we've got the heebie-jeebies about fiscal deficits and about institutions and all that stuff in the states.

You've got the dollar falling, which says the same sort of thing.

So

I would just soften.

Wait, wait, I'm interrupting again.

I'm interrupting.

I'm not going to play this podcast for my wife because she's going to see me doing this.

But I will interrupt again to say

the bond market is not freaking out that bad.

It's a little jumpy.

It's a little jumpy at the long end, but it just ain't that bad.

The vigilantes are visible.

The bond vigilantes are visible on the horizon, but they are not coming storming over the horizon

to they're not having a they're not having a full-on tantrum just yet no not yet

so

does that mean you're all in my

thought here is that stocks are on thin ice and that you need more good news which i is not currently kind of coming through to really sustain this going further do you think the worst has passed and the only way is up I wouldn't go that far.

I mean, as I've said on the show before,

stocks are expensive.

The economy, while it's pretty good, the trend is sort of flattish.

Earnings are quite good, but I'm not sure how much better they can get.

So I'm not like roaring into equities here.

I'm just saying there is this collection of orange flags.

I'm just saying the flags aren't red.

And so I'm not running out.

I have a lot of friends who are like, I'm selling all my stocks and just waiting the stuff out.

I'm not that person.

No.

I have plenty of cash in my portfolio for the reasons you've described so well, Debbie.

But

I still own a lot of equities too.

That's not investing advice.

That's just what one no longer famous schmuck is doing with his own money.

Listeners, Mr.

Taco has spoken.

Orange flags on the horizon.

Make of that what you will.

What you will.

You can ponder that in the short break before we come back with Long Short.

Speaking of alternatives, PGM's monthly podcast discussing trends and strategies in alternative investing.

The history and evolution of the Australian superannuation funds, it's interesting in so many ways.

They actually mandate savings into retirement plans, and they've become some of the biggest global investors in private markets now.

And their members have seen tremendous growth of their portfolios.

Hear the full conversation on PJM's podcast, speaking of alternatives.

Alrighty, now 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.

Rob, what you got?

I have a pair trade for you, Katie.

Another one.

Beautiful scene.

Okay, so I am going to go

long Blackstone and short KKR and Apollo.

Its great rivals in the private equity wars.

There's an outstanding piece in the Financial Times today by my excellent colleague Antoine Gara, basically making the point that Blackstone's business model is very different from the one that KKR and Apollo are going towards, where Blackstone is just a fee model.

It like takes your money and manages it for a fee.

It doesn't play with its own money.

Whereas Apollo and KKR have decided we're going to own insurance companies and other businesses that have their own capital and generate their own capital, and we're going to invest that money.

And

I think Blackstone, for this cycle, it might be on the right side of that bet.

I just feel like the lower risk, lower capital business fits the times a little better.

This is not investing advice for the extremely rich men who own Blackstone, KKR, and Apollo.

Yeah, I just like the idea of all these like extremely rich masters of the universe arguing with each other and just like bathing in money.

That reminds me of.

Money fight.

I am going to be long of a story that was in the FT last week about how Nigeria is cracking down on like money showers.

Whoa.

So apparently at weddings and big celebrations, you literally just like throw huge wadges of notes of money at people.

And

this has been described, I think it was like an insult to the currency and shouldn't be allowed.

And I think

I just love it.

That's the opposite.

Glorifies the currency.

So you get like really low-denomination Naira notes and just make it rain, baby.

Yeah.

I love it.

I really want to go to a Nigerian wedding now.

Yeah, seriously.

I'm ready.

I'm getting a huge wad of Naira and I'm going to party.

Yes.

With your newfound fame, which is quickly

wearing off.

Okay.

That is enough for us for today.

Listeners, we will be back in your ears on Thursday, so listen up then.

And in the meantime, remember...

Don't be a Debbie Downer.

Unhedged is produced by Jake Harper and edited by Brian Erstadt.

Our executive producer is Jacob Goldstein.

We had additional help from Topa Forge.

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.

Donald Trump has already changed the way we think about the US economy.

Now he's back in the White House, and Bloomberg's Trumponomics podcast is here to help.

I'm Stephanie Flanders, head of government and economics at Bloomberg.

Whatever the big question of the week is, we'll have something interesting to tell you about it in a lively conversation with the reporters and analysts closest to the action.

Listen to new episodes every Wednesday and follow Trumponomics on Apple Podcasts, Spotify, or wherever you listen.