Deep Breaths: What’s Next?

By Peter Tchir of Academy Securities

Deep Breaths – What’s Next?

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

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

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

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

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

India First?

Based on the latest chatter (which can change at a moment’s notice), it looks like India will be the first to strike a deal.

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

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

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

Freight Slowdowns and Inventory Concerns

I’ve seen a lot of charts showing slowdowns in shipping and domestic freight. I’ve seen so many of them that I have to assume you have too, so I won’t try to recreate the charts (but just in case, here is one).

The big question, like everything else, is how quickly can those flows be reversed?

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

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

More Tariff Complexities

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

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

If Country X is a high tariff country with the U.S. then ABC Corp is highly incentivized to reduce the value of the two parts coming from country X. If the finished good is worth $10, the overall tariff paid will be lower if the value is largely ascribed to part C and the “finishing process.”

Even with efforts to ascribe “appropriate” values it is extremely difficult to do for 1,000s of goods, with 100s of parts, and a myriad of “processing” steps.

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

Smartphones, the U.S., China, and India

We have already mentioned the announcement that Apple will move production for phones destined for the U.S. market from China to India.

Seems good for India.

Seems bad for China.

But I spent some time with my good friend Grok on smartphones:

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

It is very easy to say, “they need us more than we need them,” and it may be completely true, but every time I dig into the details, it doesn’t seem as clear cut as you would expect.

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

The U.S. Consumer

Let’s repeat the last sentence from the prior paragraph. The U.S. is by far the biggest, richest market in the world. Companies can generate the most profits by tapping into U.S. demand for the highest quality items and our ability to afford them.

Maybe that will be enough to win the trade war?

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

Can the U.S. consumer “win” the trade war?

We have all learned never to bet against America’s desire to consume, but it seems stretched at the moment – which is why I think it is so important to pivot to policies that focus on domestic growth. Yes, we will get some “wins” in trade deals, but if that is the primary source of job creation in the U.S., I think we will all be sadly very disappointed.

Bottom Line

A lot to cheer about! Whether markets have already cheered too loudly or not will be determined as details start emerging.

On Google trends, searches for the U.S. deficit recently increased.

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

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

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

Can that be reversed by good deals? Sure. 

Is it possible that the market has been so focused on the domestic back-and-forth in terms of policy that we haven’t noticed shifts that will impact us negatively down the road? I think so.

The administration seems to have reversed course on many things that I (and many others) didn’t think would work. That is great! The ability to pivot and shift away from losing strategies is powerful and as I’ve argued, I think it dramatically reduces the scale and scope of any recession we get (which I still think is coming).

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

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

Many people will argue that the worst of the policy risk is behind us, which seems valid.

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

Hopefully things remain quiet and positive, but I think we are stuck trying to sell big moves to the upside and buy big moves to the downside, because things are never as good or bad as they seem with an administration that has some aggressive goals (rebuilding the middle class) and seems quite willing to be aggressive, even if they shift course when it is clear that it isn’t working smoothly.

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

I guess my single biggest fear is that we are playing to a narrative, and the details won’t support that narrative. Take the recent reprieve as an opportunity to take some deep breaths and prepare for the next round of tough decisions that we will likely face on the investing and corporate fronts!