Believe It or Not…

Believe it or not, we typically prepare the T-Report on Saturday, for Sunday morning delivery.

Well, rip up the script.

With the U.S. attacking Iran, we had to change some things.

First, let’s start with the SITREP that went out last night. Please read if you haven’t already.

A few quick takes:

• The attacks help establish Deterrence and Peace Through Strength.
• There are risks of retaliatory attacks by Iran and disruption to oil flow, but those risks seem low.

We cover those issues and more in the SITREP. Without redoing the entire T-Report, let’s run with it as is – most of which is still very relevant.

A LOT of Moving Parts

As we start the summer, there seems to be a lot of moving parts. However, not many are rising to the level of being likely to dramatically move markets. The sum of the parts, if they are all resolved, could strongly propel markets and the economy forward. There is still a chance that the questions facing the market get resolved negatively, in which case, we could see renewed selling pressure, as the market has become very comfortable with risk. In all likelihood, yawn, there will be a mix of good and bad outcomes and markets will continue to churn along.

There is a sense of “deadlines” for many of these “moving parts.” July 9^th for the tariff pause? The 4^th of July for the Big Beautiful Bill? Will have to see what the new deadline could be for Iran. But many of these “deadlines” are self-imposed, and we have plenty of wiggle room.

We will highlight our current outlook for many of these issues. Despite running through a laundry list of “moving parts,” we have likely missed several, and are almost certainly going to be surprised when something new springs up.

Tariffs

Despite the long list of issues to discuss, tariffs remain front and center. They probably have the biggest potential to surprise markets to the downside at this point.

• The K. deal/outline was signed last week at the G-7. When the U.K. deal was announced it moved markets, not so much that it, in and of itself, was impressive, but it was viewed as the template for more to come. Maybe we get more deals, but the headlines on that front have been marginal at best. It also seems plausible that the war in the Middle East is taking up precious bandwidth for the administration. A flurry of “good” deals, at this stage, would surprise the market.
• The China deal remains in a state of flux. It is a bit unclear what was agreed to (including the timing of enforcing the agreement, and just how many loopholes there are around the deal). If anything, hopefully it has highlighted the need for the U.S. to develop its own sources of processed/refined rare earths and critical minerals. It seems difficult, at this stage, to get excited by the announcements so far, and if anything, renewed tensions with China on the trade front seem plausible and detrimental to markets. The positive would be if the questions around rare earths and critical minerals (the processed/refined versions of them, more than the raw state) light a fire under the administration to really press aggressively on National Production for National Security. The admin is already taking steps in this direction, but we could see bigger pushes. Again, fighting NIMBY (Not In My Backyard) was one of our forecasts for Trump 2.0, but it hasn’t materialized the way we were hoping, so far.
• The pause extension. Anything other than a series of deals, or pauses almost across the board, would be disruptive for markets. Everyone, including us, has deals/extensions as their base case. Maybe an outlier or two. We haven’t really had “sectoral” tariffs. We haven’t seen what “punishment” would look like for countries/regions not making progress (watch the EU). Even the USMCA could become problematic if the admin tries to back away from the “compliant exemptions” which have neutralized much of the potential impact of the original Canada/Mexico tariffs (a lot of products that were in theory USMCA compliant didn’t bother to get certified, as there was no reason, but now they are being certified).
  • As a whole, it seems difficult to believe the administration will risk another bout of equity selling by pushing a tougher stance on tariffs. It shouldn’t happen, but tariffs have been an issue bothering the President for a long time.
• Tariffs are one of the last things apparently keeping the Fed on heightened inflation alert. Maybe we see some exemption (commodities for example) to ease that fear? Markets would certainly like that.
• Tariff revenue. Tariff revenue is increasing and will continue to increase as companies are forced to bring in products and pay the tariffs (assuming tariffs remain in place and it is difficult to transition very quickly). For a variety of reasons (tariff policy uncertainty, and continuation of tariffs, etc.) not much benefit is being attributed to tariff revenue. This could occur.
• When will tariff impacts show up? Our belief is that direct impacts from tariffs will be noticeable in July and August as we get the June/July data. It is extremely “confusing” to digest who bought what, when, impacting the timing of any potential impact. We have argued that pricing will take time to eke its way through the system. We could see other shifts in tariff policy that negate any potential impacts (we seem to be running out of time on this, given the lack of deals so far, but it is possible). We do hear more and more anecdotal evidence that it is small and midsize businesses bearing the brunt of tariffs (working capital issues, less leverage with suppliers and customers), which is why tariff issues could take longer to appear in the “hard” data, much of which seems to be garnered from larger companies. We are looking for economic data to weaken (spending and jobs), though not just from tariffs. Markets, given current levels, and sentiment, seem more at risk for disappointment following the upcoming data.

Who the President is Talking To

While it is unclear if that is an actual “moving part,” it seems like the President is expanding the circle of people or groups he is listening to. Whether it is the Chamber of Commerce getting his attention, or the farmers and leisure industry businesses, he seems to be making amendments to his policies to better accommodate these groups. This is a big positive and given the President’s nature of being “a man of the people” this could continue and hopefully will shape policy that can drive his larger agendas, but minimize damage to the economy in the meantime (or even promote growth).

The Big Beautiful Bill

This seems to be meandering through the various channels in D.C.

• Getting the extensions though is almost mandatory. Unfortunately, the extensions do not act like a tax break, since they are the status quo, while increasing official deficit projections, but not getting this through would slow the economy.
• Some amount of additional spending (read, deficit increase) is already priced in.
• Large, unpaid for spending increases, which is still a possibility, would be bad for bonds (going against our current outlook on bonds), but would promote growth and isn’t anywhere nearly as bad as failing to get the extensions through.

There seems to be a high degree of complacency that some version of the Big Beautiful Bill, that doesn’t over-reach on spending, will get approved.

We see no reason to argue with that general assessment, which might be the only reason to be nervous that we all get taken by surprise by some group who thinks they can get an aggressive agenda through, while there are so many other moving parts.

Iran/Israel

As described in the SITREP, this changes the playing field, most likely in a positive way.

Oil prices may surge, but given Iran’s diminished ability to respond, China’s likely pressure to keep oil flowing, and the potential for “regime change” (in a positive way), these items may be more important. This isn’t just Israel versus Iran, it is most of the Middle East hoping to move beyond conflict and fossil fuels.

Russia/Ukraine

Ok, there no longer seems to be a timeline here. Having said that, the events of this weekend must put some fear into Putin and some hope into Zelensky. That meshes with what seems to be going on behind the scenes. The public image is one of Zelensky less in the doghouse and Putin starting to walk on thin ice.

Peace through Strength.

We should learn some lessons from what happens in the coming days between Iran, Israel, and the U.S.

Will Russia learn something? Will Ukraine learn something? Will the U.S. learn something?

At the moment, it feels like we are all watching Russia/Ukraine out of the corner of our eye. It isn’t the main focus (Iran/Israel, and the U.S. is on the military front, China, India, Japan, and maybe the EU are on the economic tariff front, and the Big Beautiful Bill is on the domestic front). Assuming there is no major escalation in the coming days (which is a possibility as both sides continue to try to position themselves as strongly as possible, if negotiations are to begin in earnest), then this will come back to everyone’s attention.

While no one knows what will happen next, reaching any sort of positive conclusion would be good for the administration as wins demonstrate power and can help create the atmosphere for more wins.

This war remains a problem area (especially for Europe), and while it has moved to the backburner, it is yet another moving part, whose resolution will help shape the overall direction of the world (and the global economy).

Questioning the Fed?

Maybe it is because we received such great feedback on Getting the Fed to Get Ahead that we wanted to highlight a shifting view on the Fed as a “moving” part.

Where was Waller on Wednesday? On Friday, he went on record saying, “could cut rates in July.” He is probably still an outlier, but we are sticking to the view that the market is pricing in too few cuts and starting them too late.

Commerce Secretary Lutnick is also saying a lot of what the President has said about the Fed and Powell. I’m not sure that helps, as it may force some Fed voters to position themselves as somewhat hawkish so they don’t seem to be weak under the administration’s quite aggressive language.

Having said that, the rationale to hold steady, especially if we get another tariff pause, looks weaker and weaker.

The Art of the Deal

While this is likely to get some backlash, I see a need to “shift” from “the art of the deal.”

However, the “strikes on Iran” give more “power” to the art of the deal and the people negotiating on behalf of the U.S.

This is a very rough take, and subject to my interpretation, but:

• Saying something aggressive and trying to back people into a corner, so they negotiate/capitulate doesn’t seem to be working. Yes, I understand that is a simplistic take, but I’m not sure that doesn’t make it valid. Look at the list of moving parts we’ve gone through. How many started with an aggressive statement or action by the administration? How many have reached resolution, let alone reached a state better than before? Some of that may just take time, but in “game theory” it was a simple strategy, which worked well under Trump 1.0, but it seems like others have figured out how to counter it (don’t come to the table, then force an even more aggressive position, which is untenable, and results in taking backsteps). The TACO trade (Trump Always Chickens Out) is overdone, but maybe this administration is moving to some new strategies.
• Trump talking to the “people” is a good one. Gravitating to things that he does best – overcoming regulations and listening to the workers (farmers, small biz owners), would be for the good.
• The three legged stool. For many, Bessent’s conversation at the Milken Conference, where he laid out the strategy quite clearly, seemed to bridge a gap for “incoherent and often conflicting” messaging, to something that Wall Street (and presumably Main Street) could get behind.

A leopard doesn’t change its spots, so we will get bombastic, even outlandish comments. But he was also well known for talking to the workers at his construction projects. Getting the “inside scoop” from those doing the job. He likes one-on-one meetings too. He loves to negotiate one-on-one. Some things (like China trade) might be too big for that, but there are plenty of areas that are not (like a Big Beautiful Bill for fighting deregulation to get National Production for National Security rolling).

Maybe this “moving part” is a figment of my imagination, or even if it is real, it will be short lived, but it would make for a calmer, and more optimistic summer.

Bottom Line

Who would have thought that the “Bottom Line” written on Saturday afternoon, wouldn’t need many changes, but we don’t think it does.

There are so many moving parts that “steady as she goes” seems to be the best bet.

Win some, lose some, and maintain the status quo.

A best bull case would be one when it becomes clear that tariff pauses will be largely extended (maybe even interspersed with a deal or two), so then we can look to some of the other potential positive outcomes for upside optionality.

A return to tariff wars would be the worst case. It is difficult to see any of the other moving parts resolving themselves so badly that we are back to selling risky assets like we were earlier this year. The only obvious way for that to occur would be renewed aggressive trade policies (which seems unlikely) along with a lot of losses on the other moving parts (which again seems unlikely).

We continue to like duration. Credit should do well.

For now, hug benchmarks in equities, as it will not just be important how the moving parts resolve themselves, but the order in which they resolve themselves will also matter. Add to “National Production for National Security” positions.

Good luck and hopefully this can be an enjoyable and profitable summer for everyone!

War is scary, but preventing bigger wars may also take some aggressive steps.

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