This is an audio transcript of the Unhedged podcast episode: ‘The real cost of a trade war’
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Katie Martin
So I got a PR email this morning saying hey, it’s stress awareness month, and PR lady, I just wanna tell you I am aware of my stress. (Robert laughs) This has been a pretty stressful month so far and hey, as we speak it’s only the 10th. Far out. The source of stress for so many of us is that man in the White House. Now the good news is that the massive global tariffs that he announced last week are now off. They’re delayed at least. Phew.
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The bad news is that the tariffs on China are now absolutely enormous. America, get ready to pay more than twice as much for all of your Chinese imports and good luck.
Today on the show we’re asking: how can investors trust the US now? Is this pause in the tariffs really good news? And crucially, is it the weekend yet, dammit? This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I’m Katie Martin, a markets columnist, and frankly, a shadow of my former self, at FT towers in London. And I’m joined by fellow stress monkey Robert Armstrong, a little bit hungover, it has to be said, from the Unhedged newsletter in New York. Dude, how are you going?
Robert Armstrong
I’m going all right. I did go out and celebrate the end of the so-called reciprocal tariffs a tiny bit excessively last night.
Katie Martin
Reciprocally.
Robert Armstrong
So my head feels a little bit like the world trading system, I would say, this morning — slightly disordered, unsure where to turn, etc.
Katie Martin
Yeah. Let’s start with the bad stuff, shall we? (Yes) How is the US gonna cope with 125 per cent tariffs on China, please?
Robert Armstrong
I don’t know. The number is very big, to slip into econospeak. We are going to discover exactly what the elasticities are here. In other words, how elastic is the pricing of the Chinese manufacturers and importers of Chinese goods? Will they absorb some of the tariff themselves and leave only part of it to be absorbed by the American buyer?
Katie Martin
It is a fascinating natural experiment, I’ve got to say.
Robert Armstrong
It sure is.
Katie Martin
There are a lot of small businesses in the States that, you know, pretty much every paper you read at the moment, they simply can’t afford to pay twice as much for this stuff.
Robert Armstrong
There was a good story in the FT just this morning by my colleagues. Oliver and Anna reported from Staten Island and they spoke to this woman who runs a comic book and figurine emporium there — you know, little plastic figures of the Hulk and Captain America, and comic books. And she was saying, you know, the comic books are mostly printed in Canada, the figurines all come from China, and she is existentially worried about the future of her business.
Katie Martin
And that’s gonna be a really common story.
Robert Armstrong
Yes. Here is a story that will also be really common. Let me ask you this: how carefully are they gonna be able to enforce carefully the many kind of geegaws and windmeedittles we buy here in America that are like 13 per cent from one country, 12 per cent in another, 60 per cent from China?
Katie Martin
But also here’s this thing: it’s come from Indonesia, but has it really come from Indonesia or has it come from China via Indonesia and yada yada?
Robert Armstrong
So it’s gonna be, as you put, a very interesting natural experiment. And maybe the systems are in place to do this. I am very interested to see what happens to the price of a little item known as the iPhone, which will be a very visible price to many Americans. And if the price of that goes up 80 per cent or something, is there like torches and pitchforks in the streets of Brooklyn as, you know, the iPhone 15 goes up by however many hundreds of dollars? I don’t know.
Katie Martin
You will rise as one. (Robert laughs) The good news for the rest of the world is, so the tariffs that are on the rest of the world and, of course, still, I believe, on the penguins, they’re still pretty substantial and there’s like extra 25 per cent tariffs on stuff like cars. And you’ve also got additional tariffs on steel and aluminium/aluminum, take your pick.
Robert Armstrong
I was buying a bag of penguin guano this morning and let me tell you, (Katie laughs) the price was swingeing.
Katie Martin
So much more expensive than the last penguin poo you bought.
Robert Armstrong
(Laughter) But I don’t wanna be all grim here. It is good that Trump dropped the craziest of the reciprocal tariffs and put . . . It is good.
Katie Martin
It’s good, but I was just talking to another colleague about this just now. If Trump had come out on liberation day, as he likes to say, and said, OK guys, it’s 125 per cent on China, 10 per cent on the rest of the world, we would have all gone, what? That’s ridiculous. That’s so much. That’s so, you know, you’ve got to roll this back. Whereas now it feels like a win.
Robert Armstrong
So what you’re saying is that Trump is a master negotiator.
Katie Martin
I did not say that. So one thing that I think is interesting is like the tariffs on the rest of the world are still pretty substantial, but it’s the US that’s gonna really feel the pain here, the US and China, right? The rest of us, like Europe, UK, we’ll muddle through, we’ll find a way. But I wonder whether, so as soon as Trump blinked, right, he put out this post on Truth Social and said, you know, reverse ferret, I’m not doing these tariffs any more, 90-day delay. Thank you for your attention to this matter. US stocks went bananas, so we had like a 9.5 per cent rise on the day in the S&P 500 benchmark index of US stocks. And that’s a lot, boys and girls. It’s like, it’s the biggest rallies that we’ve seen in US markets for years and years.
Robert Armstrong
I think that made sense, and let me tell you why. The important thing is not whatever the adjustment to the tariffs were. The important thing was that the markets are in charge.
Katie Martin
Behold the mighty markets.
Robert Armstrong
A lot of people were saying, you know, Trump is playing chicken with the world, he’s speeding his car towards the world and he has thrown the steering wheel out the window. He will never back down. Well, as it turns out, no one stands up to the bond market, not even Trump. And that is good news, right? That is a guardrail on American trade policy. The bond market started to freak out and policy had to change. And that is a good thing and worthy of celebration. And you are a big old British grouchy for not seeing that.
Katie Martin
I would have come for a drink with you yesterday if I’d been in New York. I would have celebrated this, although I’m not sure how good the podcast would have been if we’d both been as hungover as you.
Robert Armstrong
Yes, exactly. You got it. You’re dragging this thing along with your teeth. But my point remains that you know, that’s a very significant moment and it shows that the market indicates something about the economy and about investors and about global flows of capital. And we found out yesterday that Trump is, after a certain point, sensitive to that. And that really matters.
Katie Martin
At a certain point he doesn’t like it up him. Here’s the thing: so just to back off people who were not tracking the bond market over the course of this week — and lucky you is what I would say. So stocks as we all know fell really hard after he put out these tariff announcements, ’cause people were saying eeks recession, eeks corporate America. You know, this is just bad.
The bit that was actually slightly more scary is when the bond market got infected, particularly in the early part of this week, because as we’ve discussed before, whenever anything bad happens in markets, the first thing that happens is that US government bonds jump in price because they’re safe. They are base. They are the place to get to when you are worried about what’s going on in the world. So always, always, always this has always been how it’s worked. Bad stuff happens, bonds go up, which makes the yields come down.
What we saw in this latest little mini-crisis is that the bond yields did not come down. The bond prices did not go up, and in fact, actually the bonds weakened a little bit. This is quite scary and . . .
Robert Armstrong
More than a little bit, actually. Pretty big move.
Katie Martin
More than a little bit scary, yeah.
Robert Armstrong
Yeah, long into the curve, the 10s and the 30s had a little bit of a freakout.
Katie Martin
Yeah. The really long-term bonds properly lost it and worse, all of a sudden Japanese government bonds start selling off and UK government bonds start selling off. And this, boys and girls, is how hiccups turn into crises, is when you get contagion.
Robert Armstrong
So the phrase I like to use is what happens in the bond market does not stay in the market. Not only are bonds base, as you put it nicely there, base for investors, as it were, but US Treasury bonds are kind of like the mayonnaise on the global market sandwich, right? It just kind of lubricates everything else. So for example, Treasury bonds are the collateral that almost every other market in the world depends on.
So if you can’t count on the bond market acting like the bond market is supposed to — I’m talking about the Treasury bond market here, of course. If you can’t count on it to act like it’s supposed to act, basically every other market will start to have problems if you don’t do something about it. And, you know, I think we were getting pretty close to that point. People were talking yesterday and the day before — is the Fed gonna have to intervene in the bond market, which they did have to do the last time we saw a freakout like this during Covid, where Treasuries were not base? You know, nobody knew where to run to and the Fed had to get involved.
Katie Martin
Yeah. I mean, as you say, the thing with Treasuries is they are so central to the whole financial system, you know. To allude to the greatest movie of all time, The Big Lebowski, they really tie the room together. Like, you can’t really do anything without the Treasuries market behaving itself. So the question is why was the US government bond market not behaving itself in the early part of this week? Now . . .
Robert Armstrong
Well, I think we can . . . You go first and then I’ll go. Sorry.
Katie Martin
I’ll go first. I’ve been chatting to some pretty senior traders and stuff over the past few days to try and get a really good sense of this. And the point that’s coming across is there’s some technical stuff here, right? So there are some quite sophisticated trades that very speculative investors who really know what they’re doing, like hedge funds, can make where they do stuff like what you call basis trades. I would argue we don’t need to get into the weeds of that whole thing here.
But the point is there are sophisticated trades where you play off one type of bond product against another type of bond product and there’s a tiny little gain to be made in the middle of them and if you do that enough times and with enough leverage you make lots of money. It makes lots of money until a massive wave of volatility comes through and then it all falls apart very quickly. There’s also a dynamic whereby hedge funds and other investors suddenly found themselves losing lots of money and they had to send money to their banks to make up for these losses. To get hold of that money they sold nice liquid government bonds so that they could get hold of cash and give that cash to their banks.
So again, there were these technical factors that were pushing Treasuries lower, but the really big thing that was really spooking investors was are Treasuries base now? Is the US still a safe haven? Is the US dollar still a global reserve currency? Are US Treasuries a worthy massive component of global reserves? And people who I speak to who are very normcore — like, not alarmist, kind of not people who shout about stupid stuff just to make themselves sound clever. Normal people are saying, I’m wondering when China’s gonna start selling, when it’s gonna start selling its reserves. And once you’re having that conversation, you are not in a good place.
Robert Armstrong
I don’t think that the status of the Treasury as the indispensable mayonnaise of global markets is actually in danger, but I 100 per cent agree with you that if you’re even talking about it, things have gotten badly out of hand.
Katie Martin
Because we would not have been having this conversation.
Robert Armstrong
Yeah, we should not be having this conversation. You know, I don’t think there’s any, you know, for reasons we’ve rehearsed on this show before, I don’t think there is anything to replace the Treasury. I think, you know, America has the money printing press, all of this stuff. I think it is still base, but if people doubt it, the discussion is over. It’s like with a bank, right? It doesn’t matter if the bank’s insolvent. If people think it’s insolvent, it’s insolvent, no matter what it says on the balance sheet, right? And there’s an element of that with the safe asset, US Treasury bonds.
Katie Martin
Sensible people are wondering this, and this is not a conversation that we would have been having this time last year, and it’s definitely not a conversation we would have been having five years ago. This has just never been questioned before.
And my feeling about this is that once you have this really kind of scattergun policymaking and this kind of real intellectual paucity around your policymaking, you do undermine all of that. And the thing that I always say about this — and I’m going to do a small swear, so if you’re sensitive to small swears then please close your ears now — but you can’t put the shit back in the donkey. As soon as you’ve let this conversation out there into the wild, you can’t stop it. It becomes a topic of conversation. It becomes an element of doubt around the dollar and around Treasuries that wasn’t there before.
So one thing that I think is really interesting is if you look at the dollar, just like with Treasuries, the dollar, it did not jump during the mini-crisis, which it normally would. When you have a mini-crisis the dollar would jump. It did not jump. And guess what? It’s not jumping now either. And that I think tells you — again, it goes back to our friend the donkey, and it says people don’t want to hold US assets in a crisis and they also don’t want to hold US assets for choice.
Robert Armstrong
I think you put it too strongly. I would say something more boring than what you just said, which is that at the margin, people are less willing to own you. It’s not like, I mean, you know, the Treasury yield is still under 4.5 per cent, or whatever it is. There are not zombies roaming the streets here. But at the margin, something has changed and it has not changed in the direction that we want it to change. I will agree with you that far.
Katie Martin
If we were in a situation where the dollar really was on fire and the dollar’s safe haven, you know, global reserve asset status had completely gone, then yes, we would barely have time to record this podcast. It would be just hellfire and brimstone out there. We’re not quite at that point, but I just don’t know how and whether Trump’s administration, first of all, but then any administration, can get that trust back to where it was before.
Robert Armstrong
You and I disagree on this. I don’t think the situation is as irredeemable as you do. I think it will take a period of measured policymaking at some point in the future, perhaps under a different presidential administration, to walk it back. But the American economy, the American financial system, our infrastructure in the form of the dollar and the Treasury are so good that I would see the rest of the world running back into our arms when some semblance of sanity has returned to our budget process, our trade policy and so forth and so on.
Katie Martin
I’m shaking my head at you here, Armstrong, which you can’t see.
Robert Armstrong
To use your small swear, I think you can’t get the shit back into the donkey.
Katie Martin
Well, as you may know, I grew up on a farm and we had donkeys and I never tried.
Robert Armstrong
(Laughter) I’ve never been . . . I’ve never set foot on a farm, so you have to . . .
Katie Martin
I never tried to put it back, but I really don’t think it would work.
Robert Armstrong
Well, maybe we need a new metaphor then.
Katie Martin
Yes, maybe.
Robert Armstrong
Or is that an analogy, or whatever it is?
Katie Martin
Where I do think you’re quite possibly right is that Trump, whichever way you paint it, and he’s trying to paint it very differently, he has blinked. There was a game of chicken and he was the chicken and it was too much.
Robert Armstrong
And that’s great. Yes. I love that. I love it that he blinked. That is such good news.
Katie Martin
So maybe this is, like, maybe we’ve had the low point of policymaking, economic policymaking by this administration and it’s gonna get much more normal from here. Maybe the kind of . . .
Robert Armstrong
Well, much more. All it has to be is incrementally more normal, right?
Katie Martin
Maybe the kind of Peter Navarros of the world are sort of pushed off to one side and the Scott Bessents of the world are gathered more to the centre of policymaking. And then, maybe, happy days with your friend the donkey. Maybe you can get it back in. And then maybe this whole discussion ends up being moot. All I would say is that asset managers and bankers and hedge fund managers that I speak to on this side of the Atlantic are taking a much more sceptical view of being exposed to the US than perhaps you guys over there realise.
Robert Armstrong
I say you’re just jealous.
Katie Martin
(Laughter) I am slightly jealous of the drinks that you went out on last night, although the last time we went out drinking did not end well.
Robert Armstrong
Yeah, it did not turn out well. (Laughter)
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Katie Martin
OK, so cheers, Rob. We will leave it there and come back in a sec with Long/Short.
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Okey-doke, 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?
Robert Armstrong
Following up on our earlier conversation, Katie, I’m gonna go long the global trading system. You know, we’re at a low point, it’s terrible, the low point could last for a long time, but this too will pass. We are gonna get to the other side of this. I’m feeling optimistic about this today. Maybe it takes five years, maybe it takes 10, but, you know, I’m an FTer. Trade is good. Free trade is good. It makes everyone richer and that fact will win in the end.
Katie Martin
Free trade and normal, vague centrism.
Robert Armstrong
We will get back to normal. It may take a long time, but we’re gonna get back there, listeners. You heard it here.
Katie Martin
(Laughter) Sooner or later. I have a bit of a techie one. I am long of the stuff in Europe that got really battered during the tariff sell-off, so stuff like European defence, European banks. Again, when things got really messy, people sold the stuff that was, like, easy to sell and that had done really well for them. But nothing has actually changed. Nothing bad happened to the European defence sector but it got absolutely killed on this little shock that came along.
My hunch — and this is not investment advice, and I am generally wrong about things — is that they will spring back pretty quickly. (Robert laughs) So that’s my long for this week.
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Rob, try not to be hungover when we do our next show, which is on Tuesday. Listeners, listen up then.
Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. Special thanks to Laura Clarke, Alastair Mackie, Gretta 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/unhedgedoffer.
I’m Katie Martin. Thanks for listening.
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