Everyone’s talking about the Trump tariffs on Canada, Mexico, and China. So I’m going to get right to them as well, starting with this:

As I wrote on social platform X this morning, this is a drug war, not a trade war.

I don’t think the media is highlighting that nearly enough – or at all. But on Saturday, the White House published its stance that “the extraordinary threat posed by illegal aliens and drugs, including deadly fentanyl, constitutes a national emergency under the International Emergency Economic Powers Act (IEEPA).” Therefore:

Until the crisis is alleviated, President Donald J. Trump is implementing a 25% additional tariff on imports from Canada and Mexico and a 10% additional tariff on imports from China. Energy resources from Canada will have a lower 10% tariff.

You can read the rest

here. But suffice it to say these tariffs were designed to stay in place until the border situation is handled to Trump’s satisfaction.

In short, he made demands for Canada and Mexico to prioritize their American alliances above their connections with China – where the fentanyl process originates – as he had every right to. They refused or only complied up to a certain point, as they have every right to.

And so we have this “drug war” as a result.

Now, earlier this morning, I was writing that I didn’t expect it to last long. But before I could even publish the thought, we got some breaking news.

It turns out the Mexican government agreed to join the U.S. in tackling fentanyl trafficking across the southern border. So President Trump agreed to put the Mexican tariffs on hold for a month. If meaningful progress is made on border security, I wouldn’t be surprised if they’re removed altogether.

In an interview last year, I said of Trump’s negotiating tactics:

But at a broader level, what so few understand about Trump is that he is – first and foremost – a dealmaker. He is very transactional.

And one of the first rules of dealmaking is that you always negotiate from a position of strength. And your first salvo in negotiations is always asking more than you’re willing to settle for. If you’ve ever negotiated on buying a new car, you know what I mean. But in the end, you find a way to a happy middle.

When it comes to trade relations, Donald Trump has a carrot and a stick. He wants the counterparty to take the carrot. But that stick only means something if you demonstrate that you’re willing to use it.

It looks like Mexico took the carrot.

The Inflation Game Continues

As we found out on Thursday, GDP grew at a slower rate in the fourth quarter than experts predicted. Economists expected 2.6%, but it came in at 2.3% instead.

Either way, it was lower than the third quarter’s 3.1% growth.

Kathy Bostjancic, chief economist at Nationwide, wrote that:

The U.S. consumer continued to power overall economic growth as employment and wage gains remain firm and massive wealth effects from sharp increases in equity and home values turbo charge spending especially among upper-income households.

Holding back growth was a decline in business investment, flat reading in net exports, and sharp decline in inventories… The drawdown in inventories, especially at the wholesale level, indicates that retailers also scurried to stock up before possible tariffs. This could continue into early 2025.

It’s doubtful, however, that any of this will affect the Federal Reserve’s decision to keep rates as-is for a while… especially after Friday’s news that the Personal Consumption Expenditures (“PCE”) Index rose 2.6% month over month in December and 0.3% year over year. Core PCE, which cuts out food and energy factors, rose 0.2% over November and 2.8% over December 2023.

Incidentally, this is the 46th month in a row that annual core PCE inflation has been above 2.5%. Considering how it was below 2.3% from 2008 to 2020…

President Trump might have a legitimate point in criticizing the Fed, as he did on Wednesday. Taking to Truth Social, he wrote:

If the Fed had spent less time on DEI, gender ideology, ‘green’ energy, and fake climate change, Inflation would never have been a problem. Instead, we suffered from the worst Inflation in the History of our Country!

Trump says he’s going to bring it down on his own. Which, I think he can.

It’s just a matter of how long it’s going to take. And we might end up seeing that garden-style recession sooner than later as a result.

The Eurozone Economy Flatlined in the Fourth Quarter

The eurozone also reported preliminary fourth-quarter GDP figures on Thursday.

Reuters-polled economists had called for the teeniest-tiniest bit of quarterly progress in the economic region at 0.1%. This wouldn’t have been as good as the third quarter’s 0.4% expansion, but it would have been better than nothing.

Instead, what the eurozone apparently got was… nothing. While there was no constriction, there was also no growth.

On a country-by-country basis, Spain’s GDP rose 0.8%; and Portugal’s increased by an even more respectable 1.5%. But when you add in Germany’s 0.2% contraction, France’s 0.1% downturn, and Italy’s non-existent growth… along with results from Austria, Belgium, Croatia, Cyprus, Estonia, Finland, Greece, Ireland, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Slovakia and Slovenia…

It just wasn’t enough.

Later on that day, the European Central Bank (“ECB”) cut interest rates by a quarter point to 2.75%. But, unlike eurozone growth (or lack thereof), that move was expected.

This marks the fifth time the ECB has cut rates since June 2024.

I Love My iPhone, but China Doesn’t

Apple (AAPL) reported better-than-expected earnings on Friday. Its first-quarter earnings per share were $2.40 on $124.3 billion in revenue compared to predictions of $2.35 and $124.1 billion.

But “better than expected” still wasn’t all that impressive.

Apple’s quarterly sales in China dropped 11.1% thanks to local manufacturers Huawei and Xiaomi. Those two have been cutting into its profits for several years now.

Multiple news outlets are reporting that this is the largest drop Apple’s seen in China… since the first quarter of 2024. Which isn’t a reassuring detail any way you look at it.

We also learned that iPhone sales specifically plunged 25% year over year there as Huawei shipped 37% more of its models. And that’s not where the problems end.

Apple is also struggling to implement AI features in China. The Chinese Communist Party has notoriously been favoring its own tech companies, and its bureaucratic tape has Apple floundering – despite how Apple has partnered with Chinese Internet giant Baidu in its AI efforts.

Next add in the more international issue of trying to find a new credit-card partner. Apple was working with Goldman Sachs (GS) before, but that financial institution is now pulling back from consumer banking.

If Apple can’t transition those operations to another big bank in a timely manner, it could see even greater losses from here.

Some Good News for the Office Market

Last but not least – and something you might very well have missed amidst all the other news – is how private equity juggernaut Blackstone (BX) President Jon Gray called a bottom to the global office market. “particularly in stronger markets and better-quality buildings.”

That’s a big deal considering how U.S. offices have fallen up to 70% from their pre-pandemic peak.

Blackstone itself had reduced its U.S. offices holdings down to a mere 2% of its real estate holdings – a clear indicator of how unimportant the category had become.

But apparently, Gray and his team see a shift in the sector and are ready to move back in. They’re already working on buying a Midtown Manhattan office property and “would be willing to buy” more “properties out there” still.

Incidentally, Vanguard Group bought up 187,281 shares of Office Properties Income Trust (OPI) on December 31. That brought its total holdings in the fund up to 4.9 million shares. At the time, the stock was trading for under $1.

OPI, for the record, is a real estate investment trust (“REIT”) based in Newton, Massachusetts. And, despite its miniscule share price right now, it’s actually a nationwide landlord with a noteworthy client base.

OPI holds 145 properties in its portfolio, with an 89.3% portfolio occupancy.

Please note I’m not recommending OPI – or certain other office REITs of interest at this time. However, I clearly have to acknowledge that two enormously influential financial institutions are making moves into the space.

It’s more than enough to pique my interest…

Regards,

Brad Thomas
Editor, Wide Moat Daily