William Blair macro analyst Richard de Chazal breaks down a wild month of macroeconomic news, focusing on the impact of President Trump’s tariff policies on the global economy, equity and bond markets, consumer confidence, and corporate inventory strategies. Richard also shares his firsthand experience of Spain’s recent power outage and its unexpected lessons.
Podcast Transcript
Chris T
Hi everybody. Today is April 30th, 2025. We're closing out an especially wild month of economic news, which featured everything from tariff shocks and extreme market volatility to record gold prices and now, this morning, an economic contraction.
Joining me now to talk through the many economic story lines in the past month is William Blair macro analyst Richard de Chazal, who in addition to keeping up with the frenetic pace of a rapidly evolving global economy, was recently caught up in the mayhem of Spain's recent power outage, which sounds like a story unto itself.
Richard, hopefully things are back to normal. I guess normal-ish on your end. Thank you for joining me once again.
01:00
Richard D
No thank you, Chris. You know, pretty much, pretty much back to normal. I have to say, that was, quite an experience. If I had one takeaway, it was, hold a bit more cash, have some in your wallet, maybe some at home. I think that was the first thing that I noticed I needed when basically all the electricity and phone lines went down, cash became king once again.
01:25
Chris T
So cash is no longer dead. Okay.
01:28
Richard D
Yeah cash is no longer dead. Yeah. Yeah. Bitcoin. Bitcoin doesn't work in a power outage.
01:34
Chris T
Right. So yeah we've had a lot of volatility in financial markets over the last month due to changes in President Trump's policies on tariffs. How do you think the economy is handling these changes. You know, what's showing up in the data?
01:49
Richard D
Well, it’s still very noisy. You know, it feels a bit like going back to sort of the pandemic days when you can see sort of things happening on the ground or, you know, you're expecting to see things, but then the actual real economic data that we that we sort of look at isn't quite reflecting that yet.
So maybe we don't start to see that for another month or two or three. So what we're all doing at the moment, I think, is kind of scrounging around, maybe looking for some alternative data sources to try and get some evidence of what we think might be happening and what might be coming down the pipeline at us.
But I mean, just in terms of what the actual regular, call it, regular data is telling us, again, we touched on this a little bit last month where we've seen the soft data has continued to deteriorate. So that's mostly sort of sentiment surveys from the consumer and corporate sector. And I think what's interesting here is that it's mostly the expectations component of those reports rather than the view of the present situation.
So consumers are basically saying, we don't see a ton of weakness right now, but we're getting really worried about what's coming down the pipeline sort of six months from now or in the next six months. So that hasn't really improved. In terms of the harder data, we had some GDP today, that was negative for the first quarter. But again, a lot of noise in that. There was some pull forward in imports. So if you're importing more because you're worried about tariffs, that's actually a negative for the GDP reports. There's actually a lot of that, some inventory growth. But actually if you sort of cut through all that and cut through the drag from government spending on the DOGE, sort of consumer spending and business investment wasn't actually all that bad.
03:47
Richard D
So what we're seeing, we're definitely seeing consumers pulling forward demand. One of the most prominent things we saw recently through March was a big surge in auto sales. So that's obviously a key big durable good that that's going to be hit by tariffs. And those or where unit auto the volume of unit auto sales increased by 11% in in March.
That's 13% higher than a year ago. And obviously this is just durable goods right. So tariffs aren't really on services which you're not trading internationally. Haircuts or trips to restaurants or things like that. But you know what? We're definitely seeing some pull forward there. And then, you know, in the next few months, obviously there's going to be some payback from that.
You only buy a car once or you know, you don't buy them month after month. And so I think, I think that's again, is messing with the data. I think what's interesting though, is that at the corporate level, so that that was consumer level, the corporate level, I thought there would be a little bit more pull forward in demand and actually doesn't seem to be all that much.
So if you look at sort of the inventory data, you think companies would be building more in their warehouses to get around those tariffs and actually, say like the ISM inventory index, that was still in contraction territory in March. If you look at small business sentiment from the National Federation of Independent Business. So smaller companies were actually the ones that that do most of the inventory carrying for those large companies, they are still saying that they think their inventories are really too high.
So it seems like companies are kind of more worried about demand dropping off. Then they're worried about having enough sort of stock at pre tariff prices to fulfill that future demand.
05:51
Chris T
Interesting. So is it more of a consumer confidence issue right now than it is anything else?
05:56
Richard D
Yeah it seems to be because we've been wobbling about on the tariffs and only a few tariffs are actually in place at the moment. So those reciprocal tariffs were, were sort of paused for, for 90 days. And we're kind of waiting on, what's going to happen there. But one area where I think, certainly getting a lot of questions from our investor client base is, is around some of the, alternative data. And that's, you know, one of the primary is to look at there. So these daily container shipping data, so the number that the count of the number of ships that are leaving China to go to the US and the tonnage that they're actually carrying, and I think what we've seen has been quite a sharp decline there of ships leaving China for the US.
06:48
Chris T
I saw somewhere. Was it 35%, something like that? Something like a 35% drop is what they're expecting?
06:53
Richard D
It was about that. Yeah. So pretty sharp. So the level we had a bit of a surge ahead of the tariffs. But then those have now collapsed even below that sort of pre tariff surge. So companies again are holding back on what they're ordering. And then there's going to be knock on effects from that. So you know that's going to hit truckers, transport, logistic companies. If you look at, I was looking at earlier the S&P 500 truckers sub index. So the relative performance of that relative to the aggregate index. And that has come down quite, quite surprisingly. And then that's all generating this sort of fear that we're hearing a lot of talk about these sort of empty shelves coming up.
And I think the we probably will see that certainly just, just given that, if it takes a month or two months to actually ship stuff and a lot of that stuff is not being shipped now, even if, we don't get these reciprocal tariffs being put in place in July, we're still not shipping enough in enough time, probably to avoid at least some of the empty shelve experience coming forward.
08:13
Chris T
And when you say empty shelves, you know, I, I feel like that some people are can maybe perceive that as everything is gone, you know, you don't have there's no food, there's no that's I'm assuming that's, you know, that's more so, you know, let's say technology or consumer based products, not as much as food as it is other supply, right?
08:33
Richard D
Yeah. So the US does not import a lot of food from, China. In fact, the opposite. China imports a lot of soybeans and things like that. From the US. So yeah, it's more kind of quote unquote stuff like, yeah, from iPhones and things like that. But then actually Trump has kind of, softened his stance on, on those as well.
08:57
Chris T
So what about the financial market response to all this? What's happening in the bond market, for example?
09:03
Richard D
Yeah. Volatility I think, as you would expect, you know, in both equity and bond market, which is unsurprising because I think it's pretty difficult for investors or, you know, fundamental investors to make any kind of decisions based on what's coming out of Washington. I mean, there's so many inconsistencies in the sense that, you know, what they say one day they roll back on another. So what goes up goes down the next day. So, as much as you want to, you can try to block all of these out. You know, still, you know, you still need to, to, to pay attention to it all. And I guess what's been perhaps comforting in a certain kind of way, I guess, has been that Trump has actually shown himself to be responsive to what's going on in the market.
So he, you know, the markets are acting as a bit of a guardrail here. That's something that, investors were kind of worried about, given the staunchness of the stand he was taking. So that is proving to be helpful. And we've seen this a number of times now, over the last month. So we saw that with the 90 day tariffs, being paused for every country except China's or China really is being singled out here.
We saw him backing down on tariffs on smartphones and some other electronic goods. We saw him backing down on his threat to fire Fed Chair Powell after the equity market took exception to that. And then he's also softened his tone on China a little bit. He was saying a few days ago that tariffs won't be anything like the 140% or 145% reciprocal tariffs. They're going to be much, much lower, you know. And then he's also clarified that the tariffs on automobiles aren't going to be stacked. So there was again a fear that they would be stacked on top of a bunch of other tariffs like steel and aluminum. And that's not going to be the case. So that that's helpful.
But what I think I think we saw earlier in the bond market earlier in the month, which actually prompted that 90-day tariff was instructive in a way, and it highlighted potentially one major area of weakness in the financial markets. So something that that we've kind of been looking at for several years now. But, you know, no regulators or anyone wanted to touch that. And that's this so-called basis trade. And that's what I think frightened Bessent and Lutnick and without getting too technical, this trade is kind of akin to picking up pennies in front of a steamroller. And its basically asset managers need to hold bonds instead of going out and buying those cash bonds and holding them on their balance sheet, what they do is they just go out into the futures market and buy futures, on those bonds so that, you know, that doesn't take up balance sheet space. And, you know, they can use that that space for, for other things.
And but then someone has to take the other side of those and, and short those short those futures. And who does that are a bunch of hedge funds. And what they do is, is they short those bonds, but then they also buy the underlying cash position to hedge themselves, so fairly risk free. And then as you get closer to maturity, the prices of those to converge and, the hedge funds pick up what we call the basis yield. And then they just walk away from that. But that's kind of pennies. But what they do to actually make this more exciting and get actual big profits from this is they leverage they leverage this up by 40, 50 or maybe 100 times.
And I think what happened that as we saw this sort of volatility in the bond and equity markets, the hedge funds started getting margin calls on all this leverage. So they have to then hand over this collateral, the underlying treasuries, to the asset managers who then sell them into the market. And then that reinforces this actual weakness taking place.
So that I think has been sort of an accelerator. But what's key is that the size of this basis trade is huge. So it's like $800 to $1 trillion. So pretty, pretty big. And again, what I think we read about later in the, in the, in the Wall Street Journal had an article on this talking about Secretary Bessent and Commerce Secretary Lutnick, both who are market people.
They were watching this play out. They started to get a little antsy and hightailed it over to the Oval Office and got the president to input this pause before something breaks in, in, in the financial markets. And I think that's clearly the big risk here, is that you can move fast and break things. But, you know, that also holds the risks of, of a breaking something in the financial markets.
And then, you know, if you do that, that can kind of take on its own momentum and as sort of a life zone that becomes very, very hard to stop. So thankfully, that that didn't happen.
14:49
Chris T
All right. So given all this, this bond market volatility, is there a chance that the U.S. could default on its debt? Or are yields a good investment opportunity where they are now?
14:59
Richard D
So yeah, I think I mean, there's effectively zero chance that the US is going to involuntarily, default on its debt. So remember, as the MMT crowd likes to remind us, all government debt is priced in dollars, so they can always just print more, if they need to. I guess they did. There was one incident in 1979 where they did involuntarily kind of technically defaulted when there was some computer glitch in the checks you know, for, for payments weren't actually mailed out, on time and, and those that was resolved, pretty quickly.
I mean, there are other ways of defaulting. I mean, this this is this has been a little bit of a concern to the market, this so-called Mar-A-Lago accord, which the administration admittedly has completely disowned, but it was, based on a report which was drafted by Steven Miran, who heads up Trump's Council of Economic Advisers.
And in this paper, which he wrote before being appointed to that position, he included one scenario where foreign central bank, so not individuals, could be forced into conversions where they're forced to convert at least part of their Treasury dollar reserves into 100 year non tradable zero-coupon bonds. And maybe that would be part of some kind of trade deal or some deal over payment for being under the US defense umbrella.
And again the administration is not endorsing that. But if that were actually to have happened or to happen that that would be considered, effectively a default and, but I, I think, I think the problem is now is that there's a lot of talk about this stuff going on. And, you know, that makes investors a little bit uncomfortable.
We're starting to see a little bit of capital flight away from the US. So we've seen some significant correlations break down recently. There's a strong correlation or had been until recently between the euro exchange rate and bond boon spreads German Bunds. And that seems to have broken apart. So I think this is kind of showing up increased borrowing costs, increased yields or what we call an increased term premium.
So that's the reward that investors demand for the risk of investing in in treasuries. And up until recently that term premium was mostly negative, which in itself was kind of weird. But that was mostly because investors weren't investing in bonds for yield. They wanted them for the negative correlation they held with stocks. So they just wanted them as a hedge, an insurance policy, not actually for the yields. And I think that's kind of that's changed.
18:13
Chris T
And then what does this mean for the equity market.
18:16
Richard D
Well again, looking at sort of measures of investor sentiment at the moment. So again, the sort of soft data, bulls, bears ratios, that kind of stuff, sentiment is pretty, pretty bearish. Those ratios are very, very low. That's not actually as bad as it seems in the sense that many of these ratios are contrarian indicators.
So, you know, if, if, if everyone's very negative, it means, investors are not all in on the market and it's not overbought. Now that's not a reason to go and buy the market today. You know, at William Blair remember where we believe in fundamental investing. But I think it is part of the broader picture that one paints of the entire equity market, the sort of the mosaic, that we look at.
But I think, I think with all this noise, it's, it's good to look at maybe the bigger picture, the sort of where are we? And that's what we're trying to do. And I think one area that we're looking at is what's happening with the inflation regime. And because that's a major driver of equity market returns. And again, we've talked a little bit about this before, but I think what we're seeing is important.
And it's worth reiterating. And I think what it is a change in the and or in the, in the inflation regime that we're seeing. So we are in what I think is a is a new inflation world, where in the old world, which was sort of 2000 right up until the Covid, supply was not a constraint on demand.
So any company or person could pretty much get whatever they wanted whenever they wanted it. So there was no shortages of labor. We had this kind of hyper globalization. There were no shortage of parts of materials you could get anything you wanted shipped over, you know, overnight pretty quickly. So if demand was too strong, you know, inflation wasn't going to get too high because it could be quickly satiated by that demand.
And then the other thing which was part of this old world was that monetary policy was dominant. So was this the technocratic central banks that were driving the bus on economic policy. And part of that is that the Fed is obsessed with clarity, transparency, forward guidance, you know, telling as much or giving as much clarity to financial markets, as they can.
And Washington was kind of in the passenger seat or at the back of the bus. It was in policy gridlock. And I think what that meant is that it gave kind of a free rein to the central bank, to the Fed, to act preemptively and not reactively. So for equity investors, what that meant was it gave them a long runway of visibility.
They knew that at the slightest wobble in the financial markets or the economy that the Fed put was there to, to support them. So I think that that clarity, that combination of, of low and stable inflation, low and stable interest rates, combined with what we also had was this sort of innovation wave and then a rise in in passive investment, which by definition means that momentum is more driving the market than, than valuation is it meant that, investors and performance got kind of increasingly funneled further and further out along this sort of duration curve, and you ended up with so-called balanced portfolios.
But those portfolios were really balanced just in the equity side, in very long duration tech stocks, i.e. the Mag seven, and then balanced out with treasuries, which had a negative correlation with bonds. So they were using those for hedging purposes. But that's changed today. And when it comes down to inflation, I think what we're seeing over and over again is that supply side of the economy once again matters.
Like we never thought about supply chains all that much until Covid, basically. But now we're seeing the labor market is structurally tight. So the shortages of workers, we're getting weird and more frequent weather events, just like we saw in Spain and Portugal now. We're seeing globalization, we're seeing sanctions, tariffs. So supply chains that are being too tight and too brittle.
And companies are sort of building in some redundancy there. And then we're also seeing a lack of clarity because fiscal policymakers have nudged the central banks out of the driver's seat. So they're kind of driving the bus now. And that reduces the transparency that the Fed had kind of given the markets before. So that runway of visibility, that duration for the equity market shrinks.
So there's more uncertainty there. And, you know, it's not that the Fed's gone away and you no longer have a Fed put, but what you do have is a more reactive less preemptive Fed because they have to sit around and wait until to see what the fiscal policy makers are doing. And I think what we end up with is a more volatile inflation world.
Not one where inflation is kind of permanently higher, but it's just more volatile around that sort of central mean, which is maybe a little bit higher. We've got more policy uncertainty. And I think again, that means investors come back a little bit on that duration curve. They're being forced as well to demand a little bit more compensation for that uncertainty, that lack of visibility.
And where they get that is through lower valuation. So, they want to increase that that margin of safety. And on top of that, because we no longer have this negative correlation with stocks and bonds, bonds are no longer as reliable as they were. You know, to be used for portfolio insurance. So I think what it means is that investors now have to be more active in managing their, their portfolios.
So I think that that sort of pendulum swing to passive is kind of starting to swing the other way. And I think that investors have to think more about how they're going to get that diversification in their portfolios to offset risk if, if bonds are not going to do that. And I think they can get that through different asset classes, but they can also get that through the equity market itself by looking across different sectors that, maybe you wouldn't previously have held or different sizes of stocks.
So instead of maybe looking entirely at the mega cap stocks, you're looking at larger or mid or even or even some of the small cap stocks. So it feels like we're moving more towards the sort of more actively managed portfolios.
And then I think the last thing I'll just say is just to, to kind of, deal with that economic uncertainty. So I think investors still want growth because in a, in a world where if you're going to have some economic volatility, you still want to be in stocks that have a proven track record of solid growth and quality growth. And I think what's happening there is you're moving from what I'm calling a world of, growth to a world of GARP in the sense that, you know, where the old world was, just put it in growth and valuations didn't matter all that much. We're now in this sort of world where, you know, you're still investing in growth, but growth at a reasonable price. Investors are a little bit more demanding, a little bit more discerning of what the valuations you are paying for that equity investment. Again, to give you some, to give you some cushion against that increase in uncertainty.
27:36
Chris T
Oh, man. Well, that's a lot. Yeah. I expect we'll have a lot more to talk about next time. But unfortunately, that's all the time we have for today. But, looking forward to picking this up next month. Thanks for taking the time to be with us, Richard. Always a pleasure.