Tariffs, AI and National Production Are Mixed Bags for the Economy
With several themes driving the market at the moment, there are some good reasons for optimism as well as pessimism about what's ahead.
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There seem to be several themes driving markets at the moment. And each one has some negatives and positives. Some things seem to be well priced in, while others, not so much.
Tariffs
Positive: They are generating revenue; it is real and immediate and helping the deficit.
Maybe Positive: They are generating deals. The lack of specifics on many of these deals is a bit problematic, but I’m particularly wondering about all of the “commitments” and what will materialize. The questions surrounding the legality of the way that the tariffs were implemented is likely to wind up in the Supreme Court and could create noise around everything already in place.
Potential Negative: It will take months and even quarters for the tariffs to show up. The on again, off again nature of tariffs means that many importers, especially large companies, have avoided the bulk of tariffs. Now that tariff policy is more clear (though there is still a lot of noise) companies can start negotiating with suppliers. It will take time to negotiate with suppliers, and it will take time for imported inventory to reflect the “new” cost minus the import price and tariff. Then it will take time for companies to adjust pricing to their consumers. Many have contracts, but also companies are reluctant to raise prices because of tariffs, as the administration seems to be scrutinizing that behavior.
The market is currently underpricing tariff risks.
AI
Positive: It is driving corporate spending and investment. Without this bright spot, the economy would likely be slower. It seems that almost universally, companies decided that, given high levels of uncertainty on the future of economic policy and growth, they would invest in AI as efficiencies help regardless of the outcome.
Mixed: Energy equals electricity. I admit, I’m old enough that when I hear “energy,” I think “oil.” But ttht is just wrong. Now, energy equals electricity. The demand for electricity is rising rapidly. This is a massive opportunity for utilities and anyone along the chain who can help produce electricity efficiently and consistently (uninterrupted power is crucial for data centers and AI). On the other hand, energy prices are rising and this could slow the consumer.
Mixed: Jobs. Many of the efficiencies of AI seem likely to lead to near-term job losses, or I think less hiring. I’m disturbed by recent college employment. The spike in law school applications, the growth in applications for EINs — which the BLS considers positive for new businesses (or at least it did) but I think is reflective of people getting nervous about their jobs and prepping themselves for the gig economy. Also, the JOLT quit rate remains low, which I view as a “crowd-sourced” assessment about the job market.
I’m looking for signs that the cost of increased AI (due to electricity demands and chip shortages) slows down spending — that's not happening so far, but it is what I’m watching. The jobs data has been my concern and will continue to be. It's priced a bit aggressively, but won’t roll over until some signs that spending on data centers will slow.
National Production
Positive: The MP Materials MP deal with Apple APPL. While the Department of Defense doesn’t have all sorts of pockets of $400 million lying around, waiting to be deployed to help companies grow, I think the deal was a model for how this administration thinks. The U.S. citizens, through investment, should benefit from investments/money spent to ensure we are producing things that are crucial for national security.
Positive: Jobs. Those with a national security interest (from chips, to biotech, to rare earths and critical minerals) should be more “secure” giving comfort and spending power to those who get them.
Positive: A lot will rely on deregulation, which is something that, not only does the president specialize in (or at least he specializes in fighting red tape), but many in his administration do, too.
Positive: The country can accomplish goals like “re-shoring” without being as obviously “zero-sum” game as tariffs.
Potential Negative: "Not in my backyard" (NIMBY) is strong and there will be resistance, in some regions, to deregulation, which can slow the potential.
Potential Negative: Organization and focus. This will require organization and focus, which at least during Trump 1.0, was not a strong point. Trump 2.0 is more fully staffed and more organized, but that ability to focus remains a concern for me.
Not priced in enough is the creation of opportunities in all the areas that can benefit from deregulation and government involvement in building for security.
I am very cautious here about the broad indices. It should be noted that the leaders are running out of steam and the laggards aren’t creating a narrative to propel them higher.
Jobs will be the key, and as much as I’ve lamented the way the BLS does its calculations, creating “artificial” data, which is a possible risk, is not the way to go and will erode confidence further as it will not allow investors or corporations to make good decisions. I’m optimistic that changes at BLS will encourage use of current technology and better data, but there are risks to my optimism.
Bonds should continue to hold their own here and long dated munis, which have been cheap to treasuries on a historical basis, are starting to get bid up. I am aggressively overweight muni closed-end funds in the income portions of my portfolios.
