The Last Hurrah!!

The “Last Hurrah” refers to the late-stage business cycle, which is marked by extreme euphoria and optimism about the economy, which leads to higher asset prices.

Although we have been bullish throughout the equity market rally, we have now turned slightly “cautious” as signs emerge that we may be entering the latter phase of the “Last Hurrah”.

Market participants have recently argued that the margin debt is significantly lower than past peaks. Still, we need to consider the rise of leveraged ETFs, which have overshadowed and, in fact, replaced the role of margin debt.

While the total Leveraged ETF AUM has jumped to $135 billion (highest ever), the margin debt has now ballooned to $920 billion, just 2% away from the 2021 highs of $935 billion.

Moving on, we saw a historic move by POTUS this week as tariffs/trade were for the first time used as a weapon against a sovereign state. The US set a dangerous precedent by imposing a 50% tariff on Brazil despite a trade surplus due to disagreement with the Brazilian “domestic politics”.

Furthermore, as the tariff figures came out for other countries, it became apparent that the tariff rates were significantly higher than the market’s estimates. In fact, Japan is one of the largest trading partners of the US, and the tariff rate of 25% is higher than the “proposed” reciprocal tariff rate on liberation day.

Thus, we believe that risks are piling up and markets are ignoring them.

Today, we will discuss the macro data and also shed light on what we believe will likely transpire due to higher tariffs.

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US!

This week was a data-light week; however, we received the NFIB Small Business Survey results. The NFIB Small Business Survey is one of the oldest soft data releases, which helps us gauge the health of small businesses—the backbone of the US economy.

Small businesses are the largest employers in the US.

Nonetheless, since the small businesses are politically biased, favouring Republicans, we have seen unusual spikes in Small Business Optimism after the Trump win in 2016 and last year.

The Optimism Index fell sharply after the announcement of reciprocal tariffs on Liberation Day in April.

However, it recovered this month as equity markets staged an explosive rally, leading to a reversal in the sentiment.

Nevertheless, when we look at the internals, trouble is brewing.

Undoubtedly, taxes (tariffs) are now the prime concern for small businesses. Note that these companies operate on wafer thin margins and we 20-30% average tariffs, we are potentially looking at enormous bankruptcies if they are unable to pass on the costs.

On the contrary, the good news is that (interestingly), the small businesses don’t feel that inflation is the single biggest problem.

We will keep a close eye on the Cost of Labour as Trump’s immigration policies might lead to higher costs. (Though it’s also a function of the health of the labour market).

This brings us to some intriguing observations about