This is an audio transcript of the Unhedged podcast episode: ‘Three surprises that might spook the markets’
Katie Martin
You know what? The Rolling Stones had a point when they sang that you can’t always get what you want. The supposedly all-powerful Donald J Trump is figuring this out too. What he can get is his “big, beautiful budget”, which managed to get through Congress a week or so ago, warts and all. His radical rewiring of global trade is taking a little bit longer though. Right about now is supposed to be the end of the delay on the super-aggressive trade taxes he outlined back in April. And yet now we have — surprise, surprise — another delay, albeit with some very punchy tariffs outlined for Japan and South Korea.
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Now listeners, if you feel like you’re losing your marbles and you’re trapped in Groundhog Day going round and round in circles, then I hear you — I’m exactly the same. So today on the show, we’re asking what ties these two major policy platforms together and crucially, for nerds like us, what markets make of it all.
This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I’m Katie Martin, a markets columnist here at FT towers in London, the world’s greatest city, and I’m joined down the line from the inferior New York City by Admiral Robert Armstrong from the Unhedged newsletter and his able deckhand, Aiden Reiter, or what is left of him after losing all the moisture in his body on a roasting hot train this morning. (Aiden laughs)
Robert Armstrong
It’s true. The good ship Unhedged is in New York waters, and it is on fire because the temperature here is enough just to have wood spontaneously combust.
Katie Martin
Infinity . . .
Aiden Reiter
And Rob and I are on opposite sides of the same train line and that same train line was not working today.
Robert Armstrong
Was not working today so it was a rough commute. It was a classic July New York commute.
Katie Martin
Yikes. (Laughter)
Robert Armstrong
The odours, Katie, the odours.
Katie Martin
Aiden, if you’re trapped in a small room with Rob right now, then I symphatise. (Laughter)
So listen, you two, for those of us who are blissfully unaware of what Uncle Sam is up to, get us up to speed here. First of all, Aiden, tell me about this budget.
Aiden Reiter
Yeah. The US Congress recently passed Trump’s “big, beautiful bill”, which was kind of his all-in-one big budget package. It was signed into law by the president on July 4, American Independence Day, and it is a big whopper of a bill. Essentially, the main component is it keeps Trump’s tax cuts from his first term on the books and enshrines them into law, and then it adds other random tax cuts he promised on the campaign trail — no tax on tips and those types of promises.
It also slashes other programmes that the government had given out. So it makes changes to how the government pays for healthcare for poor people. It changes the government’s previous electric vehicle subsidies and various electric manufacturing subsidies. And then on top of that, it also raises the US debt limit. So it’s just like all the things you could imagine a bill would do are squeezed into this package.
Katie Martin
I think sometimes people on this side of the pond don’t realise, but it’s literally called the big . . . the One Big Beautiful Budget Act, or like, what’s the exact name of it? Like this isn’t just an exaggeration or just hyperbole, this is literally the name on the piece of paper.
Aiden Reiter
It is the BBB, the Big Beautiful Bill, which is also what the Biden administration had their own BBB, which was Build Back Better. So they’re copying a little bit.
Robert Armstrong
I do like a bit of alliteration. I will say that in defence of the bill.
Aiden Reiter
Yeah, and you know, it’s also a really great allusion to what America’s credit rating will be in the future. (Robert laughs)
Katie Martin
Oh hey!
Robert Armstrong
So the most important thing is that it increases the deficit just a few months after we had what might be described as a kind of fiscal scare. And now we’re making the link to the tariff policy. After Trump announced the “liberation day” tariffs on that weird piece of poster board in the Rose Garden, markets suddenly had a little panic about the fiscal future of the United States and bond yields rose and the dollar fell. That has since subsided, that scare, and the Republican party, by a hair, has passed a bill that pretty significantly increases the deficit and the debt in the future. So we’re going for it, man. We did not as a country get scared straight.
Aiden Reiter
Yeah. To put this in context, this bill is expected to add $3tn to $4tn in debt over the next 10 years on top of already the US’s pretty shaky debt trajectory.
Robert Armstrong
What is our total debt right now? Do we know that?
Aiden Reiter
Our total debt is $36.1tn.
Robert Armstrong
Yeah, so another four on top of that is non-trivial. It’s pushing it by 10 per cent. Something like that.
Aiden Reiter
Yeah, over the course of 10 years. And we should note that a lot of that spending is grouped in the next four years because the tax cuts like no tax on tips, no tax on overtime are just bunched into the Trump administration. And they also phased out more of the cuts to be later on. So you’re really spending a lot in the next couple years and then it pitters out over 2028 to 2034.
Robert Armstrong
I think you mean peters out. Peters out. I don’t know what “pittering” is.
Aiden Reiter
Pitter-patter, right?
Katie Martin
Like pita bread, but with budgets. (Robert laughs)
Aiden Reiter
What’s wrong with pitter?
Katie Martin
Here’s the thing, guys: like, so the truest thing that people say in markets is that deficits don’t matter until they do. And it’s so true. Like, you know, deficit levels in major economies around the world, the amount of borrowing that big governments around the world are doing, it’s just been ratcheting higher and higher and higher for years. And every now and then like investors have a bit of a freak-out about it. Like right now, it strikes me that there is at most a very moderate freak-out going on around US deficits.
Robert Armstrong
As I said, there was this freak-out in April, and it was notable, and everybody thought it was all over. Like US exceptionalism is finished and foreigners don’t trust the dollar. In the last month or so, there is absolutely 0.00 evidence that that “America is dead” trade continues. The world, you know, the correlations are back in place. I know you love it when America has trouble, Katie. I know this about you, you’re an America hater, but the rest of the world is not with you right now, Katie, it’s just not.
Katie Martin
Well, you know, reasonable people can disagree about this. There’s definitely a backing away from the dollar going on here. But I will grant you that US government bonds are not on fire. I mean, there has been a bit of a pick-up in yields since the “big, beautiful bill” was passed. That means that prices are going down, but it’s not dramatic.
Robert Armstrong
No, and if you look at a one-year chart, it’s not even there. Like the 10-year bond and the two-year bond are right in the middle. The 10-year bond is right in the middle of the trading pattern it’s been in for six or eight months. The two-year . . . the trading pattern it’s been for three months, they did tick up a bit, but from the perspective of a mile up, you can’t even see this thing.
Aiden Reiter
Yeah, I mean, there was a 13-basis-point increase over the last, what, four days since this bill was passed. That’s not nothing. I mean, the market has registered it. It’s just not panicking.
Robert Armstrong
But yields are still lower than they were in the middle of June, and they’re still a lot lower than they were in January.
Katie Martin
So 13 basis points — to humans, that’s 0.13 percentage points, and I know that doesn’t sound very much. It’s quite a lot in bond land, but it’s not disastrous.
Robert Armstrong
For a week. But it’s not a lot, you know. Anyway, I’m not trying to justify, I’m not saying the market is telling us none of this is a problem. What I’m saying is — and maybe we need to try to explain this — the market doesn’t much care. And risk appetites for kooky stuff like equities, say, they’re quite good! We’ve had a couple of sort of sluggish days on the market, but they’re quite good.
Katie Martin
Yeah. Stock markets are doing OK, yeah.
Robert Armstrong
Cathie Wood’s Ark Fund, doing quite well, thank you.
Aiden Reiter
For listeners who are lucky to not know what the Ark Fund is, it is a very speculative, tech-heavy, very volatile fund.
Robert Armstrong
People love it.
Katie Martin
It’s full of like wackadoodle tech — you know, mad punts — and it’s doing fine.
Robert Armstrong
I mean, the explanation for the market’s indifference may be as simple and dumb as this: markets that go up tend to keep going up. And the momentum just turned out to be more important than the news out of the budget and the news out of the tariffs. I guess we haven’t really talked about the tariffs yet.
Aiden Reiter
I think on the budget point, and I think it just fits into this broader theme, is investors and, you know, other people don’t really know what to make at this moment. We’re not really sure where tariffs will be. We’re not really sure what we’ll go through. You could argue that yes, this is significantly increasing the US debt trajectory, but there’s A, so much baked into this bill, and B, so much uneasiness and uncertainty about the other parts of the US economy that it’s very hard to make a judgment on how much this debt will actually play into the broader economic outlook going forward.
Robert Armstrong
Similarly on tariffs, I would argue. We’re sitting there and look, tariff inflation has not, except in a few niche-y cases, tariff inflation doesn’t seem to be rearing its head, and we don’t know where it will, and indeed we don’t know how much of it will rear its head. So when Trump comes out as he did yesterday and said we’re gonna put, was it 20 per cent or 25 per cent on South Korea?
Katie Martin
It was about 25, yeah.
Robert Armstrong
Twenty-five. The market’s like, well, maybe that won’t happen. And maybe if it does happen, it won’t matter that much. And there is something to the maybe-it-won’t-matter-that-much point.
Aiden Reiter
I mean there is, for Japan and Korea specifically, there is the argument that it doesn’t matter that much already. I mean the sector-specific tariffs — autos, pharmaceuticals, etc — are in place and unchanged by those new Trump tariffs on the two countries, and most of the US’s imports from Japan and Korea are cars.
Robert Armstrong
Yeah, so, already covered.
Aiden Reiter
Already covered.
Robert Armstrong
Or electronics, already accepted.
Aiden Reiter
Yeah. The effective tariff rate is I believe goes from like 15.5 to 16 per cent. Like, it’s really nothing.
Robert Armstrong
That’s from Paul Ashworth.
Aiden Reiter
Yeah, that calculation comes from Paul.
Robert Armstrong
At Capital Economics, who did some quick math on that. That’s what he found.
Katie Martin
Gotta love a bit of math. (Robert laughs) So there was a moment yesterday where, I’ll be honest, I was watching the tennis on the telly, where all of a sudden this news broke about these new tariff levels that Trump is threatening or doing, I don’t even know, against Japan and South Korea. But the main point is that, like, he was supposed to kind of end the pause on the really aggressive tariffs like tomorrow, July 9. And now, surprise, surprise. It’s been pushed out to some time in August. I mean, how . . .
Robert Armstrong
And let it be noted, Katie, it’s worse than that because Scott Bessent, the Treasury secretary and theoretically the adult in the room in Trump economic circles, he keeps mentioning Labor Day, which is the 1st of September. So it may not even be August, maybe September. There’ll be a nip in the air. We’ll be drinking pumpkin lattes by the time any of these Trump tariffs get resolved, at best.
Katie Martin
Down with pumpkin spice drinks. (Robert laughs) I know it’s early in the year to be getting exercised about this, but they are bad and wrong. Anyway, we digress.
Robert Armstrong
So, anyway, it seems like these deadlines just get kicked on forever, and listeners will know that I think they will be just . . . the kicking will never stop, that I think the deadline extensions, the Tacoing, the can-kicking, this is gonna be an infinite game. And there was this Politico article yesterday that basically made the point that for Trump this is fun. Why would he have a hard deadline? You know, people, it keeps the camera on him and he’s just noodling around with these numbers. I’m gonna get this country or that country. And he gets to write, frankly semi-literate, letters to the president of Korea and Japan and with weird capitalisation throughout.
Aiden Reiter
Strange capitalisation.
Robert Armstrong
It’s all good fun for him. And why would he come to a decision when he could be fiddling around and having a good time instead? I think there’s something to that thesis, frankly.
Aiden Reiter
Also, I think it is just part of his character. One of his former aides said that haranguing the president to talk about policy was like gathering a bunch of squirrels. Like he’s just a guy whose mind wanders in a lot of different ways — you can see it in the way he speaks. So why would he stick to a deadline? That’s not how he plays.
Katie Martin
Yeah, someone put it to me the other day, it’s a bit like, you know, like a kind of game show where there’s a kind of wheel and you spin it and you see where your tariff level ends up based completely at random, based on a spinning wheel. It sort of feels a little bit like that.
But let me ask you, you mentioned that all this inflation that was supposed to come from tariffs is kind of MIA, right? It’s kind of like missing in action. We don’t know where all this inflation is, but it could hit like kind of any minute.
In addition, you’ve got, so Trump outlined some reasonably aggressive tariffs, like we were just saying, against Japan and South Korea, and the market’s gone, yeah, yeah, whatever, whatever. I feel like that kind of level of yeah, yeah, whatever and the fact that the damage isn’t yet coming through in the data is actually potentially a little bit dangerous because that really emboldens Trump to say, see, told you, doesn’t matter, doesn’t bring inflation, doesn’t trash the markets. I’m gonna double down.
Robert Armstrong
Hmm. I mean, of course we’ve talked a lot on this show about Taco, right? Trump always chickens out. But there’s nothing for him to chicken out about. In other words, so long as the market doesn’t really believe or credit the thing he says, it won’t challenge him, right? The point about the early days, going back to April again, is he made a policy pronouncement, the market freaked, he folded.
Now the market’s not even freaking anymore. So there’s no folding. So it pushes the game further, right? So it’s kind of almost a game-theoretic argument. I agree with you. It does put us in a dangerous situation because it’s almost like the two sides, meaning the administration and the market, are almost searching for where the boundary is, where trouble actually starts. They’re gonna, you know, they’re kind of feeling around for where there’s actual, you know, where the electric fence is. It’s out there somewhere and if we keep groping around, we’ll put our hand on it eventually.
Katie Martin
This is by definition a ridiculous exercise because you don’t know where shocks are going to come from until they do. But Rob, if someone did ask you a stupid question on a podcast about where you think the summer shock is gonna come from, then what would you say?
Robert Armstrong
Katie, as you know to your sorrow, I’ve been saying every three months for five years that this coming earnings season is particularly important. But just because it hasn’t been all that important the last 20 times doesn’t mean I won’t say it again. We know that profit growth in the S&P 500 is slowing. If it turns out to be slowing faster than we expected, I think that could put markets right on edge. That’s candidate number one for me.
Candidate number two is I think there is a chance that the trade negotiations between Europe and the US, which I think are the big ones, like that’s the big daddy of all these deals or so-called deals, if that turns ugly, suddenly all these larger questions, which we’ve managed to kind of press into our subconscious will be at the forefront of our minds.
Katie Martin
Yeah, that’s reasonable. Aiden, Rob selfishly grabbed two there, but what would you go for?
Aiden Reiter
(Laughter) A weak Treasury auction. It doesn’t even have to be that weak. It’s just one where it looks like foreign investors have stepped away meaningfully. We sort of had that early on post-“liberation day”, and we had one other weak Treasury auction since then. If we have another, especially now that this budget bill is through, I think that would be very concerning. And we’ve seen, again, some signs around the world that people might not want to buy what the US is selling. So there’s, you know, the movements in Taiwan’s currency, which suggest the Taiwanese central bank and Taiwanese life insurers have turned away from Treasuries. There’s little things around the edges like that that could add up to something concerning.
Robert Armstrong
(Whispering) Aiden, that’s not gonna happen. (Katie and Aiden laugh) Just a secret: Treasuries are gonna be fine.
Katie Martin
I’m team Aiden here and I think your most likely candidate for causing some sort of upset like that is Japan. And let’s not forget that last year’s summer shock came from Japan pretty much at random. It does have form for sparking like weird market flip-outs over the summer that correct themselves, but are pretty unpleasant while they last. Japan is the world’s largest holder of US government bonds and Donald Trump is going out of its way to annoy Japan. It doesn’t take a genius to see how this can go horribly wrong quite quickly. If they were to suggest that OK, maybe we don’t want your stinking bonds if you’re gonna slap this horrible tariff on us, then Rob’s darling US Treasury market gets a little bit sticky and the summer gets a little bit unpleasant. And let’s hope that I’m sitting on a sun lounger when it all goes wrong. (Robert and Aiden laugh)
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Leave you guys to it. In the meantime, listeners, we’re gonna be back in one sec with Long/Short.
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Right, let’s do this. 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. Aiden, why don’t you go first?
Aiden Reiter
I’m short regressive tax policy. You know, regardless of politics, I think it’s bad form to give massive tax cuts to the wealthiest Americans and to take vital services like Medicaid away from the poorest Americans, not just from a political equality standpoint. Just from an economic growth standpoint, I think the evidence around trickle-down economics is very dubious and I think been fairly disproven multiple times. And I think especially when you have most of your political base is people in the lower quintiles of income, it seems just a strange political proposition.
Katie Martin
Mmm, so woke these young people are.
Robert Armstrong
Someone who works on this show is kind of a nice person, Katie. I never thought that that development would happen.
Katie Martin
Yeah, we need someone nice and it’s certainly not you. What have you got Rob?
Robert Armstrong
(Laughter) I am short Boston Consulting Group. My colleague, Stephen Foley, who is a brilliant reporter, broke this story about how Boston Consulting Group was basically working on a project in Gaza that involved basically the relocation of people, without going into the details. This is something that consultants should not have approached with a 10-foot pole.
Katie Martin
The Gaza Riviera. Yeah, yeah.
Robert Armstrong
And yet they did. Yeah, it was the Gaza Riviera thing. And whatever you think about this situation, I am consistently surprised by the way that the big consultancies will blithely put their brands at risk, which is really all they have. They’ll blithely put their brands at risk getting involved in projects that just look awful.
Katie Martin
Where is the moral compass, man? Listeners, if you haven’t read this stuff yet, read it and get yourself a nice strong drink before you do. It’s a lot.
On a much lighter note, I am short hot-yoga networking, which my colleague Emma Jacobs has been writing about. (Robert laughs) This is wrong on all fronts. First of all, yoga, no. Hot yoga, hell no. Hot-yoga networking, like sort of organised fun with like colleagues or clients or whatever, triple damnation hell no. I’m here for like sporting networking so I went to the JPMorgan Corporate Challenge, like a 5-ish K run around Battersea Park — that’s fine.
Robert Armstrong
But hot yoga, you draw the line on hot yoga.
Katie Martin
Hot yoga is a bridge way too far, it’s a huge no from me. Listeners, bear this in mind: no hot yoga, definitely no LinkedIn-flavoured hot yoga, bad. So please avoid doing that between now and Thursday, when we will be back in your ears. If you’re listening from New York in particular, stay cool in the meantime.
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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