Expert Macro Commentary
Feb 19, 2025 | Steven McClurg, CEO
Key Takeaways
- Tariff risk is overstated: Market reactions to proposed tariff regimes are exaggerated; the actual inflationary impact is likely muted.
- Global liquidity surge favors crypto: Divergence between traditional risk assets and digital assets is emerging as monetary easing resumes globally.
- China’s economic malaise deepens: Structural issues in China could pressure global supply chains and sovereign credit markets.
- Equities remain vulnerable: Traditional manufacturing equities bear the brunt of policy-driven cost pressures; crypto emerges as a relative safe haven.
Tariff Turbulence is Transitory
Despite headline volatility, the inflationary threat posed by proposed broad-based US tariffs is likely overblown. Contrary to what media pundits claim that a 10% tariff automatically translates to 10% price hikes, real-world pass-throughs appear closer to 1%, given global substitution effects and the elasticity of consumer demand.
Autos present the primary exception, where narrow margins limit producer flexibility. Even there, our base case projects no more than a 5% price increase—a level that remains digestible by consumers, especially if offset by cooling energy costs.
Domestic manufacturers and US-based supply chains stand to benefit from ongoing zero-tariff negotiations with key partners like Korea and Japan. As these agreements materialize, we expect headline inflation pressures to abate and sentiment around reshoring to strengthen.
Main Street vs. Wall Street
The Trump Administration’s rhetoric signals a shift toward a more secular economic strategy. With inflation continuing to strain lower-income households and roughly half of Americans lacking meaningful exposure to the stock market, the policy focus is increasingly clear: prioritize job creation, wage growth, and domestic production over capital market performance. Currently, the wealthiest 1% of Americans control more than half of all equity holdings, while the bottom 50% own just 1%. This pivot aims to rebalance income distribution between the nation’s richest and poorest. In this context, equity valuations—especially for globalized manufacturers—face downside pressure, while policy tools are increasingly directed toward supporting real-economy assets and U.S.-based production.
China’s Structural Breakdown: An Under-appreciated Macro Risk
The narrative of China’s slowdown is rapidly evolving into a broader secular contraction. Ghost cities, plummeting consumer spending, and stagnant wage growth point to what may already be a depression-level event.
China’s export dependence amid weak domestic demand creates a policy paradox: the need to support growth without overtly conceding economic weakness. The country’s retreat from US Treasuries is not just symbolic—it foreshadows systemic dislocations in global credit markets.
We anticipate increased volatility in sovereign debt, with a real risk of failed auctions and rising long-end yields in the absence of Chinese demand.
Crypto: The Quiet Beneficiary of Global Reflation
While traditional asset classes digest the twin shocks of tariffs and macro uncertainty, crypto assets—particularly Bitcoin—are exhibiting relative resilience. Loose monetary policy in Europe and Asia, coupled with declining real yields, is fueling capital rotation into crypto.
As central banks across the G7 accelerate liquidity injections to stave off recessions (or soften ongoing ones), digital assets appear poised to benefit from a second-order liquidity tailwind.
In our view, crypto carries the least amount of macro risk exposure in this environment—especially as it decouples from traditional risk-on correlations and begins to trade as a hedge against fiat dilution.
Positioning for What’s Next
Recommendations
- Underweighting global equities with high foreign supply chain exposure (e.g., consumer electronics).
- Caution in sovereign debt markets—especially US Treasuries—amid declining foreign demand. Particularly, long-duration bonds are riskier.
- Overweight exposure to crypto, particularly Bitcoin, as global liquidity inflection points materialize.
- Selective rotation into US manufacturing and supply chain beneficiaries, supported by policy tailwinds.
