Weekly Research Briefing: Uncertain Trade Bridges
Are President Trump's guardrails still in place? Or have the global trade wars begun? Will the tariff threats and resulting economic volatility have a long lasting impact to the financial markets? Will anti-U.S. trade alliances be formed? Will foreign debt buyers show up at the next U.S. Treasury bond auction? Should I cancel my weekends for the next four years?
Saturday's big tariff announcement on nearly half of all U.S. imports sent us scrambling to calculate the impacts. What we guesstimated given the opening tariff hikes of 10-25% across all imported goods from China, Canada and Mexico:
- Higher prices estimated to be a $1,000-$2,000 cost to U.S households and hit all areas of daily spending from the grocery store, to the gas station, to our healthcare spending
- The average new car price is estimated to rise by $3,000
- Supply chain bottlenecks will break and hit auto and new housing production
- Retaliatory tariffs from the three nations will hit many US industries including some of our largest like grain and meat production
- Inflationary costs of tariffs will end the Fed's current rate cut cycle and lift short term Treasury yields
- Long term Treasury yields could fall as GDP growth falls and recessionary odds increase
- Top decile market equity valuations will react negative to tariff uncertainty as corporate earnings are hit by lower sales volume and higher costs of goods sold
- New IPOs and M&A activity could slow as investors wait for clarity and certainty
- Likely that both Mexico and Canada could fall into a recession which would further negatively impact U.S. GDP, as well as increase the likelihood of the illegal drug trade across our borders
On Monday morning, Mexico and the U.S. decided to pause their tariff actions for one month. As I write this at midday Monday, it appears that Canadian tariffs will also be delayed by 30 days. So it looks like only China will see the increase this week, while Europe waits in the on deck circle for their tariffs. There will be few winners amid this trade chaos. Volatile and irrational decision making will push some to no longer prefer U.S. goods and services. Good luck trying to restock Kentucky Bourbon and Tennessee Whisky at Canadian retailers or restaurants. We hope that rational heads will prevail and that we can return toward normal economic and financial activities.
The FOMC met last week and stayed put on rates. They are pleased with the economy and with continued signs of disinflation. They are uncertain on the impact of the trade war threats and will avoid speculating on the range of possibilities. This week we will see last month's employment data series: JOLTS, the ADP and Friday's jobs report (which should be strong), but how much will it matter if tariff talk is still front and center. It is also the last big week for large cap earnings. The individual company releases will still be relevant, but will the market pay attention? As my wife reminded me this weekend, the one really nice thing about private market investing is that there are no hourly violent moves in the underlying assets. Just keep the public stock charts and screens minimized this week. Have a good week.
"The Dumbest Trade War in History" as titled by the WSJ Editorial Board...
Mr. Trump’s justification for this economic assault on the neighbors makes no sense. White House press secretary Karoline Leavitt says they’ve “enabled illegal drugs to pour into America.” But drugs have flowed into the U.S. for decades, and will continue to do so as long as Americans keep using them. Neither country can stop it.
Drugs may be an excuse since Mr. Trump has made clear he likes tariffs for their own sake. “We don’t need the products that they have,” Mr. Trump said on Thursday. “We have all the oil you need. We have all the trees you need, meaning the lumber.”
Mr. Trump sometimes sounds as if the U.S. shouldn’t import anything at all, that America can be a perfectly closed economy making everything at home. This is called autarky, and it isn’t the world we live in, or one that we should want to live in, as Mr. Trump may soon find out...
None of this is supposed to happen under the U.S.-Mexico-Canada trade agreement that Mr. Trump negotiated and signed in his first term. The U.S. willingness to ignore its treaty obligations, even with friends, won’t make other countries eager to do deals. Maybe Mr. Trump will claim victory and pull back if he wins some token concessions. But if a North American trade war persists, it will qualify as one of the dumbest in history.
It is unfortunate that President Trump was not an investor with his Treasury Secretary's recent hedge fund...
@NickTimiraos: One year ago (almost to the day), Scott Bessent wrote to his investors:
If you buy anything from these categories, then you will have higher costs after the tariff hikes...
That didn't take long at all...
@scottlincicome.bsky.social: Most predictable headline ever...
For the 400,000 U.S. grain farms, the tariffs will mean lower sales and much higher costs...
Joining in the tariff pain will be the 900,000+ U.S. auto workers...
Among the most exposed industries to a regional trade war is automotives, with vehicle suppliers accounting for more than 930,000 jobs. Tariffs would jeopardize those positions, boost costs for consumers and undermine a “highly integrated North American supply chain that is critical to US competitiveness,” according to a statement from MEMA, an association of auto industry suppliers.
According to research by BE’s Gorton-Caratelli, carmakers in the US rely on Canada and Mexico for more than 80% of some key auto parts, with American brands particularly reliant on regional suppliers.
Steven Downing, CEO of Michigan-based Gentex, which sells technology for automotive vision such as auto-dimming rearview mirrors, said on a call with investors Friday that tariffs could lead to “a little bit of chaos here in the first half of the year.” Gentex’s CFO Kevin Nash estimated an impact on raw materials from Mexico in the “$5 million to $10 million range” as a worst-case scenario.
The homebuilding industry speaks up in direct letter to the POTUS...
"An ongoing challenge facing home builders is the cost and availability of building materials. Since January 2021, inputs to residential construction saw price increases of just over 30%. Our sector relies heavily on a diverse and cost-efficient supply chain for building materials such as lumber, steel, gypsum and aluminum. While home building is inherently domestic, builders rely on components produced abroad, with Canada and Mexico representing nearly 25% of building materials imports. Imposing additional tariffs on these imports will lead to higher material costs, which will ultimately be passed on to home buyers in the form of increased housing prices. Further supply chain disruptions from increased tariffs coupled with increased demand for materials could also hinder rebuilding efforts in areas affected by natural disasters, which you have pledged to help rebuild as quickly as possible."
Here is just one example of how the tariffs could affect one of the largest U.S. railroad companies...
Similar effects will be felt by all other transportation companies who ship goods to and from our three largest trading partners. And because railroad, trucking and shipping are asset heavy businesses, the impact to earnings is multiplied for ever drop in volume.
Loop Capital Downgrades $UNP to Sell from Hold, Lowers PT to $200 from $265
Analyst comments: "We’re in an upside-down market where company strengths suddenly become weaknesses, and Union Pacific is a prime example. It is by far the biggest rail player in the North American auto supply chain, which will be disrupted by these tariffs, requiring a complete restructuring. In the meantime, Union Pacific is set to transport significantly fewer autos and auto parts, as North American-produced vehicles become more expensive due to multiple border transits per vehicle.
Another key strength—its extensive access to Mexico, including all six rail gateways—now presents a risk. Reduced border traffic and a likely Mexican recession will not benefit Union Pacific. Additionally, its 26% ownership in Mexican railroad Ferromex could face challenges.
Union Pacific also hauls containers from China off the West Coast, exports U.S. grain to Mexico, and imports Mexican beer—each of which faces demand risks in the near term. Given these headwinds, we are downgrading to Sell." (analyst: Rick Paterson)
Agreed. Some damage will have been done...
"Even if tariffs are called off tomorrow, the increase in policy uncertainty will be hard to put back in the bottle" - J.P. Morgan
The biggest risk to the U.S.'s economic future if the threat of tariffs continue...
Trump’s tariffs threaten to destroy the unity of the western alliance. He is sowing the seeds of an alternative grouping formed by the many countries that feel newly threatened by America. Co-operation will be informal at first, but will harden the longer the tariff wars go on.
The collapse of western unity would be a dream come true for Russia and China. Trump himself may not care; he has often expressed his admiration for Vladimir Putin and Xi Jinping. But Marco Rubio and Mike Waltz — the men Trump has appointed as secretary of state and national security adviser — both claim to believe that containing Chinese power is the central strategic challenge facing the US.
If that is the case, it is profoundly stupid for Trump to impose tariffs on China, Canada and Mexico (although the Mexicans may have negotiated a one-month stay of execution). In so doing, he risks creating a convergence of interest between these three countries — as well as the EU, which has been told it is next in line for the tariff treatment...
Countries such as Britain and Japan that have not yet been singled out for tariffs might breathe a sigh of relief. But they are kidding themselves if they think keeping a low profile will buy them immunity. If Trump decides that his first tariff war has worked, he will certainly look for new targets.
Corporate America also needs to wake up and stop the sycophantic prating about the return of “animal spirits” to the US economy. What Trump is essentially offering America is economic autarky and the destruction of the western alliance. That would be an economic and strategic disaster for American business — and for the US as a whole.
At some point other nation's will become tired of the threatening games and work together...
No way that the S&P 500 keeps its near all-time high multiple in a world with tariffs causing earnings, inflation and interest rate uncertainty...
A 10% correction to the 5-year P/E ratio average is easy to visualize. And if trade wars accelerate, I would slide some chips over to a 20% correction.
One thing helping stocks this week will be a return of aggressive corporate stock repurchases as Goldman Sachs illustrates below...
A good January ISM, but will it even matter?
@LizAnnSonders: January ISM Manufacturing up to 50.9 vs. 50 est. & 49.2 prior (rev down from 49.3); new orders up to 55.1 vs. 52.1 prior; prices paid up to 54.9 vs. 52.5 prior …employment up to 50.3 vs. 45.4 prior
This is the last major earnings week for large cap U.S. companies...
Speaking of earnings, were Chili's comp store sales really +31.4%?
Okay, who caught the 2.5 year, eight-bagger in Brinker International's stock price move? That was a great stock back when I was young and they had a one-page menu. Who says there isn't any gold in U.S. small caps. I am definitely going to have to find a store to see what kind of pixie dust they are sprinkling on all the dishes.
Reports Q2 $2.80 v $1.80e, Rev $1.36B v $1.24Be; Raises outlook sharply;
Notes new guests trying Chili's and return guests coming more frequently despite a more competitive promotional environment
- Brinker SSS +27.4% y/y v +16.2%e
- Chili's SSS +31.4% y/y
- Maggiano's SSS +1.8% y/y
- Restaurant Op margin 19.1% v 13.1% y/y
- Adj EBITDA $216M v $107M y/y
- Comments: "Chili's sales comps accelerated to +31%, driven both by new guests trying Chili's and return guests coming more frequently despite a more competitive promotional environment. These results would indicate we are building a much stronger business for the long term."
(TradeTheNews)
Remember a week ago when all we talked about was AI and DeepSeek?
Well, even with all the tariff and trade war threats, computing demand continues to increase exponentially.
Current and widely used AI models, including OpenAI’s GPT-4 and Meta’s Llama 3.1, were trained at data centers that use around 30 megawatts of electricity at a time, according to the nonprofit research group Epoch AI.
That’s roughly as much power as 30 Walmart stores use at any given moment.
Trends suggest that by 2030 data centers for training the largest AI models will require more than 5 gigawatts of electricity, about what Manhattan consumes at a time, on average.
“There is an incentive to go bigger,” says Jaime Sevilla, director of Epoch AI. “Since 2020, we’ve known that if you train a model for longer and on more data, you are able to squeeze more performance out of it.” He doesn’t think that DeepSeek changes the outlook for power consumption.
Data center build cost inflation running at 60%...
Amazon.com Inc. is expected to spend 60% more than previously announced on a massive data center project in Mississippi, underscoring the escalating costs for artificial intelligence infrastructure.
The company will spend $16 billion to construct two data center campuses north of the state capital Jackson, according to state planning documents reviewed by Bloomberg. When Amazon announced the project a year ago, the company put the price tag at $10 billion and called it “the single largest capital investment in Mississippi’s history.”
Here is a good chart showing how data center growth is ripping thru 114 year old Eaton Corp's quarterly earnings...
@TheTranscript_: $ETN Eaton CEO: "Hyperscale customers alone expect to spend almost $300B in CapEx in 2025, +30% YoY...the data center construction build rate doubled between '23 & '24...any notion that this market will slow down is simply not consistent with any of the data that we're seeing"
We have been waiting for the IPO market to get active. Venture Global's IPO will not be one that market bulls or investment bankers point to…
Initial valuation price talk was double where the stock is currently trading. Maybe this LNG exporter has found a fair trading level after the reduced IPO pricing and further post-DeepSeek energy sector decline.
More generally, markets have a way of recalibrating, and Venture Global’s IPO offers a nuanced lesson. It’s a reminder that valuations aren’t fixed by management or banker decree, but rather hammered out in the back-and-forth with investors.
The key takeaway from Venture Global’s market debut is clear: investors are willing to pay a premium valuation, but only if the financials justify it today — not based on the hope that the company might enter a higher-growth phase two or three years down the line.
Even in these optimistic markets, there’s a boundary between visionary thinking and valuation credibility. Venture Global’s down-priced, downsized offering is not a negative omen for the IPO market, but a reality check at a time of market excess elsewhere.
As more often seen now, most of the value is created in the private market, not after a company goes public...
Pimco, one of the world’s largest bond managers, is sitting on one of the most profitable investments in its 50-year history. It’s a stock.
Currently, Pimco owns 354 million Class A shares of Venture Global, the natural-gas exporter that went public on Friday at $25 a share. And while the stock has since dropped to about $20, the California manager’s stake is still worth about $7 billion. That is more than 14 times what the shares cost the investment firm as it accumulated them over the past eight years. On paper, it is one of Pimco’s most profitable investments in any one security, people familiar with the firm said.
Pimco’s unusual windfall is the latest sign of the rise of private markets. The pursuit of private equity, private debt and other high-octane investments is transforming the once-staid world of asset management—increasingly pitting traditional mutual-fund firms against the alternative-investing stalwarts that manage money for pensions and other institutions.
The other big IPO of the month, Smithfield Foods, got public and is now in the black for it's IPO buyers after a weak start caused by the tough news cycle...
Smithfield Foods Inc. shares fell 1.3% in the pork producer’s return to being a public company, after the stock priced below the range offered in its IPO.
Shares of the world’s largest pork producer closed at $19.75 each on Tuesday, below the initial public offering price of $20 each. Smithfield and an indirectly owned subsidiary of its backer, Hong Kong-listed WH Group Ltd., sold about 26 million shares to raise $522 million.
The trading gives Smithfield a market value of about $7.8 billion, based on the outstanding shares, well above the roughly $5.38 billion WH Group projected last year.
Smithfield and WH Group had offered 17.4 million shares each for $23 to $27 apiece, a previous filing showed. WH Group, which acquired Smithfield more than a decade ago, will maintain control of the company after the listing.
A U.S. small cap aerospace supplier goes private after turning $100 into $182 over twenty-nine years...
By comparison, a $100 investment into the S&P 500 would have a total return of $1,446 today. Let's see if private market ownership can do a better job of generating returns in their Triumph Group investment.
Private equity firms Warburg Pincus and Berkshire Partners agreed to take aircraft parts and services supplier Triumph Group Inc. private for about $3 billion, including debt.
The buyout firms offered to pay $26 per share in cash for the Radnor, Pennsylvania-based company, according to a statement on Monday that confirmed an earlier Bloomberg News report. The offer price represents a premium of roughly 39% to the closing price on Friday. The transaction is expected to close in the second half of this year, subject to approval from regulators and shareholders.
Triumph Group shares jumped as much as 37% to $25.61 in US premarket trading on Monday. The company’s market value was about $1.5 billion on Friday. Triumph also has about $966 million in debt, according to data compiled by Bloomberg.
Our new 2025 Global Private Wealth Survey showed that advisors continue to plan on increasing their client exposures into the private markets…
Private wealth professionals from around the world shared how they plan to use private market investments in 2025. One key finding: 30% of advisors plan to allocate 20% or more to the asset class. See more details in the full survey.
Our Co-CEO, Erik Hirsch, gave a great interview last week discussing the case for investing into privately held companies...
As a long time public market investor, I thought it gave many good examples and reasons for why investors need to be more open minded about the asset class. For those advisors with clients asking "Why PE?", I think this would be a great listen for them. Even I pick up an extra bullet point or two when I hear Erik talk to others so maybe you will enjoy it also.
Erik joined NPR's Full Disclosure podcast to discuss how capital concentration in the public markets and the trend of fewer companies going private makes a strong case for diversifying through private markets investing, the mechanics of private markets, opportunity set for individual investors and more. Listen here:
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