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Good morning, everybody. This is Michael Cembalest with a mid-March Eye on the Market podcast this month called 50 Days of Grey because what’s been going on in the markets does feel a little sadomasochistic in terms of the administration policies. Recording this podcast from Vegas. This is actually my first trip here. I’m not really a Vegas kind of person.
For people that know me, that is consistent. I’m in the Wynn Hotel, and I’m looking out at Treasure Island and the mountains, and whatever else happens here. I wanted to record a podcast in conjunction with this Eye on the Market that we sent out today because of what’s going on, and how unique and unorthodox this all is for markets and for investors.
So I want to start with this, these pictures again, that I’ve been using this year to frame discussions about the administration policies, where it’s a little bit of Calvin Coolidge and small government and pro-business, and a little bit of James Polk and Manifest Destiny. And whether it’s Panama or Canada or Greenland, Andrew Jackson, Woodrow Wilson’s isolationism, Nixon’s Enemies List size, and powers, deportations and lower corporate tax rates, the one that we’re going to focus on most days.
McKinley. McKinley was all about tariffs and protectionism, and for those of you that have read some recent Eye on the Markets, McKinley’s tariffs didn’t work out so well for him or for the Republican Party. In, in, in the 1890 midterm elections, the Republicans lost over 100 seats in the House once the inflationary consequences of those tariffs became felt.
Anyway, the market reaction is pretty severe. And there’s something interesting about markets that I wrote about this time: The stock market can’t be indicted, arrested or deported. It can’t be intimidated, threatened or bullied. It doesn’t have a gender or, and ethnicity. It can’t be fired or furloughed or defunded. It can’t be primaried before the next midterms. It can't be seized, nationalized or invaded. And it’s the ultimate voting machine. And it reflects prospects for earnings, growth, stability, liquidity, inflation, tech, taxation and predictable rule of law. And the market consensus earlier this year, which was clearly wrong, was that the administration would carefully and surgically balance its advertised inflationary, anti-growth policies of tariffs and deportations with a lot of pro-growth policies.
The problem for investors is they’ve come storming out of the gates with a lot more of the former than the latter. And I, I did anticipate, as I wrote in the Outlook, in the Executive Summary, a 10 to 15% correction this year. The only surprise is that I didn’t think it would happen before 50 days has even passed since the inauguration.
So, if we look at what’s going on, we’re, we’re, we’re close to that 10% level on the S&P, we’re I think at a 20% correction, if you’re looking at the Mag 7, it may take time before the pro-market policies of this administration, whether it’s deregulation or infrastructure permitting, cajoling more foreign direct investment, which I think is a great thing.
The, the benefit, whatever DOGE spending cuts may take place, it’s going to take time before those pro-market policies materialize. And with the prospect of some kind of universal tariff or reciprocal tariff still in the wings for April, you know, we have some more downside risk in the markets here. And I would, if I had to put a number on it, I would say another 5 to 7%.
By the time all of the tariff clarity becomes clear, now, when if you get to those 12 to 15% overall correction levels on the S&P, when and if that should happen, I would look at deploying some excess liquidity if people have some in portfolios, but you know, that’ll take time to see when we get there.
I could be convinced that the U.S. needs some kind of painful short-term adjustments to reduce chronic deficits of, of traded goods, right, and we’re all aware of that. But it’s really hard to have a lot of confidence in the way this is being rolled out, given the zigzagging nature of some of the policies. And given that this same administration at the same time has been spending time and energy on establishing a strategic crypto reserve, that’s not a confidence builder with respect to their overall economic policies.
in terms of valuations, where that the Mag 7 valuations and the valuations on the S&P 500, ex the Mag 7, have taken a hit. I wouldn’t describe us as anywhere near kind of a severe bear market or cheap territory. We’re getting closer to some of the lowest Mag 7 valuations we’ve had in the last, you know, eight, seven or eight years, less so with respect to the rest of the market.
But I would be a little bit patient here. I, I did note the, the, the Department of Justice filed a 130-page report the other day arguing for another, they can’t require it, the judge has to approve it, but arguing for Google divestitures of Android and things like that, and Chrome. And bans on default search engine payments and maybe even bans on future AI and other search acquisitions.
So that sentiment may be weighing on the Mag 7 stocks as well. So in terms of the, the tariffs themselves, there’s a chart that we have in the piece that looks at the historical tariff rate and where we are right now. No matter how you cut the numbers we’re getting, we’re already at the high of the highest tariff rates of the last 50 years.
So the only question is, are we going to start approaching the tariff levels that existed in the ’30s and ’40s? And that’s why, that’s how we have to see what’s going to happen on the 10% tax on critical imports globally. What’s going to happen with the 25% tax on global autos? Will there be some kind of reciprocal tariff? Will it include VAT taxes or not? Will Trump put another 20% on China in advance of some potential Xi-Trump summit to have more negotiating leverage? So you know, we’ve got this chart in here. I think you’re going to see a lot of these charts. They’re all approximations because it’s complicated to figure out when some of these tariffs are overlapping with each other.
But we have a chart in here that, that’s our best take on where each one of these tariffs incrementally brings the, has the average tariff rate on imports relative to where we’ve been in history. You can see that here. The other thing we’ve done is we’re trying to have some discipline around how we analyze this, this administration, so we created a Trump Tracker.
It’s online and it has a bunch of charts. I’ve included four of them here in this deck and also in the Eye on the Market this week so you can get a sense of what we’re tracking. And these four things are not great confidence builders for investors. It shows the ISM surveys of prices paid in both manufacturing and services are rising.
It shows medium- and long-term inflation expectations. Surveys are rising and are my favorite. My single favorite economic indicator is the ISM new orders, less inventory chart because that shows you how much demand is percolating, net of inventory accumulation, that’s rolled over, and then small business capital spending plans have rolled over. So now that the business sector and other participants in the economy are digesting all of these policies, we’re, we’re starting to see some of the impacts in the, in the high-frequency data that we look at.
Tariffs for the auto industry would come at a difficult time because the growth, production and employment in autos have already been what was already weakening at the end of the Biden administration. And this would compound things, and you know, a history on the steel tariffs shows that most of the tariff increases end up being reflected in producer prices that are not somehow eaten magically by the exporting country.
And we have some information on that in here as well. I did notice that yesterday Ontario applied some kind of export tax on electricity transfers to some northeastern U.S. states. And in response, Trump has now doubled the tariff on imported Canadian steel and aluminum from 25 to 50%. I, I don’t think it’s going to have a large economic impact because of the scope of those, of the dollar value of those imports, but it may have an outsized confidence and knock-on impact on investors who were just trying to feel their way through a really unprecedented period, the usual sort. Not everybody agrees, but the usual suspects, whether it’s the IMF, the Yale Budget Lab and the Peterson Institute, all believe that these tariffs are going to result in a one-time hit to GDP and a one-time increase in inflation. You know, we’ll obviously, we’ll have to see how that plays out. But the bottom line here is I don’t think we’re through the market repricing of these tariff risks. The consensus view that, that the administration would be balanced and strategic about how it was rolling out these policies, I think, has been mistaken. And, and when we’re all trying to find our way through the fog from here.
At the same time that this tariff drama is playing out, the administration is also working on a reconciliation bill to avoid the double-whammy of having all the tax rates sunset higher to pre-2017 levels. Now, it’s not easy to negotiate a reconciliation bill when you’ve only got a four-seat lead in the House, which is the situation the GOP is in. Even with a lot of tight discipline around the caucus because you’re, you know, threatening to primary people that don’t, that don’t support.
So I wanted to just give you a sense for what this budget reconciliation bill could look like.
So we have this giant chart with pluses and minuses, and I’m just going to walk you through the main points here because I think it’s interesting to understand what they’re trying to accomplish. So the budget reconciliation bill would start out, step one, cut some spending, right, and it falls under these categories that, that don’t mean very much, like energy and commerce.
It turns out that the vast majority of the energy and commerce spending cuts the administration might pursue are actually Medicaid cuts of somewhere between $6 to 700 billion, then add in about $330 billion of spending cuts on student loans and about $230 billion of food stamp cuts. That falls under agriculture. So then you've got around $1.5 trillion of spending cuts. Then you spend that and more by extending all the tax cuts. That costs for, a little over $4 trillion. So now you’re deep in the hole again. So now you’re going to do some tax hikes, and you’re going to do some weird individual income tax hikes. You’re going to end some SALT cap loopholes on very wealthy people, and then the biggest one is going to be from restructuring in the energy bill, as we wrote in the energy paper which came out recently, we think somewhere around two-thirds of the subsidies in the energy bill will be clawed back through this restructuring, mostly EV credits related to buying EVs and charging stations, but also a rollback of some of the IDC and PTC provisions for, for wind and solar. So that, that gets back, let’s call it another trillion of tax hikes.
But then there’s going to be roughly another several hundred billion of new tax rates. It’s increasing the SALT cap, no income tax on tips and some manufacturing incentives, and then some kind of reduced tax on seniors. And then on top of all that, you put on about $300 billion of spending hikes on homeland security and defense.
At the end of the process, you expand the CBO, the deficit over 10 years by two-and-a-half to 3 trillion versus the CBO baseline, right, but nobody thought that baseline was realistic anyway, because it included the assumption that all the tax cuts were going to sunset back to pre- 2017 levels. Even Harris, you know, Harris’s program didn’t assume that either. So, but this, this would kind of lock in deficits of somewhere around three-and-a-half to four percent over the next few years, which is larger than I think a lot of investors may have been expecting, and on the margin could put some upward pressure on interest rates.
The last thing I wanted to talk about in this podcast was about NATO, and I’m not saying it’s a good thing or a bad thing. I don’t know that I’ve ever thought about it enough to make a judgment, but I always just assumed that if Russia attacked a NATO country, whether it was one of the Eastern European countries like Bulgaria, Romania or, or even one of the Baltics that has large Russian populations, I always thought that there would be an immediate and vigorous response by NATO militarily, including substantial participation of the United States. And again, I, I, I’m not saying, I’m not making value judgment, I’m just saying I always assumed that hair trigger was in place. And within the first 50 days of this new administration, I think that scenario may, may be gone. And some of the military people that I’ve talked to believe that Trump has effectively, at least for now, driven a stake through the heart of NATO and that the U.S. would not participate in any kind of military defense of a NATO country. Even if the U.S. remains in NATO, supporting other countries when they’re attacked is voluntary, not mandatory, according to Article Five of the NATO laws. So I think that, that that may have changed, and just in 50 days, like the, in throughout my entire 60-year, 62-year life, that, that assumption about how NATO functions in the world may have been upended. And, you know, NATO was a—so what is—NATO is a defense organization in which most members share common values.
We have a chart in the Eye on the Market at the end of this week’s piece that shows the common Western Values Index of NATO countries: judicial independence, freedom of the press, separation of powers, judicial system, fairness, freedom of religion, expressive expression, movement, liberty, limited military involvement in government affairs. And that’s what at least initially joined a lot of these NATO countries together, and but that’s what now appears to be fractured. And so it’s hard to say exactly how this will play out. I think there are some really important implications for cross-border investment, migration, portfolio flows, and trade and other things that I’m still thinking through, but as it relates to the specific military consequences and implications of, of, of a, of a NATO that essentially disappears, we do walk through some of those prospects in, at the end of this week’s Eye on the Market.
So take a look if you want to read in more detail. That’s it for now. And we’ll keep in touch as market situations evolve. Thank you. Bye.
(DESCRIPTION)
Text: J.P. Morgan, Eye on the Market. MARCH 2025, Fifty Days of Grey.
(SPEECH)
Good morning, everybody. This is Michael Cembalest with a mid-March Eye on the Market podcast. This one's called 50 Days of Grey because what's been going on in the markets does feel a little sadomasochistic, in terms of the administration policies.
I'm recording to this podcast from Vegas. This is actually my first trip here. I'm not really a Vegas kind of person. For people that know me, that is consistent. I'm in the Wynn Hotel. And I'm looking out at Treasure Island and the mountains and whatever else happens here.
I wanted to record a podcast in conjunction with this Eye on the Market that we sent out today because of what's going on and how unique and unorthodox this all is for markets and for investors. So I want to start with these pictures again, that I've been using this year to frame discussions about the administration policies, where it's a little bit of Calvin Coolidge and small government and pro-business and a little bit of James Polk and manifest destiny, whether it's Panama or Canada or Greenland, Andrew Jackson, Woodrow Wilson's isolationism, Nixon's enemies list, Eisenhower's deportations and lower corporate tax rates.
The one that we're going to focus on most today is McKinley. And McKinley was all about tariffs and protectionism. And for those of you that have read some recent Eye on the Markets, McKinley's tariffs didn't work out so well for him or the Republican Party. In the 1890 midterm elections, the Republicans lost over a hundred seats in the House once the inflationary consequences of those tariffs became felt.
Anyway, the market reaction's pretty severe. And there's something interesting about markets that I wrote about this time. The stock market can't be indicted, arrested, or deported. It can't be intimidated, threatened, or bullied. It doesn't have a gender or an ethnicity. It can't be fired or furloughed or defunded. It can't be primaried before the next midterms. It can't be seized, nationalized, or invaded. And it's the ultimate voting machine. And it reflects prospects for earnings growth, stability, liquidity, inflation, taxation, and predictable rule of law.
And the market consensus earlier this year, which was clearly wrong, was that the administration would carefully and surgically balance its-- it advertised inflationary, anti-growth policies of tariffs and deportations with a lot of pro-growth policies. The problem for investors is, they've come storming out of the gates with a lot more of the former than the latter. And I did anticipate, as I wrote in the outlook, in the executive summary, a 10% to 15% correction this year. And the only surprise is that I didn't think it would happen before 50 days has even passed, since the inauguration.
(DESCRIPTION)
A line chart is titled U S versus global equity total returns. The x-axis has months from July of 2024 to February 2025. The y-axis shows percents from negative 15 up to positive 5. The S&P 500 has gone up over that time, then come down, but has an overall gain. The S&P 500 M S C I All Country World went up and came down. It ended lower than it started. And the Magnificent 7 started at negative 15 in September, went up to positive 5 in December, then came all the way back down.
(SPEECH)
So if we look at what's gone on, we're close to that 10% level on the S&P. We're, I think, at a 20% correction if you're looking at the Mag Seven. It may take time before the pro-market policies of this administration, whether it's deregulation or infrastructure permitting, cajoling more foreign direct investment, which I think is a great thing, the benefit of whatever those spending cuts may take place, it's going to take time before those pro-market policies materialize. And with the prospects of some kind of universal tariff or reciprocal tariff still in the wings for April, we have some more downside risk in the markets here. And if I had to put a number on it, I would say another 5% to 7% by the time all of the tariff clarity becomes clear.
Now, when, if you get to those 12% to 15% overall correction levels on the S&P, when and if that should happen, I would look at deploying some excess liquidity if people have some in portfolios. But that'll take time to see, when we get there.
I could be convinced that the US needs some kind of painful short-term adjustments to reduce chronic deficits of traded goods. We're all aware of that. But it's really hard to have a lot of confidence in the way this is being rolled out, given the zigzagging nature of some of the policies and given that this same administration, at the same time, has been spending time and energy on establishing a strategic crypto reserve. That's not a confidence builder with respect to their overall economic policies.
(DESCRIPTION)
A line chart is titled U S Equity valuations. The x axis shows years from 2018 to 2025. The y axis shows P E ration from 12 to 52. The Mag 7 goes up and down wildly, but ends down from where it started. The S&P 500 ex Mag has less wild ups and downs, but also ends down.
(SPEECH)
In terms of valuations, the Mag Seven valuations and the valuations on the S&P 500x, the Mag Seven have taken a hit. I wouldn't describe us as anywhere near severe bear market or cheap territory. We're getting closer to some of the lowest Mag Seven valuations we've had in the last, seven or eight years, less so with respect to the rest of the market. But I would be a little bit patient here.
I did note, the Department of Justice filed a 130-page report the other day, arguing for-- now, they can't require it. A judge has to approve it-- but arguing for Google divestitures of Android and things like that, and Chrome, and bans on default search engine payments, and maybe even bans on future AI and other search acquisitions. So that sentiment may be weighing on the Mag Seven stocks, as well.
(DESCRIPTION)
A line chart entitled Average tariff rate on all U S imports. The x axis shows years from 1900 to 2025. The y axis shows percentage rate from 0 to 25%. The line starts high and comes down drastically. In 2025, it goes back up a little.
(SPEECH)
So in terms of the tariffs themselves, there's a chart that we have in the piece that looks at the historical tariff rate and where we are right now. No matter how you cut the numbers, we're getting-- we're already at the highest tariff rates of the last 50 years. The only question is, are we going to start approaching the tariff levels that existed in the 30s and 40s? And that's how we have to see, what's going to happen on the 10% tax on critical imports, globally? What's going to happen with the 25% tax on global autos? Will there be some kind of reciprocal tariff? Will it include VAT taxes or not? Will Trump put another 20% on China, in advance of some potential Xi-Trump summit, to have more negotiating leverage?
So we've got this charted here. I think you're going to see a lot of these charts. They're all approximations because it's complicated to figure out when some of these tariffs are overlapping with each other. But we have a chart in here that's our best take on where each one of these tariffs, incrementally, [INAUDIBLE] to the average tariff rate on imports, relative to where we've been in history. You can see that here.
(DESCRIPTION)
Four line charts that show I S M surveys, prices paid, U S medium and long term inflation expectations surveys, I S M new orders less inventories, and small business capex plans. The collection of line charts is titled Trump Tracker.
(SPEECH)
The other thing we've done is, we're trying to have some discipline around how we analyze this administration. So we created a Trump tracker. It's online. And it has a bunch of charts. I've included four of them here, in this deck, and also in The Eye on the Market this week so you can get a sense for what we're tracking. And these four things are not great confidence builders for investors. It shows the ISM surveys of prices paid in both manufacturing and services are rising. It shows medium and long-term inflation expectations surveys are rising.
And my single favorite economic indicator is the ISM new orders less inventory chart because that shows you how much demand is percolating, net of inventory accumulation. That's rolled over. And then small business capital spending plans have rolled over. So now that the business sector and other participants in the economy are digesting all of these policies, we're starting to see some of the impacts in the high frequency data that we look at.
(DESCRIPTION)
Two line charts show U S industrial production of motor vehicles and parts, and U S motor vehicle parts employees over years from 2012 to the present. The slide title is Tariff impacts, challenges for the U S auto industry.
(SPEECH)
Tariffs for the auto industry would come at a difficult time because both production and employment in autos was already weakening at the end of the Biden administration. And this would compound things.
(DESCRIPTION)
A line chart on U s labor productivity versus all workers, and two charts, 2018 steel and aluminum tariffs and Tariff impact on U S grown and inflation, 2025 to 20206. The slide is titled Some history on steel tariffs.
(SPEECH)
And a history on the steel tariff shows that most of the tariff increases end up being reflected in producer prices and are not somehow eaten magically by the exporting country. And we have some information on that in here, as well.
I did notice that yesterday, Ontario applied some kind of export tax on electricity transfers to some Northeastern US states. And in response, Trump has now doubled the tariff on imported Canadian steel and aluminum from 25% to 50% I don't think it's going to have a large economic impact because of the scope of those-- of the dollar value of those imports. But it may have an out-sized confidence and knock-on impact on investors who are just trying to feel their way through a really unprecedented period.
Not everybody agrees, but the usual suspects, whether it's the IMF, the Yale Budget Lab, and the Peterson Institute, all believe that these tariffs are going to result in a one-time hit to GDP and a one-time increase in inflation. Obviously, we'll have to see how that plays out. But the bottom line here is, I don't think we're through the market repricing of these tariff risks. The consensus view that the administration would be balanced and strategic about how it was rolling out these policies, I think has been mistaken. And we're all trying to find our way through the fog from here.
At the same time that this tariff drama is playing out, the administration is also working on a reconciliation bill to avoid the double whammy of having all the tax rates sunset higher to pre-2017 levels. Now, it's not easy to negotiate a reconciliation bill when you've only got a four-seat lead in the House, which is the situation the GOP is in, even with a lot of tight discipline around the caucus because you're threatening to primary people that don't support you.
So I wanted to just give you a sense for what this budget reconciliation bill could look like. So we have this giant chart with pluses and minuses.
(DESCRIPTION)
Text: Other Day 1 to 50 projects, a budget reconciliation bill. A bar chart with different spending and tax cuts and hikes on the x axis and cost on the y axis.
(SPEECH)
And I'm just going to walk you through the main points here because I think it's interesting to understand what they're trying to accomplish. So the budget reconciliation bill would start out, step one, cut some spending, right? And it falls under these categories that don't mean very much, like energy and commerce. It turns out that the vast majority of the energy and commerce spending cuts the administration might pursue are actually Medicaid cuts of somewhere between $600 to $700 billion.
Then add in about $330 billion of spending cuts on student loans and about $230 billion of food stamp cuts. That falls under agriculture. So then you've got around $1 and 1/2 trillion of spending cuts. Then you spend that and more by extending all the tax cuts that costs for a little over $4 trillion. So now you're deep in the hole again. So now you're going to do some tax hikes. And you're going to do some weird individual income tax hikes. You're going to end some SALT cap loopholes on very wealthy people. And then the biggest one is going to be from restructuring the energy bill.
As we wrote in the energy paper which came out recently, we think somewhere around 2/3 of the subsidies in the energy bill will be clawed back through this restructuring, mostly EV credits related to buying EVs and charging stations, but also a rollback of some of the ITC and PTC provisions for wind and solar. So that gets back, let's call it another trillion of tax hikes. But then there's going to be roughly another several hundred billion of new tax cuts. It's increasing the SALT cap, no income tax on tips, some manufacturing incentives, and then some kind of reduced tax on seniors. And then on top of all that, you put on about $300 billion of spending hikes on Homeland Security and defense.
At the end of the process, you expand the deficit over 10 years by $2 and 1/2 to $3 trillion versus the CBO baseline. But nobody thought that baseline was realistic anyway because it included the assumption that all the tax cuts were going to sunset back to pre-2017 levels. Even Harris's program didn't assume that either. But this would lock in deficits of somewhere around 3 and 1/2% to 4% over the next few years, which is larger than I think a lot of Investors may have been expecting, and on the margin, could put some upward pressure on interest rates.
The last thing I wanted to talk about in this podcast was about NATO. And I'm not saying it's a good thing or a bad thing. I don't know that I've ever thought about it enough to make a judgment. But I always just assumed that if Russia attacked a NATO country, whether it was one of the Eastern European countries like Bulgaria, Romania, or even one of the Baltics that has large Russian populations, I always thought that there would be an immediate and vigorous response by NATO militarily, including substantial participation of the United States.
And again, I'm not making a value judgment. I'm just saying, I always assumed that hair trigger was in place. And within the first 50 days of this new administration, I think that scenario may be gone. And some of the military people that I've talked to believe that Trump has effectively, at least for now, driven a stake through the heart of NATO and that the US would not participate in any kind of military defense of a NATO country. Even if the US remains in NATO, supporting other countries when they're attacked is voluntary, not mandatory, according to Article 5 of the NATO laws.
So I think that may have changed, just in 50 days. Throughout my entire 62-year life, that assumption about how NATO functions in the world may have been upended. And NATO was--
(DESCRIPTION)
A chart titled NATO, a defense organization in which most members share common values.
(SPEECH)
NATO is a defense organization in which most members share common values. We have a chart in The Eye on the Market at the end of this week's piece that shows the common Western values index of NATO countries, judicial independence, freedom of the press, separation of powers, judicial system, fairness, freedom of religion, expression, movement limited military involvement in government affairs. And that's what, at least initially, joined a lot of these NATO countries together.
But that's what now appears to be fracturing. And so It's hard to say exactly how this will play out. I think there are some really important implications for cross-border investment, migration, portfolio flows, and trade, and other things that I'm still thinking through. But as it relates to the specific military consequences and implications of a NATO that essentially disappears, we do walk through some of those prospects at the end of this week's Eye on the Market. So take a look if you want to read in more detail. That's it for now. And we'll keep in touch as market situations evolve. Thank you. Bye.
(DESCRIPTION)
J.P. Morgan, Eye on the Market. MARCH 2025, Fifty Days of Grey.
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