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Today’s Points:

The 50% Tariff Club

The global copper industry saw President Donald Trump’s proposed 50% tariffs from a mile away. As early as February, he mooted the idea on national security grounds. That day of reckoning is fast approaching, barring a TACO U-turn, and the way the copper market is dealing with the issue — including a bizarre race to make deliveries to Hawaii and Puerto Rico to beat levies — has pointers for Brazil, hit with only a 10% overall levy three months ago, but now singled out for 50%:

Brazil

In this letter, Trump explains his reasons:

This is about politics. Trump intends the levy to punish what he sees as bad political behavior. Importers won’t be happy. But the most important implication is that the Trump political victories of the last few weeks — along with the lack of any serious negative effects from the tariffs to date — have left him freshly empowered. The president might “chicken out,” but it will need a market dive or bad economic data to force him into it. As Brazil will find it hard to concede to Trump’s demands, the threat of a drawn-out conflict is real.

The Liberation Day tariffs announced April 2 were driven to the exclusion of all else by trade deficits. The higher a country’s surplus with the US, the higher its tariff. A 90-day pause later, and that has changed. The US enjoys a surplus with Brazil. By Liberation Day logic, it’s Brazil that should be imposing a levy. Just compare the US trade balances of Brazil and Japan (25% tariff):

Levies now have nothing to do with the economy. They’re an exercise of power, made despite the risk of pain for the US. Putting tariffs on “any and all Brazilian products” would be inflationary. Brazil is the US’ largest coffee supplier, accounting for 35% of Arabica supply. This is a commodity many Americans simply cannot do without. Coffee inflation is already in double figures:

The US could substitute from other suppliers, but that will take time. People want their coffee fix now, and American tastes are more discriminating than they used to be. Brazil also accounts for 55% of US iron ore imports. That’s not great for manufacturers, whom the tariffs are supposed to protect. That brings us to copper.

Copper

The 50% tariff came via a presidential off-the-cuff comment (formally confirmed Wednesday), but Comex inventory data make clear that traders were prepared for it. Stockpiles were at levels not seen since 2018:

Regardless, copper rallied by more than 10% Tuesday. The subsequent slight retreat could be down to a belief that the tariff will be reversed or slashed. It’s also possible that traders believe there's enough stockpile to meet immediate demands. Whatever the reason, the reaction shows sudden presidential interventions won’t be ignored:

The panic is equally unsettling in China, the world’s biggest copper consumer. Historically low inventories spiked earlier this year in response to Trump’s initial musings. This is how warehouse stocks have changed each day, according to the Shanghai Futures Exchange:

TD Securities’ Daniel Ghali says the trade war catalyzed US-China competition to secure raw materials. The latest shock will drain global inventory below critical levels needed for market functioning:

Incentives are being driven by the threat of US tariffs, and separately, by Chinese stockpiling with strategic hues. Both are constraining metal availability. However, in contrast to prior years, frictions in market rebalancing mechanisms are now also preventing physical metal flows from naturally finding equilibrium. 

Beyond the scramble to build buffers before the tariff takes effect, there are concerns surrounding how countries like Chile and Peru — two of the world’s largest producers — will be able to cope. So far, the verdict doesn’t look pretty. MSCI indexes show investors’ anxiety. The countries have been spared “reciprocal” tariffs for the time being, but 50% on copper could bite just as much:

Bloomberg Economics’ Jimena Zuniga suggests producers can ride the storm, given copper’s inelastic demand. Industrial use of copper is widespread and it’s difficult to replace with other materials. She argues that the greatest impact could fall on the US. That’s certainly suggested by the widening gap between the prices in London and New York:

New York’s unprecedented 25% premium over the London price suggests that investors believe tariffs will not be imposed across the board, but on selected top producers. There’s also the question of whether this can possibly help Washington’s ambition to reinstate America’s manufacturing might. As Jefferies LLC’s Christopher LaFemina notes, the US doesn’t have nearly enough refinery capacity to be self-sufficient in copper. Thus tariffs would likely sustain the ongoing record price premiums in the US — and put manufacturers there at a competitive disadvantage.

A short-term fix, as Bloomberg News reports, requires boosting production from copper scrap, which has traditionally been shipped to processors overseas. The surge in Comex prices invariably fed into scrap. That might now turn out to be a lifeline, even if temporary, while policymakers await the broader impact from tariffs.

Richard Abbey

Nvidia Ain’t Afraid of No Tariffs

There was a time not long ago when the stock market was viewed as the ultimate guardrail against political excess. Presidential misbehavior by, for example, announcing absurdly high tariffs or threatening the Federal Reserve’s independence would be punished by a market selloff and force a reversal.

It hasn't worked that way thus far. On a day when Trump did both of those things, Nvidia Corp. rose to become the first ever $4 trillion company by market cap.

The main US stock indexes are virtually back to the all-time highs they set last week. Nobody is in need of a put option, and certainly not a Trump Put.

Nvidia continues on one of the most fascinating rides any company has ever taken. There are some similarities with the internet excitement that ended in a burst bubble 25 years ago, most obviously with Cisco Systems Inc. — which built the web’s infrastructure and briefly became the world’s biggest company. Points of Return analyzed the Cisco-Nvidia parallels last year. Nvidia has now plainly grown beyond that.  

It is unquestionably expensive, with a stratospheric multiple of sales compared to other tech groups. It peaked in 2023, but remains high and is rising again:

One of Nvidia’s chief attractions is the margin it generates on those sales. If we look at forward price/earnings multiples, Nvidia no longer seems out of line with its peers (having appeared that way at the height of the Cisco-like excitement two years ago):

The bubble, if there is one, is in the sales of Nvidia’s products, not its share price. Since ChatGPT, the rush by companies to arm themselves with Nvidia chips for their artificial intelligence efforts has been otherworldly. Sales growth has peaked, but remains way ahead of the two $3 trillion companies, Apple Inc. and Microsoft Corp. How long can Nvidia keep boosting its sales like this?

There’s also the issue of profitability. Since ChatGPT, Nvidia has commanded margins that are truly extraordinary. It remains above 50%, but has started a descent:

Nvidia’s resurgence reflects confidence that the economy will stay strong, that companies will continue investing big time in AI, and that the firm will continue to dominate the field. All of these are reasonable propositions. But it’s uncomfortable that they’re all now being priced as racing certainties.

Waiting for Kevin

The Fed is back in the news. The president says that the fed funds rate should be at least three percentage points lower. Speculation suggests that the two Kevins — former Fed governor Warsh and current White House economist Hassett — lead the race to replace Jerome Powell. Both have voiced strong support for lower rates.

One little piece of history is of note. When Trump nominated Powell in 2017, the other top contender was John Taylor of Stanford University, who gave his name to the Taylor Rule, a mechanistic system for setting the fed funds rate using the output gap (the more output exceeds potential the higher the rate) and inflation (higher prices rises means higher rates). There’s room for argument over how good an idea this is, but it’s popular among conservatives as a sensible way to limit the Fed’s discretion. Applying the Taylor Rule now would require the Fed to raise rates:

The president may regret having chosen Powell, but by his lights Taylor would have been worse — and his case for massive rate cuts isn’t at all clear. Just witness the minutes from last month’s Federal Open Market Committee, published Tuesday. Nobody formally dissented, but there was evident disagreement. While “a few” participants said tariffs would not affect longer-term inflation expectations, “most” noted the risk that they could have persistent effects. It’s not just Powell.

Trump might bear that in mind. The Fed’s independence is a complicated issue, and the president’s advisers have made proposals for changing its governance. But in a crisis, the chair needs to be viewed as an independent actor. That will be hard for contenders now trimming their views to fit the presidential agenda. Last October, for example, Hassett said that the Fed’s “jumbo cut” a month earlier was justified. Now he says: “Jay Powell is the person who cut rates right ahead of the election to help Kamala Harris (and is) doing whatever it is that Elizabeth Warren wants.”

Should Hassett win the job, he’s likely to be viewed as a politician, not an independent. That could limit his room for maneuver. But at least it appears he wouldn’t follow the Taylor Rule. 

Survival Tips

You’ve come up with more songs about letter-writing. Most of them are quite old, as letter-writing is a dying art. “The Letter” remains a big favorite, whether by the Box Tops, or Joe Cocker, or Tedeschi Trucks Band. Then there’s The Message by Grandmaster Flash and the Furious 5, This Is My Letter to the World by the Norwegian jazz musicians Solveig Slettahjell, Knut Reiersrud and Morten Qvenild, Unsent Letter by Machine Gun Fellatio, Neil Young’s One of These Days (I'm Gonna Sit Down and Write a Long Letter), “Please Mr. Postman” by The Marvelettes or The Beatles, or Put the Message in the Box by World Party.

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