This is an audio transcript of the Unhedged podcast episode: ‘The beatings will continue until markets improve’
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Robert Armstrong
The American president, Donald Trump, says he really, really means it this time on tariffs. You are listening to Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I am Rob Armstrong, coming to you from Unhedged headquarters in beautiful New York City, joined by Aiden Reiter.
Aiden Reiter
Hello.
Robert Armstrong
Aiden, can we believe what this guy says about tariffs? He said just this morning he would impose another 10 per cent tariff on China, and that his threatened levies on Mexico and Canada would go through next week. And yesterday he said he would slap a 25 per cent tariff on imports from Europe, on the grounds that the European Union was created in order to screw the United States. I feel like he says something different every day. So far, only the aluminium and steel tariffs have happened. And if I might wax Shakespearean, there’s been a lot of sound and fury on tariffs but not a lot of signification. Not a lot has happened. Do we believe him this time?
Aiden Reiter
Well, I believe him on China. So he did hit China with 10 per cent tariffs last time around in addition to the 25 per cent on aluminium. So if you look at the economic advisers in his orbit, most of them have no interest in negotiating with China, at least judging on their past beliefs and their past writings. So I believe China will go through.
Canada and Mexico, who knows? He surprised everybody when he said he would do it on the first day of his presidency. And then since then, he called it off at the 12th hour, you know. Who knows?
Robert Armstrong
Yeah. Those relationships are so economically important to us that it seems like maybe he knows he’s playing with fire. He hits them hard with tariffs.
Aiden Reiter
You know, we’ve gotten some negative economic sentiment and, you know, some potential of negative economic growth. Hitting Canada and Mexico probably has an outsized impact versus hitting China or Europe. So he might feel like he has less room to actually go ahead with those.
Robert Armstrong
Europe is the big one, right? This is an important . . . And for us, of course, we’re a European newspaper coming from the UK; Europe, of course, in the broad sense, not in the narrow sense of the European Union. And we haven’t seen that strong a reaction to all of this news and to the Europe news in particular. Of course, what we monitor when we are trying to determine if the market believes Trump is the buck. The theory is tariffs mean a higher dollar because they decrease American demand for foreign currencies — we’re buying less stuff — and they increase foreign demand for the dollar because you got to pay the tariffs in dollars.
Aiden Reiter
Yeah. And also theoretically if they raise inflation, rates stay up higher for longer. That makes the dollar stronger. Yeah.
Robert Armstrong
Stronger once again. Indeed. So. But the dollar moved a little bit today. It’s a little stronger today, but not loads. It’s still in the same trading range.
Aiden Reiter
And it’s been coming off for the past couple of days.
Robert Armstrong
Couple of weeks, even.
Aiden Reiter
Couple of weeks.
Robert Armstrong
And so the market, I think, is ambiguous. And one interesting aspect of this that I wanted to get into is that European stocks are doing pretty good this year.
Aiden Reiter
They’ve had a good run.
Robert Armstrong
Yeah. So they are outperforming US stocks by something like 8 or 10 percentage points.
Aiden Reiter
Since January 1st.
Robert Armstrong
Since January 1st they’ve been on a good run. The biggest companies in Europe, from ASML to Nestlé to SAP to LVMH, they’ve all had a good start to the year and indeed, all the whole wide European index has done well. And this is a remarkable change.
Aiden Reiter
Is that because, you know, right now we’ve seen the Mag Seven essentially flat and value is doing well. Other people have argued Europe is more value. Is that what’s going on?
Robert Armstrong
Yeah. This is the traditional rap on Europe, that its stock markets are full of companies in sectors that just haven’t done well in recent years anywhere. So it’s like banks and miners; basically value stocks, industrials. Whereas the American stock market is like Big Tech companies, growth companies, growth retail companies, etc. And so Europe has been lagging for like 15 years now. Is that starting to reverse? Possibly. I mean, the biggest change in stock markets is I think we have discussed here on the show in recent weeks is that the Mag Seven are not mag.
Aiden Reiter
Flat to down.
Robert Armstrong
Yes. They are the Sad Seven.
Aiden Reiter
My stock pick to short Google is looking a little smart right now.
Robert Armstrong
And my long is looking terrible. And so part of the difference, part of Europe’s big comeback is just America’s stock market is no longer being dragged along by these seven enormous tech companies. I also wonder if the kind of general American exceptionalism trade could only go so far. American stocks broadly, Magnificent Seven aside, just got so expensive relative to Europe that at some point you had to see some mean reversion. And then you throw in not knowing what on earth American fiscal policy is going to be. And that sort of makes the mean reversion happen. It says, people, well, maybe Europe doesn’t look so bad all of a sudden.
Aiden Reiter
Yeah. I mean, we’ve argued in the newsletter, right? Maybe Europe is overly cheap. It gives you cheap exposure to the US. We found that to be not so true. It’s not like Europe is absolutely cheap in relative terms, the growth you’re getting there. But, again, if the US is so expensive, it makes sense to buy it.
Robert Armstrong
I did a little work yesterday and it’s interesting that over the last couple of years, underneath the surface, European stocks have been making a comeback. So while the headline index in the United States continues to outperform the headline index in Europe, in certain sectors, Europe has been making its comeback — industrials, financials, materials, kind of stuff like this. And it’s just in those tech sectors that America for the last couple of years is outperforming. That’s not true by the way over the long run. Over the long run, meaning 15 years, US has been winning everywhere.
One question I have, Aiden, is whether what we are seeing is at least a tentative recognition by the market that the gap in economic growth between Europe and the US is not as great as we once thought. So if you’d asked us like three months ago why do these two stock markets act so differently, why do the bonds and the currencies of these countries act so differently, it would be very clear: Europe was on the edge of recession and America was booming. And now there’s a little wobbliness, as you mentioned, especially in sentiment in the US and in some of the hard data too. And maybe Europe is not quite as bad off as we thought before. Do you think that’s possible?
Aiden Reiter
I mean, I don’t think the picture of economic growth in Europe has actually changed that much in the last month.
Robert Armstrong
Yeah. That’s probably right.
Aiden Reiter
Right? Like, not too much has changed. They are still struggling with a lot of the same issues. They still don’t have, you know, market integration, as Mario Draghi has constantly harangued them to do, right? They still have the same major headwinds against them — population decline, etc. I think the only thing that’s really changing on the European continent, besides things happening across the Atlantic, is the Ukraine war might come to something of an end. Who knows? So, you know, Donald Trump . . .
Robert Armstrong
Right. People can see it.
Aiden Reiter
People can see it. It’s not a way Europe would have chosen to end, right? It’s not a good picture. But there are some stocks within Europe that have definitely responded well to that news. So the defence stocks which we wrote about this week. So the US has a massive military-industrial complex with big, great companies in the defence space.
Robert Armstrong
Lockheed, General Dynamics.
Aiden Reiter
Northrop Grumman, RTX — which was UTX and . . . United Technologies and Raytheon merged. Europe has some good ones, but nowhere nearly as big as the US.
Robert Armstrong
Yes. It’s like half the size of the or less the size of the US industry.
Aiden Reiter
Yeah. I think last quarter, like the top four European defence companies had a third of the revenue of the top four US companies. So anyway, but there are some really good companies in Europe.
Robert Armstrong
And they’ve been jamming.
Aiden Reiter
And they’ve been jamming. So since 2022, when the Ukraine war started, the three biggest defence companies in Europe — Leonardo, the Italian company; Thales . . .
Robert Armstrong
I don’t know. (Laughter)
Aiden Reiter
Thales, the French company . . . Probably that. Yeah, that sounds right. I’m just into Duolingo on French. So Thales from France and BAE in the UK have all had amazing runs, specifically Leonardo.
Robert Armstrong
And this makes sense, in a way. We have a war in Europe. Obviously, that’s good for European arms manufacturers right out of the gate. And then more recently, you have the United States say to Europe, you guys, from a security point of view, are on your own now. The US defence umbrella is being folded up and put into the closet. You are gonna have to spend a lot more of GDP on defence. And of course the European response to that as well: if we have to do that, we’re not gonna spend it at your companies. We’re gonna spend it at our companies. So it looks like this is kind of an obvious trade.
Aiden Reiter
Exactly, exactly. Yeah. So right in the middle of this month, JD Vance was in Munich and Pete Hegseth, the new secretary of defence, was in Europe and he said, we’re pulling our troops out of Poland. You guys have to not only increase it to the Nato threshold of 2 per cent, you need to go up above that.
Robert Armstrong
You’re talking military spending as a per cent of GDP.
Aiden Reiter
Military spending as a percentage of GDP. So now it’s looked like, you know, it was looking like they were gonna get north of 2 per cent soon. Now they’re targeting even higher. And then on top of that, the US doesn’t even seem like a reliable ally any more now that Trump is debating with Putin. So of course, as you said, they wanna spend on their own companies. So since the middle of the month, all the five biggest US defence stocks are flat down where all five of the European ones are up.
Robert Armstrong
And the other piece of context, of course, is that Doge is coming for the Pentagon eventually, right? Or not even eventually. It’s happening now. They’re talking about basically cutting that budget.
Aiden Reiter
Yeah, they definitely want to cut that budget. It’s unclear how that’s gonna flow through to armament, right? Like they might just try to cut all the contractors and smaller pieces. Not the actual military because, you know, there is a very strong lobby in the United States government.
Robert Armstrong
Yes. I learnt something about that.
Aiden Reiter
Covering the military-industrial complex. Also, you know, they’re focused on quote unquote, lethality. I don’t think you’d want to get rid of our weapons if you want to be more lethal.
Robert Armstrong
Yes. But investors are not waiting around so much to hear about the niceties of this. They are saying, let me sell something, and the big defence companies are what they are selling.
Aiden Reiter
Yeah. And on top of that, right, for the past couple of years, the US, specifically the Joe Biden administration, has worked really hard to help Europe to arm Ukraine. And one of the ways they did that, as we spoke with some experts, is they would essentially say, hey, Europe, we’re gonna buy your old system if you give it to Ukraine and then…
Robert Armstrong
Your weapons system.
Aiden Reiter
Your old weapons system. Essentially, we’re giving you the money to do this, and now we’re giving you the money to buy our newest weapons system, right? So you get something great, Ukraine gets something great, and we’ll help foot the bill. That’s not happening any more.
Robert Armstrong
Right. And what that means is the bill is being footed by Europe. And in theory, what we’re speculating here is that the bill comes from a Thales, a Leonardo.
Aiden Reiter
Or bill goes to a Thales, a Leonardo. They’re paying their own companies as opposed to us getting them to pay our companies.
Robert Armstrong
Fair enough.
Aiden Reiter
Europe is not gonna completely go off of US armaments, right? They still have to build up their defence and tactical base.
Robert Armstrong
I would think it was impossible to really go cold turkey from US defence companies.
Aiden Reiter
Yeah. I mean what US has right now, according to the experts we spoke with, is a lot of off-the-shelf supplies ready to go. Europe has time. They need to build over the next couple of years their own defence industrial capacity. Some of the biggest countries in Europe with the biggest armies actually don’t get so much of their imports from the US. They do. It’s more of like 10-15 per cent.
Robert Armstrong
So it’s like Germany, France, the UK.
Aiden Reiter
Germany, France, UK, Poland. They are less reliant on the US. It’s more the smaller countries in Europe. The idea is now these companies are gonna build up more, they get more government support and fill the void for the smaller companies.
Robert Armstrong
Yeah, countries.
Aiden Reiter
Countries, yes. Not companies. Smaller. You know, I don’t think the Czech Republic would love if we call them a company.
Robert Armstrong
(Laughter) But the smaller European countries will be served by the industrial base of the larger European countries.
Aiden Reiter
Yes. And there’s still going to . . . You know, the US has a huge lead in a lot of technologies. They’re still going to buy a lot of things in the US. But they’ll try to the best of their ability to replace a lot of that. And that’s not a good thing for the US, by the way. It hurts our relationship with allies. It hurts more companies. One might say this is a very short-sighted, if you were trying to actually help the US military-industrial complex.
Robert Armstrong
(Laughter) Aiden, you have achieved something that I thought was impossible. You have made me feel bad for the US military-industrial complex.
Aiden Reiter
Every night I go home and I just cry for Raytheon. (Robert laughs) Oh my god, I shed so many tears thinking about those poor, poor contractors.
Robert Armstrong
What this discussion makes me wonder is whether what we are seeing, and I should say, it’s extremely early days, but what we are seeing in the defence industry is a microcosm of what we might see more broadly in the world, in America’s relationship with the world — commercial relationship under a high-tariff regime.
Aiden Reiter
Yeah. I mean, if you anger your allies by telling them to get lost, they’re not gonna want to buy your products. And if you slap tariffs, you’re gonna make it more expensive for them to do that to begin with. So, I mean, we’ve heard a lot from readers and listeners who’ve written to us saying we’re no longer buying US things. I mean, these are really highly engaged readers, and people who (overlapping speech) the news . . .
Robert Armstrong
They’re FT types.
Aiden Reiter
They’re FT types who, you know, they’re more affronted by offences to globalism than most. So who knows if that’s representative. But you could imagine a lot of countries wanting to turn away from the US.
Robert Armstrong
Here’s the thing about all of this, though. I still don’t know. And this is kind of where we started the show, Aiden. It feels to me like we are at a crossroads or no, went to a fork in the road and there’s two roads ahead. One world — economics, finance, markets world — is the world in which Trump is serious about all of his tariff threats. Not just China, but Canada, Mexico, Europe, all of these allies, heavy tariffs on them. He really . . . That’s his actual destination, not just a threat. And those tariffs are coming. And then the other road is the world where it’s mostly huffing and puffing and not that much realisation of actual tariff policy.
Aiden Reiter
That world is potentially more uncertain. You kind of have the norm of what we have right now where Donald Trump is constantly threatening tariffs. We don’t know if other countries will play ball. We don’t know if it will happen. And the market and the world will just be kind of caught in the lurch between the two. You might have some real changes, right, some real concessions made by other countries, whether that be, you know, on trade balances or deals or whatever. You could have a lot of these more fake things, and that’s going to translate to a lot of uncertainty for consumers, businesses and investors.
Robert Armstrong
It’s a world where we are constantly trying to guess what an uncertain future we might have.
Aiden Reiter
Yeah. If anybody’s tired from this last month, it might continue.
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Robert Armstrong
(Laughter) One thing we can be certain about is that we will be right back with Long and Short.
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Listeners, welcome back. This is Long and Short, that part of the show where we go long things we like and short things we don’t like. Aiden, are you long or short anything today?
Aiden Reiter
I am. I’m long the Oscars. I am very excited for the Oscars.
Robert Armstrong
Come on!
Aiden Reiter
Awarding art is silly, I understand it. That being said, I really like the discourse. I really like the rankings. Also, Conan O’Brien is hosting, which I think will be really great.
Robert Armstrong
Right on. I’m gonna go out on a limb after the discussion we just had and I’m gonna go long the dollar. I think that the tariffs, my gut — and I’m not saying I can make a very coherent argument for this — my gut is that Trump will not want to be seen to back down and he will put the tariffs on and the dollar will return to its highs.
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Aiden Reiter
Or you just want more spending power when you go on international vacations. Coming up.
Robert Armstrong
It’s true. That is another thing that I want here. (Aiden laughs) Listeners, we will be back in your feed next week. Until then, stay sharp out there.
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 Rob Armstrong. Thanks for listening.
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