For those of you who would prefer to listen:
It’s just one week into the second Trump administration and it’s been as eventful a start to any Presidential term in memory. What a difference in the White House. Regardless of what people think of the 45th and 47th President, he definitely makes people move. One of the biggest takeaways from Trump 2.0 has been the Market’s hyper-focus on trade and the volatility around the constant flow of tariff headlines. The threat of wide-ranging tariffs slapped on America’s trading partners threatens growth, prices and currencies. There’s been a ton of speculation and bracing for action. Thus far, the Market has taken it very much in stride with the perceived thinking thatthus far, the bark has been much bigger than the bite. But make no mistake, there has been plenty of barking. It’s still very early days.
The first target were our neighbors. The President is pressuring them to start renegotiating the US-Mexico-Canada (USMCA) trade agreement again. The pressure was most felt in the Currency Market.The Mexican Peso slid against the Dollar, while the Canadian Loonie fell to a 5-year low amidst the news that 25% tariffs on both Mexico and Canada could be imposed in February. The Euro currency slipped as well, with Trump issuing fresh tariff threats if the EU doesn’t start buying more American Oil & Gas. So far, the tariff talk has been narrowed, as the President indicated that the universal tariffs that he campaigned on can wait.
Our Washington sources believe this is merely a negotiating tactic to get Canada and Mexico back to the table for more concessions. Considering so many of our daily goods, like Oil, Agriculture and Automobiles come from our neighbors, the risk of higher prices is real. Americans are already struggling with high prices. That has to be factored into the strategy from the Oval Office.
President Trump called for an investigation on the China trade instead of immediately slapping tariffs. If you recall, the President threatened 60% tariffs on Chinese goods during his campaign. But this week, he expressed an interest to meet directly with the Chinese President in person to see if better trade agreements can be made. That certainly cooled any concerns the Market had, at least for now. What’s more, China has signaled an openness to a deal that would keep TikTok in the US. Trump has pushed for that. Teenagers and twenty-somethings from coast-to-coast are celebrating this prospect. There are over 150 Million Americans currently on TikTok. Politics are certainly at play.
From our Washington sources:
“The evolving TikTok situation suggests that Trump can be swayed on policies if they are shown to have either positive or negative impact among his supporters. This could mean that he might phase-in tariffs and might exempt key products such as energy if he thinks such tariffs would raise prices on consumers or somehow offend one of his constituencies”.
America First is embracing AI. In one of his first actions in the Oval Office, President Trump revoked the “Safe, Secure, and Trustworthy Development and Use of AI” executive order that had been put in place by the Biden administration. This addressed the growing concerns that overregulation will slow production and stymie innovation of future technologies, which are set to power the U.S. Economy and give it a competitive advantage on the world stage. That said, rules and oversight are essential to make sure the powerful technology doesn’t fall in the wrong hands. Silicon Valley moves far faster than Washington.
Introducing “Stargate”: The new initiative to expand AI data centers and infrastructure. This venture seeks to keep America at the forefront of Artificial Intelligence innovation. According to the President, Stargate will support the “re-industrialization of the United States,” providing strategic capabilities to “protect the national security of America and its allies.” It will also require a massive amount of energy, something the United States has a lot of in the form of natural gas. AI has also triggered a revival in nuclear energy. Competing in the Digital Age will take a ton of power.
Aggressive spending continues in the space. Meta CEO Mark Zuckerberg announced the company plans to spend $60-$65 Billion on AI in 2025. This, on top of the $80 Billion Microsoft plans to invest. There’s a massive amount of money pouring into Artificial Intelligence. The investment is essential to maintain the lead. China is feverishly trying to catch-up. This from Alphabet CIO Ruth Porat: “It isn’t a foregone conclusion that the U.S. will keep its lead. We’re probably a year plus ahead in models. The West is ahead in chips. I think China is on par and may even be a bit ahead on what’s called diffusion of basic capabilities.” It’s very early days and it’s incredibly investable.
The Race for Digital Supremacy is heating up big time. Over Christmas, a small Chinese start-up called DeepSeek introduced a new AI system that can reportedly match the capabilities of cutting-edge chatbots from companies like OpenAI and Google. Initial tests indicate they’re actually outperforming the American models. What’s more, the company claims they come much cheaper. DeepSeek’s engineers said they used only a fraction of the highly specialized computer chips that leading A.I. companies relied on to train their systems. These chips, mostly made by Nvidia, are at the center of the tense competition between the United States and China. This development sent shocks throughout Silicon Valley. Operation Stargate needs to move fast.
One of the most interesting things about Stargate is its leadership. Sam Altman, Co-Founder of ChatGPT’s OpenAI, was standing with President Trump for the White House announcement. Remember, Elon Musk was also a co-founder. He’s also become buddies with the President. Musk was noticeably absent at the event but has reportedly set up an office in the White House. Elon Musk and Sam Altman are no longer friends. Oracle’s Larry Ellison and Soft Bank’s Masa Son were at the President’s side as well. Musk immediately declared that the companies involved don’t have the money to invest in the venture. The war of words with the AI race have already begun. And this fight is us versus us, not China.
Speaking of a war of words; There has been quite a bit of jawboning about buying Greenland, renaming the Gulf of Mexico and taking back the Panama Canal. On the surface it sounds ridiculous. And of course taking sovereign territory by force sends a message to the world that it’s ok to take strategic land for national security purposes. That certainly would validate Russian activity in Ukraine. Putin would absolutely love that.
The controversy over the Panama Canal piqued my interest, for a variety of reasons. I dug in a little to understand the situation better.
First of all, 30+ ships travel through the Panama Canal every day. That accounts for 6% of global seaborne trade. It’s material. The obvious key is that it cut travel time significantly from the previous route around Tierra del Fuego.
The 51-mile waterway through Panama opened in 1914. President Teddy Roosevelt championed the project. The United States operated it and kept direct control until 1999. It was given to Panama after years of protest against the US presence. President Trump says that was a “mistake” and wants to retake it, claiming Panama “overcharges” US ships and has allowed China to exert influence over the water. There is a port at either end of the canal that is operated by a Hong Kong-based company. This is presumably what Trump was referring to. Canal tolls have indeed increased in recent years due to water shortages, but they apply equally to ships from all countries. Inflationary pressures have been everywhere. Chinese companies are active in Panama, but there is no evidence so far of their meddling in the canal itself. In response, the Panamanian government has opened a probe into the Hong Kong company and asserts Panama controls the canal.
Every ship that passes through the Panama Canal must pay a toll. The toll is based on the size of the ship and the cargo it’s carrying. Cruise ships pay based on how many passengers are onboard. The largest ships pay roughly $450K to pass through the Panama Canal. A yacht under 65-feet pays roughly $1,750. Last year, the canal brought in over $5 Billion in revenue, which accounted for 8% of Panama’s GDP. It’s a significant sum.
Our sources indicate Panama wants to avoid a bigger crisis if possible. Realistically, the Central American nation is limited in its ability to counter the United States. If President Trump is using threats to secure preferential rates for US ships, then a peaceful resolution is definitely possible. But if he thinks direct control is essential in a zero-sum global competition with China, then the probe won’t move him, and things could get frothier fast. It’s important to remember that Panama was the first Latin American country to join China’s Belt & Road initiative in 2017. So, there’s that.
China’s foreign ministry spokesperson said this week: “China does not participate in the management and operation of the canal and has never interfered in the affairs of the canal.” There are legitimate concerns about the heavy presence of a Chinese company in a strategically important channel, but our sources believe that Trump’s remarks are really aimed at limiting Beijing’s growing diplomatic and economic presence in Latin America. Protectionism continues to dominate geopolitics. It’s still playing out in Taiwan too.
Back to the Market:
Despite Friday’s decline, the Stock Market had its best start to a new Presidential year since Ronald Reagan’s second term began in 1985. Consequently, that was also the last time the inauguration was held indoors due to weather. The AI Trade reaccelerated this week with the Stargate news, but attention will switch back to earnings. The Market focus will return to Earnings Season next week when roughly 40% of the S&P 500 Market cap reports. What’s more, it will be the Tech Titans turn. Reporting next week will be Microsoft, Meta, Apple, Amazon and Tesla. These 5 stocks combined are valued at $12 Trillion, accounting for one-quarter of the S&P 500 total value. It will definitely be Market-moving.
Have a nice weekend. We’ll be back, dark and early on Monday.
Mike
