Weekly summary 12/04

The Beautiful Bill

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All content on this website and publications, as well as all communications from the author, are for educational and entertainment purposes only and under no circumstances, express or implied, should be considered financial, legal, or any other type of advice. Each individual should carry out their own analysis and make their own investment decisions.

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NOTE: For personal reasons, this week’s publication was prepared using information only up to Thursday, so Friday’s news and market developments are not included. The model portfolio’s performance is therefore reported up to April 11; next week’s update will include one additional day.

Weekly macro summary

There have been quite a few interesting events to analyze this week, and below I list the most noteworthy news. Let's get started:

• The expansion of the U.S. money supply over the past two decades has completely distorted the markets. For nearly ten years, the cost of capital was ignored, leading to mortgage rates below inflation and an overvalued stock market. However, the downturn is not an unexpected deviation—it is a return to reality. And it’s not just a delayed normalization, but part of a strategic campaign to redefine the U.S.'s role in the global economy. From tariffs to trade threats and reshoring production, the goal is clear: China.

  The U.S., as the main driver of global demand, is leveraging its position to force a geopolitical reconfiguration, pressuring countries like Vietnam, Mexico, and Europe to choose between their access to U.S. markets or China’s. This strategy does not seek fairness, but rather a realignment—tariffs becoming a tool to redraw the economic map. After three days of extreme losses (Thursday, Friday of last week, and Monday), U.S. markets were off to the fourth worst start in their history.

  

  Markets have experienced some of the most significant intra-week swings in 25 years, with few investors knowing what to expect from the ongoing global trade conflict. However, things seemed to turn around on Tuesday, when President Trump announced a tariff hike on China to 125%, while granting a 90-day pause on reciprocal tariffs for the rest of the world, with a minimum 10% rate applied. This sparked one of the biggest broad-based market rallies in history—half of which evaporated the following day.

  

  Despite this pause, the tariff saga is far from over, and there’s a deep misunderstanding within the Trump administration regarding the trade imbalance and tariffs. If Navarro and Lutnick win the cabinet battle, markets will likely face chaos in the coming years. However, if logic prevails—as it often does—Bessent and Musk will come out on top, leading to a more stable environment. Market sentiment is revealing how fragile things are right now. Intraday swings of 5% to 7% in equity indices are not normal and should raise concern.

  In fact, despite claiming not to pay attention to the markets, there is certainly a point at which the administration would capitulate—especially in an environment where the credit market is signaling that a deal must be reached and uncertainty reduced NOW. The latest market reactions, such as those seen in the UK during the Truss disaster—with the dollar weakening while yields rise—have rarely occurred for a global superpower. The drop in demand for dollar-denominated assets reflects the growing loss of confidence in the dollar as a reserve currency in light of erratic U.S. decision-making. If the bond market continues to deteriorate, the Fed will have to step in with a new QE program.

  

  The administration hinted that deals with countries like Japan, Vietnam, and South Korea are near, and that Europe will be treated as a single bloc. The elephant in the room, and the target from the beginning, has been China—whose trade relations with the U.S. are, at current tariff levels, virtually nonexistent. Over the past years, trade dependencies have been reduced, but this remains a highly significant economic relationship for both sides.

  

  I am sure we'll be able to get along very well. I have great respect for President Xi. He has been a friend of mine for a long period of time and we will be able to work out something that's good for both countries. I look forward to it.
  — Donald Trump

  My view is that this is indeed the plan—and that we will end up with a megadeal with China that leaves us in a much better position than where we started, leading to new market highs.

  What’s clear is that Trump is using the strategy that has worked for him for decades, and which he details in his book The Art of The Deal:

  • Start negotiations from an extreme position to leave room for maneuver.

  • Use provocative statements to control the narrative and put the other side on the defensive.

  • Create a sense of urgency to pressure the other side into making concessions.

  • Keep the other party guessing about your true objectives.

  • Be willing to walk away if your goals aren't met.

  Sound familiar?

  

• Although it went somewhat unnoticed, the inflation data for March was very positive, showing the most progress and the lowest level in the past four years. If it weren’t for the tariffs, this would give the Federal Reserve ample room to start cutting rates and normalizing real interest rates.

  

  With the bond market in serious trouble, it’s very likely we’ll see another form of intervention from Powell in the near future, likely through a new QE program. The last time the Federal Reserve waited several days to step in during the collapse of the basis trade, it triggered the largest bailout in U.S. history. Between March 9 and 13, 2020, the basis trade spiraled out of control, bond yields spiked instead of falling, and the Fed ended up injecting trillions into the economy.

  The irony of all this is that yesterday we saw the softest inflation report in 4–5 years, extremely low across all categories, providing a strong indication of what’s likely to come in April, May, and June. Therefore, both typical macroeconomic drivers—future growth and future inflation—are pointing downward, and yet Treasury yields are rising while the USD is rapidly depreciating against gold, the euro, and the yen, for example. This is known as a risk premium or credibility issue.

  Even if Trump changes course on China, the damage is already done. To make matters worse, Trump wants to offset the tariff hikes with a tax cut—the so-called beautiful bill—but he doesn’t understand that, in a context of lost confidence and fiscal irresponsibility, this is just adding fuel to the fire. He should call Liz Truss and ask her.

• Trump also found time on Tuesday to sign executive orders aimed at boosting coal production, in a move that goes against global efforts to reduce carbon emissions. Coal now accounts for less than 20% of U.S. electricity, down from 50% in 2000, due to the boom in natural gas and the rise of solar and wind energy. The administration thus aims to revive an industry that had been left behind, with the goal of creating jobs for miners, whose numbers have dropped from 70,000 to 40,000 over the past decade. The executive orders seek to rescue coal plants that were being phased out. One of the measures includes classifying coal used in steel production as a critical mineral, which could allow the use of emergency powers to increase its production.

  Following the signing of the orders, the Department of Energy announced $200B in funding for new coal technology programs. However, uncertainty remains over the future demand for coal in the U.S., given the closure of many coal plants due to cheaper fuels and concerns about future regulations.

  With the rise of AI and large data centers, energy consumption needs are set to skyrocket, and although nuclear energy is the ideal option, the slowness of its deployment gives room for natural gas and coal to make a comeback—a second wind for local producers (one last dance for Powder River Basin).

• Europe has decided to shoot itself in the foot and finish off its automotive industry. The escalating trade war between the U.S. and China has accelerated negotiations between the European Union and China, aiming to cancel the tariffs imposed on fully electric Chinese vehicles imported into Europe by the end of 2024.

  The European Commission began applying provisional tariffs on Chinese electric vehicle imports on October 31, 2024, following a subsidy investigation launched in 2023. These tariffs, on top of the EU’s standard 10%, range from 7.8% on vehicles manufactured by Tesla in Shanghai to 35.3% on models from SAIC Motor, including 17% and 18.8% on BYD and Geely respectively. As a result, the EU and China are exploring the possibility of setting minimum prices for imported electric vehicles as an alternative to tariffs.

  Not sure if Wolfsburg will be too happy about that.

• One of the main casualties of the trade war has been oil, which, due to recession fears, has plunged to $55/bbl (WTI)—something that seemed unthinkable just a few weeks ago. Beyond the first-order effect (with producers and exploration companies dropping on the stock market), the loss of confidence and price instability have permanently disrupted the market balance. U.S. shale oil producers are now revising their investment plans amid growing uncertainty. A short-term reduction in capital expenditure (capex) is almost certain, which will likely lead to a significant decline in U.S. crude production. Real-time data shows average output hovering around 13 million barrels per day, and with WTI trading near $60/bbl, producers are not expected to shut wells, but delays in drilling and completions are anticipated. In fact, the EIA has already cut its supply estimates by 100kb/d compared to its pre-trade-war forecast—and even that might be too conservative.

  

  During these downturns, as we always say, it’s useful to look at physical indicators that reflect the real dynamics behind price movements: in this case, both timespreads and refining margins have remained strongly positive, in sharp contrast to what’s seen in crude prices.

  

  The following table I’m sharing struck me as very interesting and timely (though some figures are slightly outdated). It shows breakevens to maintain operations, total capital needs (including growth), and dividends for many oil producers. The key takeaway—beyond digging into individual companies—is realizing that with WTI below $60, half of them aren’t generating enough cash (let alone making growth projects look attractive). Could prices fall further? In the short term, yes—but the subsequent rebound will be all the more violent.

  

  Even if prices recover now, the damage is done, and many companies’ capex plans are compromised—they’ll be much more cautious when investing, putting pressure on any growth forecasts for U.S. shale (and other regions). The following quote illustrates this well: Bryan Sheffield, one of the most prominent voices in U.S. shale, is already urging his competitors to follow his lead and delay or cancel capex campaigns, to avoid entering another market share and losses war like the one seen last decade…

  

  While 2025 is shaping up to be (and already is) worse than expected and worse than what physical indicators suggested, the rebound ahead will echo the revival of 2021–2022.

Model Portfolio

Fishermen know that the sea is dangerous and the storm fearsome, but they have never found these dangers sufficient reason for remaining ashore. They leave that wisdom to those to whom it appeals. When the storm comes—when night falls—what’s worse: the danger or the fear of danger? Give me reality, the danger itself.

— V. Van Gogh

The model portfolio's return is -17.11% YTD compared to -10.22% for the S&P500, and +38.91% versus +29.81% for the S&P500 since inception (September 2022). The model portfolio, as of Thursday's close, is as follows: