5 Idea Friday: China trade; Small cap productivity; It's getting weird out there; No more Mr. Lender Nice Guy; Clearing VC Backlog
A feast for thought, heading into the weekend
China trade redirect
A fundamental rotation and of small cap productivity
A very un-fundamental rotation towards regime change (but of what regime)
No More Mr. Nice Real Estate Lender Guy (and that’s good, maybe)
Clearing the VC backlog (and that’s good, too)
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Five quick hitters on this and that for the weekend.
1. China Redirect
This all really began during first Trump admin, when the President first took a swing at China tariffs:
The percent of import value from China has been chopped by nearly 2/3rds, going from just under 25% to ~9%.
Here’s another striking visual along the same lines, but specific to building products:
China went from providing ~55% of building products to a bare 17%.
So long, Chinese lighting, we hardly knew ye’.
Mission accomplished, I guess, insofar as part of the mission was weaning ourselves off of Chinese imports. The re-shoring part still needs some work, but kicking the China habit kind of worked.
But, as you can also tell, Vietnam, Mexico, and “other” have been pretty big beneficiaries, and Vietnam and Mexico are both Chinese proxies (in large part), so even the weaning endeavor has some caveats.
As for who’s been bearing the direct cost of tariffs, the NY Fed’s recent estimate is “we do” (albeit, slightly less so, recently):
~86% of the tariff costs are born by US importers, down from 94% in the early innings.
In November, a 10 percent tariff was associated with a 1.4 percent decline in foreign export prices, suggesting an 86 percent pass-through to U.S. import prices.
Given that the average tariff in December was 13 percent (see the first chart), our results imply that U.S. import prices for goods subject to the average tariff increased by 11 percent (13 times 0.86) more than those for goods not subject to tariffs.
As of November, the NY Fed estimates that tariffs reflect an ~11% tax on tariffed goods.
Look, let’s stipulate for a moment that there is some intrinsic value to “making stuff,” (setting aside the national security concerns of one-nation dependency). Tariffs are, at best, a credible signal that (a) making stuff is a priority; and (b) not-making-stuff will be somewhat more costly (and those costs may be hard to predict).
Whether tariffs actually result in making more stuff (with attendant benefits that outweigh the costs) is, I suppose, still an open question (with some mixed, but mostly negative results).
2. Market breadth, profits, small caps, oh my!
One feature of the recent sell-off in tech stocks (and elsewhere) has been a substantial rotation to other parts of the investment landscape.
Investors don’t appear to be stock-piling cash, so much as taking their money elsewhere…industrials, small caps, EMs, Japan, etc.
Whether that’s an enduring thing, I don’t yet have a strong view, and haven’t spent enough time yet to form one. But, my operating premise is that fundamentals do win in the longer-run, so I couldn’t help but notice some “fundamental” signal.
In this case, the outlook for small caps does appear to be improving, especially when it comes to profits:
Forward EPS for small caps have indeed “risen sharply” since the summer.
Maybe a year+ of incorporating higher operating costs, without a corresponding lift to sales, was all the medicine small caps needed? Or maybe it’s just a few previously sleepy industrials and semis blowing the aggregate EPS estimates out wide.
For what it’s worth, small caps are finally getting into the “productivity” game:
Real revenue per worker has finally inflected upwards for the small cap index (although it’s got a lot of catching up to do).
So, more profitability for small caps, too. ‘More with less’ is the name of the game, after all.
Heck, margins are improving . . . everywhere:
Net margins have turned a corner in every major market (except China, who isn’t on the chart).
Is this AI? It seems hard to believe, but maybe, in part.
Survey results say: “yes, AI made us more productive,”
~95% of companies in the survey said AI had improved productivity, with healthcare reporting the largest gains.
Mostly, I think firms are just not feeling very expansionary at the moment, so they’re not inclined to add headcount, and therefore margins are steadily improving (for now). But maybe it’s AI too, and that wouldn’t be a bad thing.
ICYMI
3. It’s getting weird out there
The other part of all this market volatility is that there is plenty of weirdness.
Whatever the fundamentals may be, they are quite obviously not driving all the buying and selling.
Consider, some anecdata:
A $6M karaoke company rebranded itself as an AI transport company and the entire sector sold off:
The trucking index dropped ~7% on a basically fake announcement from a fake company.
Is it factor algos reacting automagically to “AI threat”? A reflexivity moment on steroids? Who knows, but it doesn’t make a lot of sense.
Here’s another one:
Both the “AI exposed” and “AI productivity winner” baskets are in a nosedive, while the overall market index stays pretty flat.
So, AI is disrupting everything, and helping no one, but overall, everything is fine. Lol.
You know what’s really hot right now? Big Box retail:
Walmart and Costco are trading at nearly 2x the multiples as the hyperscalers.
If AI is going to disrupt everything, it’s going to be Walmart who wins, and not the big tech cos providing all that cloud and compute. OK, alright.
There’s a calm sea above, but beneath the surface, it’s absolute mayhem:
Over the past month, the index has moved not-at-all, while the average stock moved 10.8%(!).
The spread between the average and absolute move is a 99th percentile event over the past 30 years. Dotcom and GFC are the only other times when we’ve seen this kind of ups and downs, all at the same time.
Another look from another angle:
The average drawdown when 115 or more stocks fell at least 7% in a single day (in an 8-day window) is -34% (but this time, the market has moved not-at-all).
It’s the wild west out there, and it’s starting to look like something of a regime change. Or more accurately, it looks a like investors think there might be a regime change, but to what regime, no one is entirely sure.
4. Real Estate Lenders announce ‘No more Mr. Nice Guy’
Hello, old friend:
CMBS distress rates are climbing again, after (briefly) appearing to flatten out.
Why is distress rising?
Perhaps because lenders are finally tiring of ‘extend and pretend’:
Special Servicers are turning to the foreclosure option more and more, “signaling that restructuring efforts have largely been exhausted.”
Real Estate lenders are saying “No More Mr. Nice Guy.”
It’s been a neat feature of the CRE landscape that distress has mostly not led to that much distress:
Distressed asset sales did not, in fact, increase all that much, despite substantial repricing in real estate.
The reason distressed sales did not take off is because (a) a lot of people saw it coming; and (b) lenders figured they were better off working things out in the interim. Who wants to deal with a fire sale, if you don’t have to?
But now that’s changed, and it’s not necessarily a bad thing.
If anything, foreclosure indicates a perception that prices are stabilizing, and now is the time to finally move-on:
In the aggregate, real estate asset prices are slightly below their pre-pandemic level (according to Green St.), but the volatility in the underlying sub-sectors appears to have flattened out, a bit.
Industrial, mobile homes, and self-storage made out like bandits. Everyone else, not so much.
5. VC Quietly Clearing the Backlog
On the subject of “moving on,” VC has been quietly clearing the backlog of mistakes from the prior era.
As with the broader universe of PE, M&A in the venture ecosystem has been on a tear:
Deal count for M&A in 2025 exceeded 2022, after some grim years.
More acquisitions, more exits, hooray! Right?
Well, sort of. You see, the key feature of all this merging is that startups are increasingly the acquirer—startups were the buyer of other startups 46% of the time, which is 3x higher than it was back in 2019.
Plus, the details of these deals is increasingly hush-hush, and generally, investors like to shout their good outcomes from the rooftops:
Only 12% of 2025’s deals had a “known good outcome,” the lowest share in recent history.
The small share of announced 1-3+x deals stands in contrast to the 86% of deals that have no announced terms, at all. If the details are on the hush-hush, that’s a decent signal that the details are not flattering.
This is VC clearing its backlog, and it’s a good thing. Startups are consolidating, unsuccessful ventures are winding down, and people are moving on to the next thing.
Unlike their PE brethren, a single poor outcome matters less to a VC. VC are in the outlier business, where the operating assumption is that most investments go to zero, a chunk are breakeven, and a small few drive all the returns. So, unloading a known non-outlier (and maybe even getting some cash back in return) isn’t the worst outcome. It’s healthy capitulation to the new cycle.
And hey, maybe some LPs did in fact see some liquid returns:
The 2020 vintage especially experienced a little pop in DPI, with a whopping 42% of funds showing at least some DPI.
Nature is healing.
Previously, on Random Walk
Private Credit and Insurance, two peas in a pod (reprise), and a chart dump on default rates
five charts on the rise of private credit in life insurance
Energy in 1776
It’s July 4th, so Happy Birthday America, and we’re going to keep it light and only semi-topical.
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