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SPECIAL EDITION: Tariffs & the Markets
The Wall Street Skinny
April 05, 2025
This Week on The Floor
Never a dull moment….
Markets are imploding after Trump announced a new set of “reciprocal” tariffs on the US’ trading partners in addition to the tariffs already levied against Canada and Mexico.
Equities are down as much as 10% in their worst week since March of 2020, when COVID lockdowns began.
The US dollar has been in freefall, and 10 year notes are below 4.00% again, with the market pricing in a much higher likelihood of Fed rate cuts on the horizon.
We’re giving you the skinny on what tariffs are, their history, how these new tariffs were calculated, and the potential implications for the entire economic system as we know it.
The Skinny on Tariffs: what does it all actually mean?
xAI purchase of X: an M&A case study….or is it?
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The Skinny on Tariffs…
New Tariffs Announced This Week
This week, President Trump unveiled the following tariff changes:
25% Tariff on Foreign-Made Automobiles: This kicked in on April 3rd.
10% Baseline Tariff on Imports: Starting on April 5th, any country that didn’t previously have a tariff will now face a baseline tariff of 10%. For countries like China, which already had a 20% tariff, this new baseline is essentially irrelevant.
New “Reciprocal Tariffs” on 60 Countries: These tariffs beyond the 10% minimum are based the U.S. trade deficit with each country. The new rates range from 20% to 50%, with countries like China facing a 34% tariff, the EU 20%, and Japan 24%. Note: Canada and Mexico’s tariffs were independently determined in February to be 25%, with the exception of Canadian energy at 10%
Important to understand is that the term “reciprocal tariffs” implies that our trade partners were all already charging us tariffs across the board. Actual tariffs vary according to each country, with some being zero and some being significantly higher.
However, the calculation for these tariffs was not based on the actual tariff rates. Rather, the government used a formula based on the U.S.'s trade deficit with each country.
That formula was: (Trade Deficit / Total Imports) / 2…and rounded up.
Say the US imports $200 from country X.
And the US exports $100 to country X.
The “effective tariff” would be $100 / $200 / 2 = 25%
The “reciprocal tariff” would be 25%…even if the actual tariffs imposed by country X were a fraction of the 50% “effective tariff” calculated from our trade deficit.
What Happens Next?
Now that these tariffs are in place, several scenarios are possible.
Foreign manufacturers could lower their prices to absorb those tariffs. U.S. companies could eat into their profit margins. Or, the tariff costs could be passed directly to consumers, raising prices on goods imported from those countries.
At present, many countries affected by these tariffs are retaliating with their own measures. China has already implemented a 34% tariff in response, creating a cycle of escalating trade restrictions.
And many businesses are already notifying their customers of rising prices.
What’s the near term result? A slowdown in US growth, higher prices for US consumers, and potentially a period of stagflation — slow economic growth coupled with high inflation.
Kiss that bull market “goodbye”….
Impact on the U.S. Economy
Historically, the last time the U.S. faced stagflation was in the 1970s, triggered by soaring oil prices. The Fed’s response? Hike rates to tackle inflation, and ignore the slow growth piece.
Well, that led to interest rates north of 20%, and we ultimately still had to grow our way out of it.
Now, the market looks to force the Fed’s hand in the opposite direction. Interest rates are rallying, reflecting increased expectations that the Fed will cut rates at its next few meetings to stimulate domestic growth.
What about the US Dollar?
In response to these policy changes, the US dollar has been weakening.
And sure, easier monetary policy means a lower US dollar….in theory. But also, a true trade war with other countries poses serious risks beyond the threat of stagflation.
For decades, we have flooded our trade partners with US dollars in exchange for their goods. They have taken those US dollars and bought US dollar denominated assets…like US Treasury bonds.
As long as that partnership held, the vague threats of foreign governments liquidating their holdings of US debt amounted to little more than speculation.
Now however, if trade comes to a screeching halt, the only dollars coming into these countries will be from the coupon payments on the existing Treasury bonds they own…worth less and less if the currency continues to depreciate.
So if the thesis is that the Fed will cut rates, perhaps shifting from a policy of quantitative tightening to one of quantitative easing, and that US companies will lever themselves out of a recession rather than grow their way out…
…how do we reconcile that with potentially the elimination of foreign appetite for US debt?
In our view, that is why gold and cryptocurrencies have significantly outperformed in this giant move. Perhaps it’s the first signal that the market is pricing in a real risk that the USD may one day no longer be the global reserve currency.
We break ALL of this down in great detail — with more historical context and speculation on the future of the U.S. economy — on a special episode of this week’s podcast. Listen here!
M&A Case Study: xAI purchase of X
Elon Musk just bought Twitter…again.
But this time, he bought it from himself (kinda) for what the financial news reported as a $33bn valuation.
If you remember headlines from 2022 when he bought it the first time, the sticker price was $44bn.
So…he paid significantly less?
In truth, the valuations were identical. How could that happen when everyone thought he overpaid the first time? Let’s break it down.
Equity Value vs. Enterprise Value
Elon announced that xAI — his AI startup — acquired X (a.k.a., Twitter) for $33 billion in an all stock deal.
Most headlines call out the "$33bn valuation," but what they’re actually referring to is equity value — the value X or Twitter’s stock. But X also has $12bn in debt, most of it added after Elon bought it in 2022. So the true value of the company— the enterprise value — is actually $45 billion.
Which is basically the exact price Elon paid three years ago when he paid $44bn for Twitter. At the time, the company only had $600 million in debt.
$33bn + $12bn = $44bn + $0.6bn.
Think of it like buying a house: if you put $300k down and take out a $700k mortgage, you didn’t buy a $300k house. You bought a million-dollar one. Same idea here.
So, how did bankers come up with the $33bn valuation in the first place? X is a private company, so pricing it isn’t as straightforward as with public stocks that trade daily or even millisecond to millisecond in the public markets.
However, X recently raised capital, which helped set the terms. X raised earlier this month at —surprise! — a $33bn equity value, the same price Elon paid when he took it private in 2022.
If you’re also saying, “But, wait! External investors paid that!”
Yeah…external investors and, guess who also participated in the round?
You guessed it, Elon Musk. So he helped set that price.
Ironically, Fidelity’s Blue Chip Growth Fund, which invested in Twitter during the take-private, marked down its investment by 80% as of October 2024. So somehow, despite the tech sector being down since October, X is still at its 2022 level...kind of wild.
This raises a bigger question, though. If xAI paid in stock…and Elon owns most of each business…and it was an all stock deal so no cash changed hands…who even cares what the price is?
Well, Elon doesn’t own 100% of both. He owns a majority — but there are outside investors in xAI. And now because xAI is issuing equity to pay X to buy the business, xAI shareholders are getting diluted.
Ownership Dilution Basics
Say you owned 25% of xAI when it was worth $80bn. 20% x $80bn is a $20bn stake.
With xAI “buying” Twitter for $33bn in an all stock deal it means they aren’t using cash, but rather they're issuing new shares of xAI. The combined equity is worth $33 + 80 = $113bn. But your 25% stake drops to 20 / 113 = 18%. Your piece of the AI pie — what you likely invested in xAI for — shrank.
That’s the cost of stock deals: they reduce how much of the company you own, and your claim on future cash flows.
You might say, “Yeah, but we got Twitter in the deal.” Sure.
But was Twitter worth $33bn? Or $45bn when you factor in its debt? Especially when it was a funding round that Elon the seller participated with the set the price?
This Isn’t Your Average Deal
Now this is how equity dilution works in your average all-stock deal. But nothing about this deal is average.
If you thought White Lotus is the only place incest was showing up recently think again…many of the investment funds that own xAI also hold stakes in X, like Sequoia and Fidelity. Both participated in xAI’s funding round and were also part of Twitter’s 2022 take-private deal.
BlackRock, on the other hand, also invested in xAI’s December round but doesn’t appear to have had any prior stake in X.
Also worth noting: when you see a firm’s name on an investment — they’re usually investing on behalf of others AND have multiple funds under their umbrella. So even if “Blackrock” in theory had shown up in both places, it could be entirely different funds within the firm.
The last point is that xAI’s valuation is also pretty arbitrary. xAI raised at a $51bn valuation in December, and now it’s suddenly worth $80bn — apparently because Elon said he might raise again this month at a $75B valuation?
What this deal really tells us is that they're valuing X at 33/80 of xAI. That’s the price being paid here.
Strategically, merging the two probably does make sense. As Matt Levine put it:
“Two companies that were owned by the same person (and some slightly non-overlapping friends) and shared employees and data and revenue and, you know, a name, are now one company. They were informally one company before, and they are formally one company now, and no money changed hands. It feels like a silly technicality to call this a big M&A deal.”
👀 BUT — the price paid for X? It does seem a bit like a way for Elon Musk to save face and claim a victory for selling for the same price he originally paid.