The LIT Sunday News

Inflation Concerns Resurface Amid Market and Political Uncertainty

Inflation and Market Reactions

January’s CPI inflation reading was worse than expected, showing a broad-based increase in prices.

• Shelter inflation remains a key driver, with both imputed and actual rent increasing.

• Volatile price categories, such as used cars and airline tickets, also surged.

• The "January effect" may be at play, as inflation often surprises to the upside in the first month of the year.

The Federal Reserve is now more likely to keep interest rates steady, potentially delaying or even avoiding rate cuts this year. Despite this, market reactions were subdued:

• Stocks fell only slightly, reflecting the resilience of corporate earnings despite prolonged high rates.

• The yield curve steepened, with long-term Treasury yields rising more than short-term ones.

• Investors may be pricing in the possibility of a permanently higher neutral interest rate.

Bonds, Stocks, and Constitutional Risks

Tyler Cowen raises a critical question: how would markets react if Trump ignored court rulings, triggering a constitutional crisis?

• Bond Markets: Investors could anticipate government interference in the Federal Reserve, raising inflation fears. However, Trump's past concerns over inflation might prevent such intervention.

• Stock Markets: A constitutional breakdown could hurt long-term earnings growth by dampening business investment. However, short-term consumer spending might not be significantly affected.

• Risk Perception: While a crisis could undermine investor confidence, U.S. assets might paradoxically be seen as a safe haven, similar to how the dollar strengthens in global downturns.

TL;DR

January’s inflation numbers were unexpectedly high, likely keeping Fed rates elevated and reducing the chances of cuts this year. Markets reacted mildly, with stocks stable and long-term bond yields rising. Meanwhile, concerns over a potential Trump-induced constitutional crisis raise questions about how investors would respond, particularly in bond markets and corporate valuations.

Markets May Be Underestimating Inflation’s Decline in 2025

Fed’s Perspective on Inflation and Trade Policy

The Federal Reserve is approaching tariffs and trade uncertainty with a cautious but historically informed stance.

• In 2018-19, the Fed analyzed trade uncertainty’s macroeconomic impact and chose to "look through" short-term price increases from tariffs.

• However, the inflation backdrop in 2025 is different, with inflation at 2.5% and still above the 2% target.

• While inflation expectations remain anchored, officials remain wary due to the 2021-24 overshoot.

Trade Policy Uncertainty and Economic Growth

Trade policy uncertainty—not just tariffs—was a key driver of economic slowdowns in 2019.

• The ISM manufacturing index fell from 55 to 48, and core PCE inflation dropped from 2% to 1.5%.

• The Fed responded with rate cuts totaling 0.75 percentage points.

• Similar uncertainty in 2025, particularly around tariffs, tax, and spending policies, could create new headwinds for growth.

Potential for Lower Inflation and Rate Cuts

Markets may be underestimating how much inflation could fall in 2025.

• A limited pass-through of tariffs could result in lower-than-expected inflation.

• Growth headwinds from uncertainty around the Trump administration’s policy agenda could reinforce disinflation.

• If inflation expectations remain well-anchored, the Fed may be more inclined to cut rates.

Uncertainty’s Impact on Markets

• Delayed tariff implementation has already caused market reversals, as seen with Canada and Mexico on February 3.

• While policy uncertainty could slow hiring and investment, some consumption and inventory accumulation may be front-loaded.

• Domestic added value in foreign-made goods (sales, marketing, logistics, and intellectual property) complicates monetary policy responses.

TL;DR

Markets may be too pessimistic about inflation remaining elevated in 2025. A weaker-than-expected tariff impact and economic uncertainty surrounding Trump’s policies could push inflation closer to the Fed’s 2% target. If this happens, the Fed may shift towards rate cuts—depending on whether inflation expectations remain stable.

Trump Imposes 25% Tariffs on U.S. Steel and Aluminium Imports

Broad Tariff Action with No Exemptions

• Trump announced a 25% tariff on all steel and aluminium imports, starting March 12.

• Unlike previous measures, no product or country exemptions will be granted, affecting key U.S. allies like Canada and Mexico.

• The administration argues the tariffs will combat foreign "dumping" and support domestic steel and aluminium production.

Impact on Trade and Economy

• The tariffs risk igniting new trade tensions, particularly with the EU, Canada, and Mexico.

• The move nullifies tariff-exemption agreements negotiated under Biden with the EU, UK, and Japan.

• U.S. manufacturers relying on imported metals could face higher costs, raising concerns from business groups.

International Backlash and Potential Retaliation

• The EU may retaliate, as it did in 2018, with tariffs on American exports like bourbon and motorcycles.

• Canada condemned the tariffs as “totally unjustified,” promising a measured response.

• Trump hinted at a possible exemption for Australia, citing a trade surplus and defense cooperation.

Market Reaction

• Metals prices surged in anticipation of the tariffs, with aluminium jumping 10%.

• Copper futures in the U.S. reached their highest premium over London prices since 2020.

TL;DR

Trump is reintroducing strict steel and aluminium tariffs (25%) on all imports, eliminating previous exemptions. The move is designed to protect U.S. industry but risks higher costs for manufacturers and trade retaliation from allies. Markets reacted swiftly, with metal prices spiking, and countries like Canada and the EU preparing responses.

Trump’s Metal Tariffs Bring Cost and Chaos to Corporate America

Rising Costs and Industry Uncertainty

• Trump’s 25% tariffs on steel and aluminium imports have sent shockwaves across industries.

• Manufacturers, energy firms, and consumer goods companies are scrambling to manage costs before the tariffs take effect on March 12.

• Ford CEO Jim Farley warns of "cost and chaos", calling for policy clarity as he lobbies in Washington.

Immediate Market Impact

• Steel and aluminium prices are rising sharply, even for companies that source domestically.

• The Midwest aluminium premium has surged 25% since January, reflecting transportation and tariff costs.

• Hot-rolled coil steel prices have jumped $70 per ton to $850, as mills capitalize on uncertainty.

Industry Reactions and Adjustments

• Coca-Cola may shift to more plastic packaging to offset aluminium costs.

• Energy companies warn that tariffs conflict with Trump's energy expansion goals, as drilling and pipeline infrastructure rely on imported metals.

• Carrier Global has pre-secured steel supplies but is preparing to adjust pricing and supply chain strategies.

Broader Economic Concerns

• 40% of U.S. steel demand relies on imports, with Canada and Mexico accounting for 16% of the market.

• Tariffs on Mexican goods could have an even larger impact than metal levies, forcing manufacturers to rethink pricing and sourcing.

• LCI Industries, an RV parts supplier, is spreading costs across the supply chain but warns of ongoing uncertainty in tariff policy.

TL;DR

Trump’s sweeping metal tariffs are already disrupting industries, raising prices, and creating uncertainty across manufacturing, energy, and consumer goods. Steel and aluminium prices are surging, companies are adjusting supply chains, and executives warn that policy unpredictability is making long-term planning difficult.

Trump, Putin, Xi, and the New Age of Empire

The Rise of Neoimperialism

• Trump, Putin, and Xi all embrace territorial expansion, signaling a shift toward a new era of empire-building.

• Trump has repeatedly claimed that the U.S. will "expand its territory," citing Greenland, the Panama Canal, Canada, and even Gaza as potential acquisitions.

• While Putin seeks to rebuild Russia’s imperial past through Ukraine, Xi views Taiwan’s reunification as his historical mission.

Trump’s Expansionist Rhetoric

• Trump has made frequent and serious references to territorial acquisition.

• Advisors are scrambling to justify these statements, citing national security concerns over Greenland’s minerals and Chinese interest in the Panama Canal.

• However, no clear strategic rationale exists for claims on Canada or Gaza, leading many to see this as a quest for personal grandeur.

Global Power Dynamics

• The U.S., Russia, and China now all pursue expansionist policies, undermining international law.

• This shift echoes the 19th-century “spheres of influence” diplomacy, where great powers divided the world among themselves.

• History suggests such arrangements are inherently unstable, often leading to conflict and war.

Domestic Consequences of Imperialism

• Empires need emperors—Putin and Xi’s expansionist ambitions go hand in hand with authoritarianism.

• Trump’s domestic rhetoric mirrors this, focusing on crushing internal enemies alongside external ambitions.

• Elon Musk has hinted at the need for a "modern-day Roman dictator" in the U.S., raising concerns over democratic stability.

TL;DR

Trump, Putin, and Xi are reshaping global politics through expansionist ambitions, challenging international norms. While Russia eyes Ukraine and China targets Taiwan, Trump’s territorial claims—ranging from Greenland to the Panama Canal—signal a shift in U.S. policy. This neoimperial era could destabilize the world order, with rising authoritarianism and growing risks of conflict.

China’s Tech Stocks Surge After DeepSeek’s AI Breakthrough

Chinese Tech Enters Bull Market

• The Hang Seng Tech Index has jumped 25% in the past month, surpassing the Nasdaq 100’s 4.4% rise and the 0.5% decline of the “Magnificent Seven” U.S. tech stocks.

• Renewed foreign investor interest in China follows the emergence of DeepSeek, an AI model developed on a lower budget than U.S. counterparts.

• Alibaba (+43%), Xiaomi (+34%), Baidu (+13%), and BYD (+40%) have led the rally.

AI Breakthrough Sparks Global Reassessment

• DeepSeek’s cost-efficient AI model has challenged the necessity of massive AI investments, leading to a sharp decline in U.S. AI stocks.

• Nvidia suffered the largest one-day market cap loss in history ($589B) on January 27 following the announcement.

• Chinese cloud computing and tech hardware companies are now viewed as more competitive in the global AI race.

Market Sentiment and Investor Response

• Alibaba gained 6% after reports of an AI collaboration with Apple.

• E-commerce giants JD.com (+24%) and Meituan (+11%) saw gains, fueled by strong Lunar New Year spending and expectations of Chinese fiscal stimulus.

• Stock Connect data shows mainland Chinese investors increasing Hong Kong stock purchases by two-thirds in February.

Competitive Edge in AI Adoption

• Analysts highlight that while the U.S. leads in AI innovation, China excels in scaling and adopting technology rapidly.

• Citi analysts believe China’s AI investments have been underappreciated and could continue to drive growth.

TL;DR

China’s tech sector is surging, driven by DeepSeek’s AI breakthrough and renewed investor confidence. While U.S. AI stocks slump, Chinese companies outperform, with Alibaba, Xiaomi, and Baidu leading gains. Investors see China’s ability to scale AI adoption as a competitive advantage, fueling a 25% rally in the Hang Seng Tech Index.

Alibaba Confirms AI Partnership with Apple in China

Apple’s AI Expansion in China

• Alibaba will provide AI technology for Apple’s AI-capable iPhones sold in China, confirming reports of a high-profile partnership.

• Apple faced regulatory hurdles in China, requiring it to partner with a local AI company to gain approval for AI-powered features.

• Joe Tsai, Alibaba's chair, stated that Apple tested multiple Chinese AI models before selecting Alibaba.

China’s AI Regulatory Landscape

• China’s cybersecurity watchdog has approved over 300 domestic AI models, making local partnerships essential for foreign tech companies.

• Apple explored partnerships with major Chinese AI firms, including Baidu, ByteDance, Tencent, and DeepSeek.

• AI localization may become a global trend, where companies partner with local AI providers in different markets.

Alibaba’s Stock Surge and Competitive Edge

• Alibaba shares have risen over 40% in 2025, fueled by advancements in AI, including the launch of Qwen 2.5.

• The company benefited from DeepSeek’s AI breakthrough, which triggered a global reassessment of China’s AI capabilities.

Apple’s Challenges in China

• iPhone sales in China dropped 11% year-over-year to $18.5 billion, amid geopolitical tensions and local smartphone competition.

• Chinese competitors have aggressively integrated AI into smartphones, leaving Apple playing catch-up.

• Apple may work with multiple AI partners in China, despite Alibaba being a key collaborator.

TL;DR

Alibaba confirmed its AI partnership with Apple for the Chinese market, as Apple navigates strict AI regulations. The deal has boosted Alibaba’s stock, reinforcing its position in China’s AI race. Meanwhile, Apple faces declining sales and competition in China but hopes AI integration will help reignite demand.

Apple Eyes Indonesia, BYD Expands Self-Driving, and China’s Chip Race Heats Up

Apple Explores iPhone Assembly in Indonesia

• Apple is considering assembling iPhones in Indonesia to comply with local regulations requiring 35% domestic content.

• One Apple supplier has set up a subsidiary in Batam, hiring engineers in preparation.

• Indonesia represents only 1% of Apple’s smartphone market but offers significant growth potential amid slowing global sales and challenges in China.

China’s Memory Chip Maker Gains Market Share

• ChangXin Memory Technologies (CXMT) has grown from 0% to 5% market share in the $90B DRAM market since 2020.

• The company is challenging South Korean rivals and pushing China’s self-sufficiency in semiconductors.

• CXMT is also expanding into high-bandwidth memory (HBM), a crucial technology for AI systems like ChatGPT.

BYD Disrupts Self-Driving with Affordable Tech

• BYD is rolling out its advanced "God’s Eye" self-driving system across nearly all its models.

• Unlike competitors, BYD is offering autonomous tech in cars priced under $13,700, making it accessible to a broader market.

• The move is expected to intensify competition in China’s EV sector, where smaller players face increasing pressure to consolidate.

U.S. Chip Export Controls Tighten

• TSMC has adopted strict compliance measures following U.S. export restrictions on advanced chip technology.

• Chinese clients using 16nm or better chip production must now use U.S.-approved packaging suppliers or seek U.S. government approval.

• This move is creating major setbacks for China’s semiconductor industry, affecting everything from smartphones to autonomous driving.

TL;DR

Apple is considering iPhone assembly in Indonesia to bypass local bans, while BYD is democratizing self-driving tech, threatening Tesla in China. China’s memory chipmaker CXMT is gaining market share, challenging South Korea, and U.S. chip restrictions are tightening, hitting Chinese firms reliant on TSMC.

David Tepper Doubles Down on China Bet Amid Fading Rally

Appaloosa Expands China Holdings

• Billionaire hedge fund manager David Tepper increased his investments in Chinese stocks and ETFs during Q4, despite China’s market rally losing momentum.

• Alibaba stake increased by 18.4% to 11.84M shares, making it Appaloosa’s largest holding (15.5% of its $6.7B portfolio).

• JD.com stake jumped 43% to 10.46M shares.

• Boosted holdings of iShares China Large-Cap ETF (FXI) by 13.8% and KraneShares CSI China Internet ETF (KWEB) by 21.5%.

Background: Tepper’s "Buy Everything China" Call

• On Sept. 26, Tepper announced he was exceeding his usual trading limits to "buy everything" China-related.

• His comments fueled an ongoing rally, but gains soon faded due to China’s economic slowdown and property sector crisis.

• He cited undervalued Chinese stocks, pointing to single-digit P/E ratios, double-digit growth, and strong corporate cash reserves.

Investor Takeaways & Market Reaction

• Appaloosa’s moves signal continued confidence in China’s long-term recovery, even as short-term sentiment remains uncertain.

• Large 13-F filings are closely watched, but data is retrospective and may not reflect an investor’s current position.

• Tepper previously indicated he would buy more on pullbacks, which appears to have been his strategy in Q4.

TL;DR

David Tepper doubled down on China stocks in Q4, increasing stakes in Alibaba (+18.4%), JD.com (+43%), and major China ETFs. Despite a fading rally, he remains bullish on undervalued Chinese equities, citing strong corporate cash flows and growth potential.

BlackRock Further Reduces Stake in Nio, Sells 3 Million Shares in Q4

BlackRock’s Portfolio Adjustments

• BlackRock cut its stake in Nio to 2.08 million shares by the end of 2024, down from 3.02 million in Q3 and 62.6 million at the end of 2023.

• The asset manager also reduced its XPeng holdings by 12%, selling 10 million shares, while increasing its positions in Rivian (+3.79M shares) and Lucid Motors (+5.4M shares).

JP Morgan Increases Nio Holdings

• JP Morgan added 1.57 million Nio shares in Q4, increasing its stake by 65% to 3.98 million shares.

• The firm had previously held over 10 million shares but adjusted its position multiple times since late 2020.

Stock Performance & Institutional Ownership Trends

• Nio’s stock surged nearly 5,000% between October 2019 and January 2021, reaching $67, before declining 70% over 18 months.

• Institutional ownership has fallen to a 5-year low, dropping over 60% since early 2023, with 229.7 million shares held by institutions as of December 2024.

Other Institutional Moves

• Tencent Holdings has been steadily reducing its stake, selling over 28.4M shares in May 2024 and 40M shares in 2023. Tencent now holds 95.66 million shares.

• Morgan Stanley initially increased its stake to 28.2M shares in Q1 2024 but later cut it to 13.73M shares by Q3, with a valuation of $92M.

TL;DR

BlackRock further cut its Nio stake, selling 3M shares in Q4, while JP Morgan increased its holdings by 65%. Institutional ownership has sharply declined, hitting a 5-year low, with major investors like Tencent and Morgan Stanley reducing their stakes. Meanwhile, BlackRock is shifting focus to U.S. EV makers Lucid and Rivian.

Disney Drops Diversity Category from Executive Pay Amid Political Pressure

Changes to Executive Compensation

• Disney has removed “diversity and inclusion” as a standalone metric in its executive pay structure, replacing it with a broader “talent strategy” category.

• Other key performance categories, “storytelling and creativity” and “synergy”, remain unchanged.

• The move follows increased conservative backlash accusing the company of promoting a “woke” agenda.

Other Adjustments to DEI Initiatives

• Disney will relocate, rather than remove, advisories on older films (e.g., Dumbo, Peter Pan) that warn of negative cultural depictions.

• The company reaffirmed its commitment to inclusive hiring and fostering a workplace "where everyone belongs."

• Disney renamed its internal employee network, changing "Business Employee Resource Groups" to "Belonging Employee Resource Groups" to appear more inclusive.

Political and Corporate Context

• Disney faced political attacks in 2022 over its response to Florida’s “Don’t Say Gay” law, triggering a feud with Governor Ron DeSantis over control of Disney’s Florida properties.

• Since Bob Iger’s return as CEO in 2022, he has downplayed political messaging in Disney’s content, emphasizing a return to entertainment-first storytelling.

• Other major corporations, including Meta, McDonald's, and Target, have also scaled back DEI programs post-2024 U.S. elections.

Conservative Backlash & Cultural Controversies

• Trump and Republican politicians have repeatedly criticized Disney, particularly for featuring LGBTQ+ and minority characters in its films.

• Former Marvel chairman Ike Perlmutter was ousted in 2023, with Trump claiming he left because “Disney went woke.”

• Past projects like Lightyear and Win or Lose faced conservative criticism, leading to the removal of transgender themes from Pixar content.

TL;DR

Disney has removed diversity as a key metric in executive pay, amid ongoing political pressure from conservatives and Republican leaders. While maintaining inclusive hiring policies, the company is scaling back some DEI initiatives, aligning with broader corporate trends post-2024 elections. Bob Iger is steering Disney toward a less politically charged approach, focusing on entertainment-first content.

Coca-Cola’s $7 Billion Bet on Fairlife Pays Off, But Wall Street Wants More

Fairlife’s Rise as Coca-Cola’s Fastest-Growing Brand

• Coca-Cola’s ultra-filtered milk brand, Fairlife, has become a key growth driver, with sales surpassing $1 billion in 2022—a 1,000% increase from 2015.

• The milk is creamier, higher in protein, lower in sugar, and lactose-free, making it popular among health-conscious consumers and those using GLP-1 weight loss drugs like Ozempic.

• Despite its premium price (3x higher than regular milk), demand continues to outpace supply, prompting Coca-Cola to build a $650 million processing plant in New York.

Wall Street’s Skepticism & Revenue Challenges

• Fairlife remains a small part of Coca-Cola’s $46 billion in revenue, with 60% of sales still coming from soda and concentrates.

• Recent revenue growth has been driven by price hikes rather than higher sales volumes—last quarter saw a 10% price increase but a 1% decline in volume.

• Coca-Cola’s stock has underperformed, up only 6% since February 2020, while the S&P 500 has surged 80%.

Coca-Cola’s Expensive Fairlife Investment

• Coca-Cola acquired Fairlife for $1 billion in 2020 but is now expected to pay a total of $7.4 billion due to performance-based agreements.

• This makes it Coca-Cola’s largest brand acquisition in history, surpassing its purchases of Costa Coffee ($5.1B) and BodyArmor ($5.6B).

• The operating margin took a hit, with an unexpected $900 million payout increase in just three months.

Fairlife’s Growth Amid U.S. Milk Industry Decline

• U.S. milk consumption has dropped 30% since 2010, while plant-based alternatives like oat milk surged.

• Fairlife’s unique filtering process was developed by Select Milk Producers to win back consumers, removing lactose and sugar while increasing protein.

• The brand survived an animal cruelty scandal in 2019 involving a supplier, which led to boycotts and lawsuits. Coca-Cola severed ties with the farm and moved forward.

Challenges Ahead: Leadership Changes & Expansion Plans

• Tim Doelman, Fairlife’s CEO, is stepping down, with Becca Kerr (head of Coca-Cola’s nutrition division) set to oversee the brand.

• Fairlife is only sold in the U.S. and Canada, but Coca-Cola sees opportunities to expand internationally.

TL;DR

Coca-Cola’s Fairlife milk brand is a major success, growing 1,000% in seven years and helping offset soda declines. But at $7.4 billion, it’s Coca-Cola’s most expensive acquisition, putting pressure on margins. While Fairlife continues to thrive, investors remain wary, as the company’s stock lags behind the market and revenue growth relies more on price hikes than sales volume increases.

Argentina’s President Milei Faces Impeachment Threat Over $107M Libra Crypto Collapse

Milei’s Crypto Endorsement Turns into Financial Disaster

• Argentine President Javier Milei endorsed the Solana-based Libra ($LIBRA) token on X, causing its market cap to skyrocket to $4.56B on Feb. 14.

• Within 11 hours, the token crashed by 94%, wiping out $107 million in liquidity, with insider wallets cashing out millions before the collapse.

• Argentina’s fintech chamber acknowledged the incident may be a rug pull, where developers manipulate the price before dumping their holdings.

Opposition Calls for Impeachment

• Lawmaker Leandro Santoro described the scandal as an “international embarrassment”, demanding an impeachment trial.

• Milei deleted his endorsement post, later claiming he had “no connection” to the token and was unaware of the project’s details.

• Critics argue Milei’s actions misled investors and damaged Argentina’s financial credibility.

Government Response & Investigation

• The Anti-Corruption Office will investigate all government officials, including Milei himself.

• The presidential office confirmed Milei met with KIP Protocol, the blockchain firm behind $LIBRA, in October 2024.

• Milei accused political opponents of exploiting the situation, vowing to expose "filthy rats of the political caste."

Red Flags & Insider Cashouts

• 82% of $LIBRA tokens were unlocked at launch, making them easily sellable—a major red flag.

• On-chain analysis revealed insider wallets withdrew $107M, cashing out 57.6M USDC and 249,671 Solana (worth $49.7M).

• Crypto analysts had warned of flawed tokenomics before the meltdown.

TL;DR

Argentina’s President Milei faces impeachment threats after endorsing $LIBRA, a crypto token that collapsed in hours, causing $107M in insider cashouts. While Milei denies involvement, critics claim the scandal has tarnished Argentina’s financial reputation, sparking a political firestorm and government investigation.