Observations by David Robertson, 7/11/25

News is streaming out all over the place and stocks are just as calm and unbothered as can be. Which is right? Let’s take a look.

As always, if you want to follow up on anything in more detail, just let me know at drobertson@areteam.com.

Market observations

After the passage of the budget bill and a relatively quiet (in terms of news) Fourth of July, investors were jolted afresh by tough talk on tariffs. As John Authers ($) reported, the response function of investors has changed considerably:

The 90-day pause on the Liberation Day tariffs concluded with President Donald Trump telling reporters at a cabinet meeting that he would levy tariffs of 50% on copper and 200% (!) on pharmaceuticals. In response, US stocks carried on with one of their dullest trading days this year.

Interestingly, the weak response of stocks was echoed by falling volatility. Or maybe falling volatility caused an understated response? As Tier1 Alpha observes, the fall in volatility this week represents a mechanical adjustment:

Expect a sharp decline in $SPX 3-month realized volatility this week as the “Liberation Day” returns roll out of the sample data.

All else equal, this should trigger systematic buying from Vol-targeting strategies and create a mechanical tailwind for the equity market.

As a result, relatively benign conditions for stocks this week should be taken as a transient data quirk, and not as a meaningful information signal. Further, as the seasonal volatility chart from Zerohedge ($) indicates, the headwinds from rising volatility (both implied and realized) are due to start right about now.

Politics and public policy I

Soon after the passage of the budget bill, talk about tariffs re-emerged. What is entirely uncertain is what all the talk means. Is it just rhetoric? Are the threats hollow, i.e., TACO (Trump Always Chickens Out)? Are tariffs just sanctions by another name? Are the tariffs legitimate but just slightly delayed?

Investors will probably still be struggling to answer these questions well past the new August 1 deadline, but there are some things that are becoming increasingly clear about tariffs.

Number one, as Bob Elliott ($) reports, US consumers are paying a major portion of the tariffs:

It’s pretty clear the trajectory of goods prices shifted sharply in January once expectations of tariffs started to emerge and in roughly the same order of magnitude of the tariff impacts.

While we can debate the precise elasticities here, the outcome looks pretty clear - consumers appear to be paying the vast majority of the tariff costs on goods they are buying.

Number two, US companies are also feeling the pain. As the Morning Dispatch ($) highlights:

A large swath of businesses, though, say they are already taking a direct hit to their profit margin. According to a KPMG survey released Tuesday, 57 percent of companies reported a decrease in their gross margins, with 25 percent reporting drops of more than 6 percent. In what may be the most telling finding, 77 percent of businesses surveyed said they were considering raising prices at least 5 percent in the next six months.

These reports corroborate that tariff effects are negative and are moving through the supply chain. As a result, consumers and investors can expect to see higher prices and lower profits continue to seep into reported numbers.

Public policy II

With the passage of the budget bill last week, one of the upcoming challenges will be figuring out all the little things that got thrown into it. What won’t be challenging is identifying the major thrust of the bill.

As Ed Luce ($) notes in the FT:

Joe Biden used to say that if you want to know a country’s values, study its budget. The “big, beautiful bill” that Trump signed into law on July 4 cannot be misread.

The law slashes spending on healthcare, education, clean energy, food assistance, medical research and disease prevention. The same bill lifts ICE’s budget to an estimated $37.5bn a year. That is higher than Italy’s entire defence budget and just below Canada’s. ICE will now double the number of agents in the field. What Washington is set to spend on detention centres alone is greater than the USAID budget that was gutted earlier this year.

This is actually a pretty useful insight. By these terms, things like healthcare, education, energy, and disease prevention are not priorities for the country. They are, however, all important components for any kind of national growth strategy. As a result, one can easily infer that this budget bill is not about growth; it’s about something else.

This makes some important things easier for investors. Namely, it makes obvious the probability of a return to decent, sustainable economic growth is exceedingly low. That simply cannot be accomplished without investment, and many important investments in the national economy are being cut, not increased.

Can the market “run hot” for a while? Sure. Can profits perk up for a while? Sure. That’s not the point. The point is in order to sustain solid economic growth for any period of time, fresh investments need to be made on a regular basis. This budget bill does just the opposite.

Politics and public policy III

With some time to reflect on the New York City mayoral primary, a number of insights have emerged that also have implications for national politics. For example, Ian Bremmer does a nice job of describing how different the country looks depending on how old you are:

But here’s the thing: the slurs [of Communism] only carry weight if people still see the United States as capitalist. Increasingly, they don’t. The United States looks less like a free‑market meritocracy – the kind with equal opportunity, open competition, rags-to-riches possibility – and more like a pay‑to‑play kleptocracy where access and advantage are auctioned to the highest bidder.

Socialists may still not be able to beat capitalists, but if voters conclude that America has devolved into a two-tier system that rewards proximity to power more than hard work, don’t be surprised when a Ugandan-born millennial socialist like Mamdani has a shot against oligarchs and kleptocrats.

If you’re 25, saddled with student loans, priced out of housing, and watching Trump cut the social safety net you’re paying into to fund tax cuts for his billionaire friends and cronies, soaking the rich increasingly looks not just like common sense but like self-defense. It’s no wonder Mamdani’s message resonated.

The second to last sentence is the one that jumped out for me: “… soaking the rich increasingly looks not just like common sense but like self-defense”. This seems to capture an important aspect of the sentiment. It’s not so much a “FOR” vote for Mamdani as self-defense against the economic beatings.

This is telling in itself. Younger people simply don’t view the country as a land of opportunity in the way older people tend to. Rather, as currently constructed, it represents a system that systematically abuses young people. That perspective rather significantly redefines the relative attractiveness of different options for political systems.

So far, that vote is far more defensive than prescriptive for policy, but it does capture the frustrations of younger generations. As Bremmer warns, “CEOs should worry less about Mamdani and more about the energy he’s tapping into.” So should everyone.

Politics and public policy IV

Jonah Goldberg ($) also shared thoughts on the NYC primary in what amounts to a harsh rejoinder to Bremmer’s statement:

If elected mayor, Mamdani may not be a political failure (though I’d bet that way). But if you think he has any chance of solving the problems with capitalism—as the left defines them—or if you think he’s going to deliver some transformative epoch of governance and equality, I think you’re just making a fool of yourself.

Indeed, he has precisely the kinds of public policy answers I’d expect from an English major from Bowdoin College. Mamadani was actually an Africana Studies major at Bowdoin. So, close enough.

While Goldberg’s comments are harsh, they are also pretty fair. It is true that “voting for a candidate based on how he or she makes you feel is just a really stupid way to run a country,” although that obviously applies far more broadly than just to Mamdani. It is also true that Mamdani is probably “not a serious candidate for the problems facing New York City or the country.”

The criticisms, however, also point to a way forward. While Mamdani wrote an impressive script on how to campaign, the “how to govern” part needs a lot of work. So be it; there are people who can do that. There are also people who can build coalitions out of disparate groups. Whether that happens through one or both of the major parties or through a new party, politics looks to get a lot more interesting.

Geopolitics

As is so often the case in this frenzied media environment, it’s what you don’t hear about that is often the most informative. With this in mind, Shannon Brandao ($) reveals some fascinating insights resulting from the conflict in Iran … about China.

For starters, she notes China has cast itself as “a neutral broker, a builder of infrastructure, a quiet superpower untainted by war”. That said, when the bombs started falling, “Xi’s government didn’t lead—it evacuated. Within days, Chinese nationals were pulled from both Israel and Iran.” Under the spotlight of global scrutiny, this “looked more like paralysis than a plan … Beijing offered neither shield nor solution.”

China’s quiet acquiescence made the actions of the US appear that much more formidable. For one, it became clear that “when it comes to high-risk, high-stakes use of force, only Washington is still willing—and able—to lead.” For another, the action also sent a message around the world: “If the U.S. can act this decisively in the Gulf, what might it do in Ukraine—or over Taiwan?”

While there are still conflicting reports as to the extent of damage caused to Iran’s nuclear program from the bombing, it would be wrong to use that as the only metric by which to evaluate the exercise. As Brandao describes, the strike reset the “geopolitical mood lighting” and that will almost certainly play a role in shaping the future course of geopolitical relations.

Investment landscape I

One of the more interesting phenomena of the first half of the year is the re-emergence of frenetic retail activity. At a time when institutional investors have been carefully assessing the evolving political and geopolitical environment, individual investors have been diving in head first.

According to a report by Zerohedge ($), “retail flows into US stocks and ETFs surged to a new high in 1H 2025, reaching US$155.3bn, the strongest first half on record,” “purchases of single stocks in the first half of 2025 returned to highs last seen during the bullish 1H of 2021 and 2023,” and “daily turnover – i.e., buys plus sales – has jumped a staggering 44.5% vs 2024 daily averages.”

Bottom line: Retail investors remain a major, and growing, force in the market. Participation is at record highs, the dip-buying bias is fully intact, and engagement with single names — particularly high-beta and leveraged plays — continues to rise.

One point is this high level of risk-seeking masks a more normal (though still far from completely normal) process of price discovery. With a reflexive response of buying every dip, bad news rarely gets fully incorporated into prices on a sustaining basis. There are simply fleeting moments.

Another point is the highly aggressive retail buying presents a double-edge sword for policymakers. On one hand, reflexive buying creates a cushion to help soften the blows of adverse events. On the other hand, that cushion comes at the expense of increasing the probability of an extremely severe selloff sometime in the future.

Investment landscape II

With the passage of the budget bill comes the raising of the debt ceiling and with that comes the flood of Treasury issuance to restore the general account and pay back all the IOUs. Indeed the Treasury started the process by upping the supply of bills this week on top of previously scheduled auctions.

While the announced approach is a fairly innocuous short-term response to the new funding needs, the bigger question remains how the new, higher level of supply will be sustainably met by demand. If the incremental issuance remains all short-term bills, the policy risks being inflationary. If the incremental issuance includes more bonds, the policy risks driving longer-term bond yields higher. We should learn more with the next Quarterly Refunding Announcement due at the end of the month.

Until then, traders and investors will be left guessing to a large extent about the direction of longer-term rates. One ominous sign is that Japanese bonds yields have surged higher again. With Japan being the “Saudi Arabia of capital”, higher yields create an incentive for capital to either stay in Japan or relocate back to Japan. Either way, it would further weaken demand for Treasury bonds.

Investment landscape III

While investors have remained bullish and stocks have been poking at new all-time highs, a pretty impressive list of headwinds has been accumulating.

For starters, liquidity conditions are set to get tighter as the Treasury issues large quantities of new debt. Indeed, just this week Treasury announced massive increases in the issuance of Treasury bills. The need to issue more debt also puts pressure on the yield curve as bond issuance will eventually need to increase if the value of the dollar is to be preserved. This should also cause bank reserves at the Fed to fall.

In addition, the impact of tariffs continue to work through the economy. As they do, the effects will get closer and closer to consumers. The uncertain nature of this early round of tariffs, in particular, has prompted a wide variety of responses from business due to the uncertainty. As a result, it is probably taking longer for their effects to be realized in full. Of course, new tariffs appear to be coming as well.

In the meantime, the US consumer continues getting weaker. Wage growth is positive but falling and signs of softer spending are becoming more prevalent. Unemployment remains low, but it’s getting progressively harder to find a new job after leaving an old one. Consumer credit is also getting weaker and several million student loan payments are restarting which will draw from other spending.

Also, and not to be overlooked, the one overarching goal of the Trump administration to push through its tax cuts has been accomplished. With that one major point of common interest amongst various factions in the White House now completed, there is every opportunity for rivalries within the coalition to heat up.

These challenges are also occurring in an environment in which geopolitical relationships are fraught and expectations for growth are high and for inflation are low. In short, the investment environment contains a lot of friction and is rife with opportunities for disappointment.

Implications

As noted earlier in the Market review for Q2 25, it’s hard to get a good read on whether the Trump administration wants to run the economy “hot” with deficit spending or “cold” with rampant tariffs. The confusion the policy “ping-pong” engenders may be the whole point: If people can’t get a clear outlook, they are unlikely to have the confidence to significantly change their spending or investment patterns.

The lack of clear signals is probably the most insidious aspect of the current investment environment because it prevents investors from paying as close attention to risk exposure as they ought to. With public policy space running out and no clear intention to improve financial conditions, the chances of a catalyzing event are rapidly increasing. Time is running out.

Until then, there will almost certainly continue to be opportunities for speculation, but the forecast for long-term investors with heavy exposure to US stocks and bonds is getting a lot darker.

Note

Sources marked with ($) are restricted by a paywall or in some other way. Sources not marked are not restricted and therefore widely accessible.

Disclosures

This commentary is designed to provide information which may be useful to investors in general and should not be taken as investment advice. It has been prepared without regard to any individual’s or organization's particular financial circumstances. As a result, any action you may take as a result of information contained on this commentary is ultimately your own responsibility. Areté will not accept liability for any loss or damage, including without limitation to any loss of profit, which may arise directly or indirectly from use of or reliance on such information. 

Some statements may be forward-looking. Forward-looking statements and other views expressed herein are as of the date such information was originally posted. Actual future results or occurrences may differ significantly from those anticipated in any forward-looking statements, and there is no guarantee that any predictions will come to pass. The views expressed herein are subject to change at any time, due to numerous market and other factors. Areté disclaims any obligation to update publicly or revise any forward-looking statements or views expressed herein.

This information is neither an offer to sell nor a solicitation of any offer to buy any securities. Past performance is not a guarantee of future results. Areté is not responsible for any third-party content that may be accessed through this commentary.

This material may not be reproduced in whole or in part without the express written permission of Areté Asset Management.