Eye On The Market: Redacted Straight Talk on the Decline in Business Confidence

Host: Michael Cembalest
Release Date: April 2, 2025

Introduction

In the April episode of Eye On The Market, host Michael Cembalest delves into the pressing issue of declining business confidence and its ramifications for capital spending plans. Opening with a personal note, Cembalest apologizes for his temporary loss of voice due to a recent medical procedure, setting a candid tone for the episode.

Tariffs and Global Trade Dynamics

Cembalest begins by comparing the current economic outlook to a "guy in a medieval lab" conducting unorthodox experiments, emphasizing the administration's aggressive attempts to reshape the global economy. He reflects on his initial underestimation of the administration's impact, stating:

"I underestimated the speed and ferocity with which the administration would try to change the status quo." [02:30]

He highlights that the market has already experienced a 10-15% decline, attributing part of this to reciprocal tariff responses from other countries. Cembalest notes the complexities of tariffs, explaining:

"Tariffs are both mildly inflationary and mildly growth dampening." [05:45]

He underscores that the United States has reached the highest tariff rate as a share of GDP in a century, suggesting that reciprocal tariffs could push these rates even higher.

Non-Tariff Barriers: A Growing Challenge

Shifting focus to non-tariff barriers, Cembalest discusses their escalating prevalence and impact on international trade. Referencing a Bloomberg chart, he illustrates how non-tariff barriers often overshadow actual tariff rate differentials. For instance, he explains:

"Vietnam has a tariff rate differential of 5%, but when you account for non-tariff barriers, it's an additional 20%." [08:15]

He categorizes non-tariff barriers into two main components:

• Technical Barriers to Trade
• Sanitary and Phytosanitary Measures

Cembalest emphasizes that these measures provide countries with a plethora of tools to protect domestic industries beyond traditional tariffs, creating a complex landscape for international trade relations.

Decline in Business Confidence and Capital Spending

The core of the episode revolves around the observed decline in business optimism and capital expenditure plans. Presenting a chart comparing CEO forecasts and capital spending intentions, Cembalest points out a significant downturn:

"Business optimism has rolled over pretty hard, and I anticipate it will continue to decline." [09:50]

He posits that tariffs are only part of the story, suggesting other factors—potentially related to White House policies—are also contributing to the erosion of business confidence. Although he opts not to detail these factors due to their sensitive nature, he hints at their broad impact across various sectors, including technology, automotive, and agriculture.

Future Outlook and Investment Strategy

Looking ahead, Cembalest discusses two potential scenarios:

1. Temporary Resolution: Trading partners make concessions, leading to a stabilization of tariffs and normalization of market conditions.
2. Escalating Conflict: An ongoing tariff conflict that further debilitates the global economy.

He advises vigilance, noting:

"We're already down from peak to trough 9% or so. Let's assume that we have another leg down." [11:20]

Cembalest suggests that a market decline of around 15% from peak could present a strategic investment opportunity, citing historical data where such corrections yielded average returns of approximately 12% one year later.

Policy Uncertainty and Potential Offsets

Addressing policy uncertainty, Cembalest highlights that tariffs represent one-time impacts on growth and inflation, as opposed to ongoing constraints. He discusses potential policy measures that could offset current economic headwinds:

• Infrastructure Permitting Reform
• Banking Deregulation

For example, he explains how altering supplementary leverage ratios for large banks by excluding U.S. Treasuries could significantly improve capital allocation and market liquidity:

"If you took U.S. treasuries out of the supplementary leverage ratio, the large bank capital ratios would improve by more than half a point." [10:30]

Conclusion

Cembalest wraps up by acknowledging the unprecedented and unorthodox economic environment. He hints at previous redacted analyses he has conducted, underscoring the sensitive nature of some economic factors influencing business confidence. He commits to closely monitoring tariff developments and providing updates on any significant changes that could affect the global economy.

Notable Quotes:

• "I underestimated the speed and ferocity with which the administration would try to change the status quo." [02:30]
• "Tariffs are both mildly inflationary and mildly growth dampening." [05:45]
• "Vietnam has a tariff rate differential of 5%, but when you account for non-tariff barriers, it's an additional 20%." [08:15]
• "Business optimism has rolled over pretty hard, and I anticipate it will continue to decline." [09:50]
• "We're already down from peak to trough 9% or so. Let's assume that we have another leg down." [11:20]
• "If you took U.S. treasuries out of the supplementary leverage ratio, the large bank capital ratios would improve by more than half a point." [10:30]

This comprehensive analysis by Michael Cembalest provides listeners with a nuanced understanding of the intertwined factors affecting business confidence and economic growth. By dissecting both tariff-related impacts and the broader scope of non-tariff barriers, the episode equips investors with valuable insights to navigate the current market landscape.