Thoughts from Themes: Modern Machiavelli

Donald Trump's political style often draws comparisons to Machiavelli's principles outlined in The Prince. Machiavelli advocated for pragmatic, sometimes ruthless leadership, emphasizing that the ends often justify the means. Similarly, Trump’s approach to politics has been characterized by a focus on power dynamics, strategic alliances, and a willingness to challenge norms to achieve his objectives. Both figures share a flair for commanding attention and leveraging public perception, though their contexts and methods differ significantly. While Machiavelli wrote for Renaissance rulers navigating fragile city-states, Trump operates in a modern democratic framework, where media and public opinion play a pivotal role. This juxtaposition highlights the timelessness of Machiavelli’s ideas and their adaptability to contemporary politics.

Break everything, fix it, and become a hero. This is Trump Negotiation 101. All this noise and positioning were designed to do two things: let Trump determine who he can work with and finally take on China and their notorious reputation for unfair trade practices. Will the ends justify the means?

While many dislike his Machiavellian style, the result is that President Trump has brought major allies and partners to the table to negotiate new trade deals, while standing up to China, who has long been accused as a bad actor since it joined the WTO. The chaos and the volatility in the market is all a part of the show and his negotiating tactics, but in the end, his decision to work with the reported 75 countries that are coming to the table has reassured the markets, and cornered China into what appears to be a weak position.

While uncertainty remains, the view is that Treasury Secretary Scott Bessent now has more influence with President Trump and that real progress will be made over the next several months. As we know, anything can happen with a showman like Trump, but for now, recession fears have diminished and markets, while volatile, are trading more orderly, with Gold and Bitcoin places for safe haven trades.

China is the clear target for Trump and his administration has imposed up to 245% tariffs on certain Chinese goods. China has previously retaliated with its own tariff increases, now reaching 84% on U.S. goods.

Supporters of these tariffs argue that they are necessary to counteract China's trade practices, including alleged intellectual property theft and unfair subsidies to Chinese industries. Advocates believe that higher tariffs will encourage domestic

manufacturing by making Chinese imports more expensive, causing U.S. companies to shift production back to the U.S., creating jobs while at the same time pushing American businesses to diversify their supply chains and reduce dependence on Chinese goods.

Critics argue that these tariffs will ultimately hurt American consumers and businesses by increasing costs and disrupting supply chains. Opponents highlight that tariffs function as a tax on imports, which businesses often pass on to consumers through price hikes. Others fear that Beijing’s retaliation in response to the US could hurt American exporters, particularly in agriculture, and warn that escalating trade wars could slow global economic growth and push U.S. allies closer to China.

Amid these developments, the Italian Prime Minister Giorgia Meloni visited Washington this past week to present Europe's stance on the U.S. tariffs. The Prime Minister has engaged in discussions with U.S. officials, emphasizing the need for a balanced approach to trade policies. European leaders, including Meloni, have expressed concerns about the impact of U.S. tariffs on European economies and have called for coordinated responses within the European Union. Meloni is known to have a good relationship with the Trump administration, specifically with Elon Musk, and perhaps was hand selected to represent Europe in these negotiations. The Italian Prime Minister's efforts to mediate and advocate for fair trade practices highlight the complexities of navigating these geopolitical challenges, and the idea that Trump and his administration has every intention of ultimately coming to terms with Europe, while isolating China in the process.

On the Defensive:

While Prime Minister Meloni is working with President Trump in a personal capacity to ease the impact of tariffs on the E.U., the E.U.'s "Readiness 2030" initiative - an ambitious goal to commit more resources to facing off against a now-resurgent Russia - continues to be hammered out. This initiative aims to raise €650 billion for military spending over four years (i.e. an average of €175 billion each year) by allowing member nations to increase their military budgets to up to 1.5% of GDP without being counted in their national deficits and raising another €150 billion through EU-issued bonds that will be made available as loans to individual countries under a program titled "SAFE" (Security Action for Europe).

The E.U. proposes that, to be eligible for "SAFE", the military products being purchased by the borrower must have a definite "Europe" connection. For ammunition, missiles and small drones, 65% of the costs must originate inside the E.U., European Economic Area

(EEA), European Free Trade Association (EFTA) countries or Ukraine, with the manufacturer being located within these blocs and not controlled by another country. For more complex systems such as air and missile defense systems and larger drones, it must be possible to substitute components that could be subject to restrictions imposed by other countries.

While it is possible for an E.U.-based subsidiary of a British or U.S. company to serve as a loophole, the cost origination aspect implies that weapons manufactured in a British or American plants might not be eligible - a move that rankled U.S. officials, with Secretary of State Marco Rubio (according to Bloomberg reports) warning Europe that any exclusion of U.S. companies would be seen negatively by Washington.

However, there might not be any reason for Washington to panic. While Lockheed Martin's F-35 fifth-generation combat jet – whose center fuselage and various electronics suites are produced by Northrop Grumman – might have a less-than-optimal "mission rate", it's deeply embedded within Europe, with at least 570 jets projected to be serving European air forces after the current round of orders are fulfilled. Alenia Aermacchi's Cameri facility in Italy (jointly operated with Lockheed Martin) is one of three global F-35 assembly lines and serves as Europe's hub for F-35 production and maintenance. Northrop Grumman is also partnered with Rheinmetall to establish a second production line for the center fuselages in Weeze, Germany.

Perhaps the strongest factor for its continuing service in Europe is that there is no fifth-generation equivalent currently among European manufacturers. The nearest possible competitor is the Future Combat Air System (FCAS) under development by Dassault Aviation, Airbus and Spain's Indra Sistemas - with a first test flight expected around 2027 and entry into service around 2040. Switching out of American aviation will be a very expensive proposition for European militaries; therefore, they're likely to continue to hold on and run out the sunk cost over the decades-long shelf life of the systems.

On the other hand, the likes of "smaller-ticket" items – drones, munitions, artillery, armored vehicles, etc. – are expected to be keenly contested with potentially little room to spare for U.S. manufacturers, who might instead be involved with the inevitable European-origin awardees of these contracts by way of technical consulting, guidance on manufacturing, etc. (as they have been for decades now).

Thus, while "Readiness 2030" might vigorously moot a "European" character to military spending, U.S. manufacturing expertise can be expected to be well-represented, regardless.

Fighting the Fed:

President Trump has recently intensified his criticism of Federal Reserve Chairman Jerome Powell, calling him a "major loser" and urging immediate interest rate cuts. Trump’s remarks, shared on his Truth Social platform, argue that inflation is under control and that rate cuts are necessary to prevent an economic slowdown.

These comments have rattled financial markets. The Dow Jones Industrial Average dropped over 747 points, while the S&P 500 and Nasdaq also saw significant declines (according to yahoo finance). Investors are increasingly concerned about the independence of the Federal Reserve, with fears that political pressure could undermine its credibility. The bond market has also reacted, with yields on 10-year Treasuries settling at 4.40% at the close on Monday, April 21, reflecting heightened uncertainty.

Trump’s, like many others, has his beliefs regarding the Federal Reserves’ influence over bond yields. But if the recent past shows us anything, it’s that a decrease in the Fed Fund rate may lead to higher rates on the long end. The situation underscores the delicate balance between political influence and central bank independence, with potential long-term implications for investor confidence and economic stability. All that said, the “bond vigilantes” may have reassumed control and if so, this may be more about debt and asset valuations then it is about a verbal sparring between the President and the Fed Chair.

This Week's Major U.S. Economic Reports & Fed Speakers (Time in EST)

MONDAY, APRIL 21          

10:00 am   U.S. leading economic indicators  

TUESDAY, APRIL 22          

9:30 am  Philadelphia Fed President Patrick Harker speaks        

2:00 pm  Minneapolis Fed President Neel Kashkari speaks        

2:30 pm  Richmond Fed President Tom Barkin speaks        

WEDNESDAY, APRIL 23          

9:00 am  Chicago Fed President Austan Goolsbee opening remarks        

9:30 am          STL Fed President Alberton Musalem, Fed Governor Christopher Waller speak

9:45 am  S&P flash U.S. services PMI for April    

9:45 am  S&P flash U.S. manufacturing PMI  

10:00 am   New home sales for March    

2:00 pm  Fed Beige Book        

7:40 pm  Atlanta Fed President Bostic speaks        

6:30 pm  Cleveland Fed President Beth Hammack speaks        

THURSDAY, APRIL 24          

8:30 am  Initial jobless claims for April 19    

8:30 am  Durable-goods orders for March    

8:30 am  Core durable orders (business investment) for March      

10:00 am    Existing home sales for March    

5:00 pm  Minneapolis Fed President Neel Kashkari speaks        

FRIDAY, APRIL 25          

10:00 am   Consumer sentiment (final)

Investment Themes

Amid all this volatility comes earnings season. Read on for our thoughts on this week’s relevant reports.

Tesla reported after hours on Tuesday, April 22, perhaps one of the most anticipated earnings calls in quite some time, which says a lot as TSLA is always one of the most closely watched companies. This time is different as many of the most ardent supporters had begun to lose faith in Elon Musk’s ability to focus on the company he runs. Many view the Tesla brand is in trouble, perhaps irreparably, due to Musk’s outspoken and hands on influence in the Trump administration as well as the impact that tariffs may have on international supply chains and sales. Those with concerns were looking for Musk to announce that he is stepping away from his role in government to focus solely on running the TSLA franchise. The Q1 report was not good, missing the top and bottom lines with a major deterioration in gross margins. But the dream is still alive, and Musk confirmed delivery of a more affordable fleet into production in 2025 and stayed on track for the Cyber cab rollout in 2026. This news maintained the price increase during normal market hours and comments from Musk that he will substantially reduce his efforts with D.O.G.E sent the stock higher in the after hours.

Alphabet The U.S. Department of Justice (DOJ) launched a historic antitrust case against Alphabet's Google, focusing on its dominance in online search and artificial intelligence. The DOJ found that Google has illegally maintained its monopoly through exclusionary contracts, billions in payment, and strategic agreements that stifled competition across its search engines including the use of AI powered search tools to further entrench what it

deemed a monopoly potentially limiting competition from emerging AI-driven platforms. Potential remedies include a forced sale of Chrome, ending default search agreements, a requirement to share search data with competitors to level the playing field, and potentially force Google to sell its Android mobile operating system to restore competition. Despite this and the volatile macroeconomic and geopolitical backdrop, many analysts remain bullish on Alphabet stock. Results and outlook will matter in the earnings call amid legal remedies when they report on Thursday, April 24.

Defense Stocks Report: Two things that have driven strong performance in share price over the past several years have been solid revenue growth and confidence in guidance for future earnings and revenue growth. Not too many sectors nor individual companies could deliver on that in the current environment, and the defense sector was no different. The same geopolitical tensions that are causing volatility in the broader markets have driven defense companies to be wishy-washy on guidance. Lockheed Martin’s (LMT) results were enough to drive the share price higher after earnings. However, a lack of clear guidance for Ratheon (RTX) and Northrup Grumman (NOC) drove shares down during regular trading and after hours.   

Disclosures:

All data sourced from Bloomberg as of 21 April 2025

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