Weekly Research Briefing: Groundhog Day

@ernietedeschi.bsky.social: The price level from all 2025 tariffs rises by 2.1% in the short-run, the equivalent of an average per household income loss of $2,800 in 2025$, assuming no Federal Reserve reaction. The post-substitution price increase settles at 1.8%, a $2,300 loss per household.

JPMORGAN: “.. the steady rise in tariffs is starting to feel like ‘boiling the frog.’ Ask anyone a year ago what they would have thought if the effective US rate was even 15%, let alone 20%, and the response likely would have been one of dismissive shock.”

@FactSet: The forward 12-month P/E ratio for $SPX is 22.3, which is above the 5-year average (19.9) and above the 10-year average (18.4).

"Unfortunately, there is complacency in the market [about tariffs] and (they are) a little desensitized...There is a lot of happy talk. One day, you may see a different reaction....I think the possibility of those higher rates are higher than anyone else thinks. If the market is pricing a 20% chance, I’m pricing in a 40% to 50% chance..I would put that as a cause for concern." – JPMorgan CEO Jamie Dimon

Just as President Trump threatens to put hefty tariffs on many countries, including Indonesia, the European Union is working to relax trade barriers and deepen economic relations.

“In hard times, some turn inward, toward isolation and fragmentation,” Ms. von der Leyen said. Then, in a message implicitly extended to world leaders who have been jolted by Mr. Trump’s tariffs, she added, “You are always welcome here, and you can count on Europe.”…

Since Mr. Trump’s push to reorder the trading system kicked off in February, the European Union has been hustling to strike new trade agreements and deepen existing ones.

Canada and the European Union have pulled together. Britain and the European Union have had a rapprochement, five years after Britain officially exited the union. The bloc is working toward closer trading relationships with India and South Africa, and with countries across South America and Asia.

Nor is the European Union the only global power adopting such a strategy. Canada is also drawing closer to Southeast Asia, while Brazil and Mexico are working to deepen their ties.

Officials have even floated the idea of building trading structures that exclude the United States and China, which is widely blamed for supporting its factories to the point that they overproduce and flood global markets with cheap goods.

Ms. von der Leyen recently suggested that Europe could pursue a new collaboration between the bloc and a trading group of 11 countries that includes Japan, Vietnam and Australia, but that notably did not include the United States or China.

The US president has vowed to impose the higher tariff on the metal from August 1, matching levels already in place on all imports of steel and aluminium. But it remains unclear whether the levy will be applied to all copper products, stoking anxiety across industries.

Companies’ deepening concerns over copper come as they are already grappling with the higher costs of Trump’s escalating trade war, with US sales of products from cars and trucks to construction equipment hit by policy uncertainty.

Analysts warn the consequences to prices and demand of permanently higher copper tariffs will be serious since the metal is widely used in electric vehicles, chips and defence equipment, as well as household appliances and wiring.

The US relies heavily on imports of the metal, which accounted for about 53 per cent of its copper demand in 2024, according to Morgan Stanley.

Colombia and Brazil have been the top two countries exporting coffee to the US in each year since at least 2009. The two South American nations have swapped the top spot back and forth — in 2023, Colombia led with $1.38 billion worth of coffee exported to the US compared to Brazil’s $1.35 billion, according to International Trade Administration data.‬‬

Brazil accounts for roughly 70% of global orange juice exports, and has played a more sizable role in the US supply as a deadly citrus greening disease spread through Florida’s groves. While the same disease is also impacting some areas of Brazil, the northeastern part of the country has been largely untouched and is expanding production. Orange juice futures rose as much as 6% on Thursday to the highest price in nearly a month.

The new tariff would be a lot higher than the existing rate of $415 per ton applied to Brazilian juice shipments, meaning a charge equivalent to more than 70% of the value of the product, industry group CitrusBR said. This would make shipments “unfeasible,” Executive Director Ibiapaba Netto said.

On April 14, 2025, the Commerce Department notified all Mexican fresh tomato exporters as well as the U.S. International Trade Commission that the TSA will be terminated in 90 days. A 21-percent tariff will be imposed on all fresh tomatoes from Mexico beginning on July 14, 2025. This antidumping tariff rate was set based on weighted-average dumping margins, determined to be between 3.9–30.5 percent. The justification behind such a tariff relies on attributing the large increase in tomato imports from Mexico and the decline in U.S. producer market share to “unfair” pricing of Mexican tomatoes.

Conagra, like other packaged food companies, is contending with cost-conscious consumers weary of inflation and volatility tied to President Donald Trump’s quickly-shifting trade policy. The maker of Slim Jim jerky reiterated Thursday that its biggest tariff exposure came from its use of tinplate steel it canned goods…

Tariffs this fiscal year are expected to add 3% to its cost of goods sold, or more than $200 million, Connolly said in prepared remarks.

“What we gave today was our best estimate,” of tariff costs, Connolly said in an interview. “Obviously they are continuing to evolve, so I’m sure it will change again.”

Conagra’s current estimate was based on projections of a 50% tariff rate on imported tin plate steel and aluminum, a 30% rate on imports from China and a 10% reciprocal rate on imports from some other countries, the company said in its press release.

The company expects core inflation of 4% in the coming fiscal year, bringing total anticipated inflation for the period to approximately 7%. In particular, Conagra pointed to higher costs for cocoa and eggs and “double digit” inflation increases tied to animal proteins.

Record prices for beef may sound counterintuitive when vegetarianism seems to be on the rise. Skipping meat, and particularly beef, even if only for a few days a month is a popular trend among climate-conscious social media influencers. But the issue behind sky-high prices isn’t consumption; if anything, demand is lackluster.

The problem is supply. Put simply, the world is running out of calves. In the US, the size of the cattle herd hit a 74-year low last year. In Europe, it’s the smallest since the days of mad-cow disease three decades ago. With fewer animals making it into slaughterhouses, the market’s invisible hand is rationing supply.

In Britain, the average rump steak now costs a record £18.89 ($25.61) per kilogram, up more than 25% over the last five years, according to government data. The European Union is witnessing a similar trend. In the US, American ground chuck beef – a closely watched indicator – has jumped to an all-time high of $6.02 per pound, up about a third from early 2020.

Over the past six months, Canadians returned from just 8 million trips, well below the 11 million entries during the same period in 2024, according to Statistics Canada data released Thursday. In June, Canadian-resident return trips by automobile from the US plunged 33.1% from a year ago… Canadians’ return trips by air from other countries rose 7.3% in June, while those from the US dropped 22%.

"Our consumer particularly, who I'm also speaking to, is a consumer that has not been nearly as impacted by many of the consumers that are pulling down some of those surveys that be the lower income survey...Our target consumer is a household with $100,000 or more of annual earnings, which is not, by the way, an elite definition, that's 40% of all the U.S. households. And that cohort has accumulated a significant amount of wealth in the post-COVID era. And we were worried, I think, in earlier part of the year about the wealth effect, what's going on in the markets and other financial instruments, but that's corrected itself. The market's beyond where it was even at the start of the year." – CEO Edward Bastian

"We are seeing clear evidence of the consumer trading down with average price compression of 3% to 4% in our U.S. business, which impacted first quarter revenue and profitability. You may have seen other companies recently calling out trade down behavior, including the dollar stores, which are a beneficiary of this trend." – Helen of Troy CFO Brian Grass

We tell the story of the single greatest business ever created: Google search. From its origins as a Stanford research project called BackRub, Google became the front door to the internet. Today it’s an essential service for over half the world, and one that generates more profit than ANY other US company — more than Apple, Microsoft, or Berkshire Hathaway.

But it wasn’t always so obvious. When Larry and Sergey began working on BackRub in 1996, search was a backwater industry in silicon valley. Existing search companies were eking out a living as vendors to the then-dominant “portals” like AOL and Yahoo. Google’s come-from-behind success was the result of three massive step-function leaps forward in algorithms, infrastructure and business model… some invented by Google and some borrowed (and perfected!) by them.

@TheTranscript_: Global search engine market share shows a slight decline by Google YoY:

Commentators have been forecasting gloom for years. In the face of those predictions, private equity has grown at a remarkable rate. Assets under management have ballooned from $700bn in 2005 to $6tn today, according to PitchBook data. For perspective, it’s useful to look how public markets are doing. The number of public companies in the US has shrunk by nearly 50 per cent in the past 20 years. That’s a staggering decline.

Why is private equity thriving while the public markets are in secular decline? Both companies and investors simply prefer the private markets. Many companies have decided it isn’t worth dealing with the complexities of listing requirements, the focus on short-term performance, and activist investors. Investors are likewise drawn to the private markets. They value the fact that private equity funds have the luxury of selecting their companies, management teams, and operational strategies. And private equity value creation often lies in operational improvements which are uncorrelated with broader market movements.

Investors are also, of course, drawn to the superior financial returns. Private equity outperforms the most relevant benchmarks which are the Russell 2000 or S&P 600, which track businesses of a similar size to the majority owned by private equity. Private equity has outperformed both indices by more than 3 and 7 percentage points annually over the past five and 10-year periods, respectively.

So why the consistently dire predictions? Critics are rooting for a decline more than they are predicting it. To put it mildly, the underlying narrative that surrounds private equity is unflattering. The stereotype is that private equity firms use excessive amounts of leverage, strip down companies, fire workers and sell off the pieces. Yes, private equity firms use leverage but, on average, debt accounts for only half of the capital structure of a private equity-owned company, according to PitchBook data. Real estate transactions use far more leverage. There’s nothing inherently evil about debt, but it needs to be prudent.