Democrats still refuse to admit that their policies caused inflation—and cost them the election.
Election defeats are never easy to accept, but the Bidenomics rear-guard action now underway among Democratic economists takes the denial stage of grief to a whole new level. The argument is two-fold: What the Biden Administration did worked fine, and if you didn’t like it, the next Trump Administration will be worse. Voters didn’t believe it, and neither should Democratic politicians.
The political problem Team Biden’s pugnacious rump (and its cheerleaders in academia and on Wall Street) must confront is inflation. The price level rose by more than 20% over President Biden’s term while inflation-adjusted wages lagged. While this crew touts disinflation since 2022—the economics term for a deceleration in price rises—this doesn’t mean prices are returning to their prepandemic level. Far from it: Inflation rates persistently above 2.6% mean prices continue to rise faster than the Federal Reserve’s 2% target.
Voters blamed President Biden and Congressional Democrats. A prime culprit is the $1.9 trillion American Rescue Plan (ARP) passed on a party-line vote in March 2021. Even some liberal economists such as Larry Summers warned it would be inflationary, and consumer prices began their rapid ascent soon after passage. It didn’t help that the Fed effectively monetized much of this debt via a quantitative-easing program that saw the central bank’s holdings of Treasury securities increase by $3.2 trillion between March 2020 and spring 2022.
One element of the rear-guard defense of Bidenomics is to argue inflation was a consequence of pandemic disruptions, almost entirely independent of Washington’s spending spree. An example comes via Peter Orszag, the Obama-era head of the Office of Management and Budget, who recently blamed supply-chain disruptions for 79% of the inflation experienced in 2021.
A growing body of economics research attempts to separate the supply and demand-side causes of the inflation in this way. These papers typically conclude the demand side (meaning, the target of the Biden spending) had relatively little to do with it.
But this elides the question of how and why consumers were able to pay the higher prices caused by supply-chain disruptions, and why prices for other goods and services didn’t fall to offset. A big part of the answer is the Biden budget blowout, and voters seem to have spotted the omission before the election.
That leaves other revisionists to argue that even if the Biden spending bills were inflationary, they were worth doing because the economy would have been worse without them. “Any scenario that envisions less inflation from a reduced ARP also has to wrestle with slower growth, higher unemployment and more child poverty,” Jared Bernstein of the White House Council of Economic Advisers told a Journal reporter.
Really? By March 2021, gross domestic product (in nominal and real terms) had returned to its prepandemic level and the unemployment rate had fallen to about 6% from a high of nearly 15%. The main impediment to growth was the supply-side drag from lingering school closures, persistent social distancing and attempted workplace vaccine mandates. Oh, and the chronic threat of tax increases, high-cost energy policies and overregulation.
Voters saw through this argument, too, perhaps because Mr. Trump himself was on the ballot. His first term delivered impressive pre-Covid economic growth and low unemployment without a spike in inflation. Voters didn’t believe that Mr. Bernstein’s trade-off between inflation and employment exists.
Undeterred by any self-awareness, the Biden rear guard now warns Mr. Trump will deliver, well, the same bad outcomes they did. In particular, they caution his tariffs and big deficits from tax reform will be inflationary.
One can say a lot of negative things about Mr. Trump’s tariffs—we have and will—but this is the wrong argument. It highlights the revisionists’ confusion about the difference between relative prices (which the tariffs will change) and the overall price level (which depends on many factors).
As for fiscal policy, a lot hangs on the nature of the tax cut, the size of the deficit, and whether households and businesses think taxing and spending decisions will generate enough economic growth to pay off the debt. Mr. Trump has to prove he can strike this balance, but don’t trust the revisionists to judge whether he has. They’ll oppose any tax cut because what they want is more spending.
The story of the Biden years is that Democrats pumped up demand via massive spending while sitting on the supply side of the economy with pandemic policies and measures that made it harder for businesses to invest. Voters understood the failure, and Democrats anxious to rebuild trust would be wise to reflect on it.
Read the full article HERE.
Gold prices rose over 1% to hit a two-week peak on Friday, heading for the best weekly performance in more than a year, buoyed by safe-haven demand as Russia-Ukraine tensions intensified.
Spot gold jumped 1.3% to $2,703.05 per ounce, hitting its highest since Nov. 8. U.S. gold futures gained 1.1% to $2,705.30.
Bullion rose despite the U.S. dollar hitting a 13-month high, while bitcoin hit a record peak and neared the $100,000 level.
“With both gold and USD (U.S. dollar) rising, it seems that safe-haven demand is lifting both assets,” said UBS analyst Giovanni Staunovo.
Ukraine’s military said its drones struck four oil refineries, radar stations and other military installations in Russia.
Gold has gained over 5% so far this week, its best weekly performance since October 2023. Prices have gained around $173 after slipping to a two-month low last week.
“We understand that the price setback has been used by ‘Western world’ investors under-allocated to gold to build exposure considering the geopolitical risks that are still around. So we continue to expect gold to rise further over the coming months,” Staunovo said.
Bullion tends to shine during geopolitical tensions, economic risks, and a low interest rate environment. Markets are pricing in a 59.4% chance of a 25-basis-points cut at the Fed’s December meeting, per the CME Fedwatch tool.
However, “if Fed skips or pauses its rate cut in December, that will be negative for gold prices and we could see some pullback,” said Soni Kumari, a commodity strategist at ANZ.
The Chicago Federal Reserve president reiterated his support for further U.S. interest rate cuts on Thursday.
On Friday, spot silver rose 1.8% to $31.34 per ounce, platinum eased 0.1% to $960.13 and palladium fell 0.6% to $1,023.55. All three metals were on track for a weekly rise.
Read full article HERE.
Gold prices rose in on Thursday as heightened tensions between Russia and Ukraine underpinned safe haven demand, helping bullion weather strength in the dollar.
Gold rose for a fourth consecutive session, extending a rebound from over two-month lows. But the yellow metal’s pace of gains now appeared to be slowing amid pressure from the dollar, as traders second-guessed expectations for lower U.S. interest rates.
Spot gold rose 0.8% to $2,670.80 an ounce, while gold futures expiring in December rose 0.8% to $2,673.45 an ounce by 09:19 ET (02:19 GMT).
Russia-Ukraine tensions support gold demand
The yellow metal was underpinned by higher safe haven demand in the face of increased tensions between Russia and Ukraine, after the U.S. authorized the use of long-range missiles by Kyiv.
Russia had responded by lowering its threshold for nuclear retaliation, and warned of a dire escalation in the conflict over the U.S. move. Ukraine launched a series of missile strikes against Russian territories this week, using Western-made weapons.
Fears of an escalation in the conflict drove traders towards gold, helping the yellow metal recover after it plummeted from record highs over the past two weeks.
Dollar, yield strength limits gold recovery
Gold was nursing steep losses in the past two weeks as risk appetite was initially boosted by Donald Trump winning the 2024 presidential election.
Trump’s victory also saw traders pricing in the prospect of higher U.S. interest rates in the long term, which supported the dollar and Treasury yields. The greenback traded just below a one-year high on Thursday.
Uncertainty over U.S. interest rates was furthered by sticky inflation data released last week, while the Federal Reserve struck a less dovish tone in recent addresses.
Traders were seen scaling back expectations for a December rate cut.
CME Fedwatch showed traders pricing in a 57.3% chance for a 25 basis point cut in December, compared to a 85.7% chance seen last week. Bets on a hold rose to 42.7% from 14.3% a week ago.
This notion pressured gold, given that higher rates increase the opportunity cost of investing in the yellow metal.
Other precious metals rose on Thursday but were also nursing losses over the past two weeks. Platinum futures fell 0.03% to $965.65 an ounce, while silver futures rose 0.4% to $31.125 an ounce.
Among industrial metals, benchmark copper futures on the London Metal Exchange rose 0.3% to $9,060.50 a ton, while December copper futures fell 0.6% to $4.1303 a pound.
Copper prices were walloped by increased concerns over slowing Chinese demand, especially as recent stimulus measures and economic readings from the country underwhelmed.
Read the full article HERE.
Sentiment readings currently don’t suggest a major top is near
Looking to 2025, I am reiterating my bullish call on gold — even, and over U.S. stocks.
Going back to 1980, there have been several distinct gold bull-bear cycles. For example, gold topped out at 850 in early 1980 and began a bear market that bottomed in 1985. It traded sideways and made a second bottom in 1999 and then made new recovery highs in 2004 before topping out in 2011. It subsequently broke out again at 2,100 in early 2024 and the rally has continued.
Gold now is tracing out saucer-shaped multi-year bases against different regional stock indices. The gold/Dow ratio is the weakest owing to the strength of U.S. stocks, but it is nevertheless distinctive. The Gold/EAFE ratio is poised for a relative breakout, and the gold/emerging-markets ratio has marginally broken out of a 12-year base.
These technical patterns argue for a bullish commitment to gold for 2025 and beyond for all investors in all major currencies from an asset allocation perspective.
Favorable technical picture
Here is another long-term technical reason to be bullish. Not only did gold prices stage upside breakouts in U.S. dollars but in all major currencies. The chart below shows gold’s long-term breakout to all-time highs in selected currencies, even the Swiss Franc which is considered to be a “hard” currency.
The bottom panel in the chart shows the silver/gold ratio as an indicator of speculation in precious metals. The last major gold peak was accompanied by a spike in this ratio, which is not in evidence today. Sentiment readings are not in place for a major gold top.
The chart below, meanwhile, is a close-up of the recent corrective action in gold. The violation of the rising trend line in USD is concerning, but gold did not violate the rising trend line in most other currencies. Arguably, the recent spike in the silver/gold ratio in October was a sign for traders that sentiment had become overly frothy and a pullback was due. Nevertheless, the overall technical structure of price action remains bullish.
The end of disinflation?
Gold is useful as a diversifier in a portfolio because it’s a hedge against unexpected inflation. Bloomberg columnist John Authers recently made the point that the latest October CPI report is showing signs that the disinflation trend is fading. Different measures of CPI are above the Fed’s 2% target and they may have stopped falling (see Inflation Needs Subtlety Right Now. It’s Getting Trump). In particular, Authers observed: “Both core services excluding shelter (the Fed’s so-called supercore, which has been given much emphasis over the last couple of years) and shelter ticked up very slightly and remain above 4%”.
Authers concluded: “Taken together, the data probably don’t justify another rate cut next month. However, the Fed has a dual mandate. The latest employment figures showed weakness, and so on balance the path of least resistance is to cut again, but only by 25 basis points. Further, there’s a general expectation in the market that another cut is coming, and it might be dangerous to disappoint those hopes when the post-election markets are already volatile.”
Yet U.S. Federal Reserve Chair Powell signaled in a recent speech that the Fed may not need to cut rates at the December FOMC meeting: “We are moving policy over time to a more neutral setting…we will carefully assess incoming data, the evolving outlook, and the balance of risks. The economy is not sending any signals that we need to be in a hurry to lower rates.” [Emphasis added]
All of these trends are in place even before U.S. President-elect Donald Trump takes office — and none of them are attributable to his policies. Trump’s plans to raise tariffs, extend tax cuts, and his stated intention of interfering with the Federal Reserve’s conduct of monetary policy is inflationary (see my analysis Revisiting the Trump Trade). Even as gold prices corrected, inflation expectations, as measured by the five-year breakeven rate, have been rising.
Waiting for a bottom
Tactically, I am waiting for the gold correction to bottom. Here is what I am watching. Jason Goepfert at SentimenTrader observes that gold typically hits bottom when it falls 2% below its 50 daily-moving-average, which just happened. Will history repeat?
Another way of spotting a possible corrective bottom is to monitor the technical conditions of gold mining stocks. VanEck Gold Miners ETF a proxy for this group, is in a clear corrective phase and looks oversold. The gold miner-to-gold ratio is near the bottom of its historical range, but readings are not at levels seen at recent bottoms. In addition, I would watch for percentage bullish to decline into, or at least near, the oversold zone before becoming turning tactically bullish.
Lastly, keep an eye on the U.S. Dollar Index . The dollar rallied in the wake of Trump’s victory to the top of a range, and technical conditions appear extended. If it were to be rejected at resistance, a decline would be a tailwind for gold prices as the two tend to be inversely correlated.
Overall, the picture is bright. Gold prices have staged multi-year breakouts in multiple currencies, indicating a long-term bullish outlook. In addition, gold is on the verge of staging relative breakouts against global equity markets that point to multi-year outperformance ahead. The macro outlook calls for a reacceleration of inflation, which is also positive for gold. Investors should be accumulating gold in anticipation of superior returns in the years ahead.
Read the full article HERE.
The Russian Defense Ministry claimed Tuesday that Ukraine had carried out its first strike on Russian territory using the U.S.-supplied long-range missiles known as ATACMS.
Russian President Vladimir Putin formally lowered the threshold for his country’s use of nuclear weapons Tuesday, days after the United States allowed Ukraine to strike inside Russia using American missiles.
The Kremlin announced that Putin had approved an updated nuclear doctrine — a document that governs how Russia uses its nuclear arsenal — including the declaration that Moscow could unleash a nuclear strike if subject to an attack by a nonnuclear country that has the support of a nuclear state.
The Russian Defense Ministry claimed later Tuesday that Ukraine had carried out its first strike on Russian territory using U.S.-supplied long-range weapons, hitting a military facility in the Bryansk region with an ATACMS missile.
Russian air defenses shot down five ATACMS missiles but fragments of another “fell on the technical territory of a military facility in the Bryansk region, causing a fire that was quickly extinguished. There were no casualties or damage,” it said in a statement.
“According to confirmed data, the deployed ATACMS operational-tactical missiles were American-made,” it said.
Ukraine’s military said earlier that it had hit a military arsenal near the city of Karachev in Bryansk. It did not specify what weapons were used in the attack.
The changes to Russia’s nuclear doctrine mark the most significant saber-rattling yet by the Kremlin, which has consistently warned about possible nuclear war throughout the now 1,000 days since its full-scale invasion of Ukraine.
“The nuclear doctrine update was required to bring the document in line with the current political situation,” Kremlin spokesman Dmitry Peskov told the TASS state news agency in comments published early Tuesday.
Peskov outlined Moscow’s new threat in light of Washington’s shift in policy: that the use of Western nonnuclear missiles by Ukraine’s military against Russia under the new doctrine could lead to a nuclear response.
Still, the use of nuclear weapons would be a “last resort measure,” he added.
Putin had signaled the update to his country’s policy earlier this year as he sought to warn the West against loosening restrictions on Kyiv’s use of long-range weapons to strike deep inside Russia.
Russia also reserved the rise to use the weapons even if Belarus was attacked, he said then. And the new doctrine matches that shift.
“Aggression against the Russian Federation and its allies by a non-nuclear country with the support of a nuclear state will be considered a joint attack,” it reads.
The doctrine also says that “The Russian Federation may use nuclear weapons in the event of a critical threat to the sovereignty and territorial integrity of itself and Belarus,” a shift from previous language that said it may use nuclear weapons “when the very existence of the state is at risk.”
The changes follow Putin’s warning to the U.S. and its NATO allies that any use of their long-range weapons supplied to Ukraine against Russian territory would mean NATO and Russia are at war.
The Biden administration had long resisted Kyiv’s calls to relax restrictions on the weapons it has supplied to its ally.
But after the U.S. and others said that thousands of North Korean troops had joined the fight alongside the Kremlin’s military, U.S. officials told NBC News that the Biden administration had authorized use of the long-range ATACMS missile systems for limited strikes inside Russia.
The shift drew condemnation from the Kremlin, with Peskov saying Monday that Washington was pouring “oil on the fire” and was provoking “further escalation of tension around this conflict.”
The changes “create more leeway for a Russian nuclear response to Ukrainian — or, as the Kremlin frames it, Western — strikes on Russian territory” said Tatiana Stanovaya, a nonresident scholar at the Carnegie Endowment for International Peace and the founder and head of the political analysis firm R.Politik.
She pointed to the change in leadership in Washington as a possible motive behind the timing of the updated nuclear doctrine.
“Putin may see the current situation as a strategic ‘in-between’ moment — anticipating possible peace initiatives from (President-elect Donald) Trump while emphasizing what he views as the “irresponsibility” of Biden’s policy. Putin may seek to present the West with two stark choices: ‘Do you want a nuclear war? You will have it,’ or ‘Let’s end this war on Russia’s terms,’ Stanovaya said in a post on X.
“This marks an extraordinarily dangerous juncture,” she added.
Read the full article HERE.
- Bullion rebounds by about 2% as US dollar rally stalls
- Fed cuts, central bank purchases and tariffs may fuel rise
Gold rose by the most since August as Goldman Sachs Group Inc. reiterated a forecast for prices to reach $3,000 an ounce next year, with analysts advising investors to “go for gold.”
Bullion jumped as much as 2% in intraday trading, surpassing $2,600 an ounce, on Monday after taking a battering in the wake of Donald Trump’s US presidential election victory, which spurred a dollar rally that weighed on commodities.
The bank listed a wager on bullion among its top commodity picks for 2025, citing Federal Reserve rate cuts that reduce the opportunity costs of holding gold; tariffs that underline its role as an inflation hedge; and steady demand from central banks.
Bullion has declined about 6% from last month’s record while the dollar surged to a two-year high. Against that backdrop, hedge funds’ bullish wagers fell to the lowest in three months, Commodity Futures Trading Commission data show.
However, Goldman analysts said this selloff provides an “attractive entry point to buy gold.”
Speaking on Bloomberg Television, Bank of America commodity strategist Francisco Blanch said he also saw gold hitting $3,000 an ounce by next year, but he cautioned it may fall to $2,500 an ounce in the short run if US inflationary pressures threatened the Fed’s rate-cutting path.
“Gold was pricing in at a pretty steep rate cut,” Blanch said. “If that doesn’t happen, it will be choppy for a bit.”
For the time being, some Fed policymakers appear committed to easing. On Friday, the Fed Bank of Chicago’s Austan Goolsbee said as long as inflation continued down toward the bank’s 2% goal, rates would be “a lot” lower over 12 to 18 months.
Fed Bank of Boston President Susan Collins said a December reduction remained on the table.
Spot gold was up 1.8% to $2,608.84 an ounce at 6:17 p.m. in London, bringing this year’s gains to 26%. The Bloomberg Dollar Spot Index dipped 0.4%. Silver, platinum and palladium all advanced.
Read the full article HERE.
“The world is entering an era of protectionism” as the U.S. turns to aggressive tariffs, warns one China expert. How nasty will it get?
The tariffs are coming.
The scope, targets, and even the ultimate objective remain unclear, but President-elect Donald Trump is widely expected to unleash a new front on the trade battle that he started in his first administration.
Trump, who has described tariffs as the “most beautiful word in the dictionary,” has consistently viewed duties as a valuable weapon—a reason that investors are taking seriously the risk of 60% tariffs on goods from China and 10% to 20% universal tariffs on all other imports. They serve another purpose: Revenue, paid by U.S. companies importing goods, could be used to offset the tax bill Trump has promised.
Scenario planning has started in earnest among investors, trading partners, and companies such as cosmetics maker e.l.f. Beauty ELF +0.74% and toolmaker Stanley Black & DeckerSWK+0.10%, which have already warned investors about the prospects of higher prices and curtailed growth in the event of more tariffs. The International Monetary Fund has warned that a tariff battle—one that doesn’t escalate into a full-on trade war— could shave 0.5% off global economic output in 2026.
Investors who remember the trade battle that Trump waged in 2018, and the volatility from the tit-for-tat between the U.S. and China as their relationship fractured, are reviving their old playbooks. One nugget of optimism: Markets were calmed once Trump struck a so-called Phase One trade deal that rolled back some of the tariffs in return for China vowing to make some reforms, as well as committing to buy aircraft engines, soybeans, and services. China didn’t keep the promise.
This time around, investors are grappling with a changed backdrop that could make a trade battle that ignites inflation and dents global growth more complicated. Inflation is much higher, Europe’s growth is anemic, and China’s economy is sputtering.
Upending Global Trade
Trade patterns have also been reshuffled so that beneficiaries the last time around—such as Mexico—could now be in the Trump administration’s crosshairs as countries, including China, reroute trade to circumvent duties. China has revved up its export machine, sending its excess supply of electric vehicles, steel, and chemicals abroad, pushing countries to impose their own tariffs to protect their domestic manufacturers.
“The world is entering an era of protectionism,” warns Eswar Prasad, Cornell University professor and former head of the China division at the IMF. “The U.S. turning aggressively to tariffs—and the second-largest economy in the world desperate to expand its exports—creates the perfect storm.”
How nasty the storm gets depends on a complicated exercise with a host of characters abroad and at home. Part of it depends on who holds sway in the new administration. It is expected to include China hawks like Robert Lighthizer, a protectionist who has pushed for less reliance on China and who crafted trade policy in the first Trump administration, as well as an array of advisers like Tesla TSLA +1.27%’s Elon Musk and Blackstone’s Stephen Schwarzman, who have strong business ties to China.
That variability—with the most extreme scenarios creating the most precarious tariff backdrop since the 1930s—is keeping many strategists cautious about big bets abroad and tilting toward U.S. stocks as they game out potential scenarios.
Trump’s long-term focus on trade imbalances puts China in the spotlight. Its trade surplus is approaching $1 trillion as the country leans on exports to help its ailing economy. But while the surplus has grown, China is increasingly selling more to other parts of the world than the U.S. Its goods deficit with the U.S. fell to $279 billion last year from $343 billion in 2019.
Still, China is widely expected to be the first target, offering the cleanest route to imposing tariffs amid bipartisan support for a tougher stance against the People’s Republic. Analysts expect the new administration, as early as the first day, to label China in violation of the Phase One trade deal, setting in motion an enforcement mechanism that could impose tariffs on China within months.
Roughly half of Chinese imports are already subject to tariffs, averaging about 10%, according to the Peterson Institute for International Economics. An escalation would target the remaining half, which includes consumer electronics and staples found at dollar stores, as well as chemicals and other inputs for industrial companies. “It would cause inflationary pressure on those who can’t handle it,” says Veda Partners’ Henrietta Treyz, noting the likely hit on middle-class households.
Oxford Economics estimates that raising tariffs on Chinese goods to 60% could boost the U.S. consumer price index by at most 0.7%, while a blanket 10% tariff could add another 0.3%.
A Phased Approach?
Tariff increases could come in phases. Mary Lovely, senior fellow at the Peterson Institute, expects the new administration to issue pre-exemptions that shield some companies or subsectors, possibly within consumer goods. That could mitigate some of the inflationary pressures.
Most analysts expect the trade battle to unfold in segments, since placing tariffs on China as well as universal tariffs of as much as 20% on the European Union, United Kingdom, and others would increase the risk of an inflationary spike and rattle markets, as companies wouldn’t be able to find a “safe” alternative place to source goods. Tariffs would be everywhere.
The most optimistic scenario calls for an initial salvo of tariffs on China, followed by an attempt at dealmaking. The strength of the U.S. economy and concerns about China as a strategic rival with its own economic challenges could give Trump a strong hand. “We see a lot of governments trying to think about how they will appease him. The U.S. economy will continue to grow, and it’s an important market for everyone,” Lovely says.
Chinese officials have been visiting Washington, D.C., for months to gauge what type of deal could be appealing, says Derek Scissors, a fellow at the American Enterprise Institute who recently served as a commissioner on the U.S.-China Economic and Security Commission, which advises Congress on China-related issues. The Trump administration’s lesson from the first deal, where China didn’t honor its commitments to buy an additional $200 billion in exports, probably means that the administration first places tariffs, probably 50%, before entertaining any deals.
China’s economic troubles could coax its officials to come to the table sooner—possibly with bigger commitments to buy U.S. agricultural products and energy, as well as possible investments in production in the U.S. that could create jobs. While more-hawkish prospective members of the administration have advocated curtailing Chinese investment in the U.S., Scissors thinks there could be some sectors that aren’t off-limits where Trump would welcome investment.
Critical to any sort of deal is assessing what the new administration’s objective is—and what the Chinese think it is, says Logan Wright, who leads Rhodium Group’s China Markets Research. If the Chinese view the tariffs as a stick to get them to invest more in the U.S., Wright expects a more modest tariff increase—and possibly a temporary one.
China’s Response
But if China sees the battle as a way to punish its economy or accelerate decoupling, a deal is less likely. And retaliation could be sharper, possibly with measures to disrupt the revival of U.S. manufacturing through critical mineral restrictions or their own tariffs on inputs to intermediate goods that raise prices. Even in a more benign scenario, China is likely to retaliate to a tariff increase, albeit in ways that may not hurt as much at first. U.S. agricultural products are a likely target.
Economists expect a trade battle to potentially shave two percentage points off Chinese economic growth—far from ideal for a country already trying to stabilize its growth.
To cope, China will probably redouble efforts to reduce reliance on the West. And it will probably step up fiscal stimulus, possibly with subsidies for exporters hit by tariffs to ensure the pain doesn’t lead to job cuts. Beijing could also devalue the renminbi to offset some of the hit, but this comes with some dangers.
While China could handle a 3% to 5% depreciation, a 10% to 15% weakening could trigger a wave of devaluations among emerging markets looking to maintain their competitive position—and that could risk capital outflows and financial instability, Prasad says.
If no deal looks likely within a month or two of the U.S. imposing tariffs, markets will get jittery as the risk of escalation by the U.S. increases. Beyond raising tariffs even further, Scissors says the U.S. could look to levy duties on Chinese companies operating elsewhere, like in Mexico, to circumvent tariffs or find ways to restrict U.S. companies’ investments in China.
Other market spoilers persist too. Congress is expected to introduce a bill to revoke China’s permanent normal trade relations status, which was granted in 2000—a move Lighthizer has advocated for years. If passed, it would ratchet tariffs higher and bring tensions to a new high by putting China in the same camp as North Korea and Russia. “This is a far-reaching, potentially permanent, and quite dramatic change to the U.S. trade landscape,” says Treyz, who sees 40% odds of such a bill passing.
That would rattle markets, with the Peterson Institute estimating the move and resulting retaliation could increase the U.S. consumer price index by 0.6% and lower U.S. gross domestic product by almost $160 billion between 2025 to 2028.
Universal Tariffs
The other channel for a trade battle is blanket tariffs of up to 20% on goods from the rest of the world. If the administration imposes these tariffs at the same time it goes after China, strategists expect a much bigger selloff in markets—and a larger inflation hit.
For now, many expect Trump to tap the International Emergency Economic Powers Act to start with a 10% duty later in the year. The U.S. doesn’t export that much to Europe, limiting the potential retaliation to a handful of goods like Harley-Davidson HOG -1.01% motorcycles or whiskey. In this scenario, the economic hit to the region could be limited.
Andrew Kenningham, chief Europe economist at Capital Economics, estimates a 0.2% hit to the region’s GDP if Trump levies a blanket 10% tariff.
Germany’s auto sector could face a harder time. Trump has complained about Germany’s large trade surplus and specifically its auto sector, which tends to design and make cars at home but sends them to the U.S. for final assembly. Though the sector could ride out a 10% tariff, Kenningham says German auto makers would have a harder time absorbing a 20% tariff. They would probably have to raise car prices, which could dent their sales to the U.S. by 50%., resulting in an additional 0.2% hit to Germany’s GDP.
Hitting Europe with tariffs would probably rattle markets, Treyz says. For now, Pantheon Macroeconomics economist Claus Vistesen expects the European Central Bank to cut interest rates less than expected as it waits to see the scope of Trump’s tariff battle.
The situation with Mexico is even trickier. While Trump has proposed 200% tariffs on cars made in Mexico, analysts say placing tariffs on Mexico would put the U.S. in violation of the U.S.-Mexico Canada Trade Agreement that was one of the hallmarks of the first Trump term.
Also problematic: U.S. companies have invested aggressively in Mexico to diversify production. That could create a loud lobbying pushback against the tariffs. Analysts expect the administration to use saber-ratting about a tariff to push President Claudia Sheinbaum to impose new immigration rules at the border—helping Trump make progress on another priority, Treyz says.
Mexico’s economy could be in for a tough period, with potential deportations driving up unemployment and the Chinese investment powering Mexico’s growth potentially coming under increased scrutiny. The iShares MSCI Mexico EWW +0.28% exchange-traded fund (ticker: EWW) is down 25% this year.
Nuveen Chief Investment Officer Saira Malik favors U.S. stocks, especially more domestically focused companies that are better insulated from tariffs, and is wary of making any foreign bets.
Others are also cautious. “Sometimes you just have to wait,” said Ian Shepherdson, chief economist at Pantheon Macro, in a briefing. “The potential policy changes are quite gigantic—or it could be a huge bluff.”
Read the full article HERE.
Trumponomics tees off
CRITICS ACCUSE Donald Trump of being too chaotic to get much done. The speed of his first appointments should disabuse them. The next administration means business.
Stock and corporate-bond markets are broadly delighted with the prospect of deregulation and tax cuts in a second Trump term. The Economist, by contrast, has warned of a risk that mass deportation and a global trade war would do real harm. The appointments themselves attest to Mr Trump’s desire for disruption, a hard line on China and absolute loyalty . With such a concatenation of signals, you may wonder what is about to hit the world economy.
The answer comes in three instalments, beginning with Mr Trump’s intentions. His commitment to deregulation may be good for growth. Elon Musk, the world’s richest man, and Vivek Ramaswamy, an entrepreneur-politician, have been named heads of a new outfit grandly named the Department of Government Efficiency, or DOGE. A pledge to cut $2trn from the government’s annual budget is patently absurd, but judicious liberalisation could be benign. On day one the new administration could speed up legislation on permitting that is already in Congress. Mr Trump has also promised to free up artificial intelligence. The technology is immensely power-hungry. Just imagine if easier planning rules helped unleash a revolution.
Unfortunately, Mr Trump also wants to deport millions of irregular migrants and impose tariffs of up to 60% on China and 10-20% on the rest of the world. All of these would be bad for growth. For example, the costs of mass deportation could, by one estimate, run to hundreds of billions of dollars. That does not include the economic burden of labour shortages and spiralling consumer prices. Roughly half of the workers on America’s farms have no legal status.
A second part of the answer is that the tensions in Mr Trump’s agenda will be resolved by necessity, as the hyperbole of stump speeches comes into contact with the messy reality of governing. Policies take so much effort to enact that his administration will simply be unable to do everything all at once.
Imposing universal tariffs will take time, because they would need approval from Congress or the use of untested presidential powers. But free-trade Republican lawmakers could recoil at tariffs on America’s close allies. And the use of existing law to impose a universal tariff on national-security grounds would probably be challenged in the courts. Likewise, apprehending, detaining and processing millions of people will be a logistical nightmare. Federal agencies would need to turn to state authorities for help, many of which will refuse.
The third part of the answer is that, mixed in with the intentions and priorities is the mercurial temperament of Mr Trump himself. He has a fondness for picking favourites and then dumping them. He is also beholden to nobody. In spite of his appointment to the White House of Stephen Miller, a longtime loyalist and a hardliner on immigration, Mr Trump may put growth first by making a furious noise about deportation, but limiting its real-world effect. It is the same with Mr Musk, whom markets sense may receive special favours. But will the bromance last? The only discipline on a president who has succeeded so spectacularly by defying the experts around him will be those same markets. Mr Trump has an old-fashioned regard for share prices as a barometer of success.
The conclusion markets seem to be drawing is that things will work out just fine. Although they are alive to risks of inflation and cronyism, investors are betting that tariffs and deportations will do little damage. Instead, the tax cuts will produce a sugar rush that boosts corporate profits and deregulation will bring about lasting growth.
Even if that prediction proves correct about America—a fairly big if—it is too rosy for the rest of the world. As America borrows, raises tariffs and grows, the dollar will strengthen. That will dampen trade. It will also lead to higher interest rates and greater dollar-debt burden in developing countries.
Some governments will be in the line of fire, especially if the threat to extend tariffs beyond the universal rate becomes a Trumpian negotiating tool. Most vulnerable is Mexico, which will be a target both of Mr Trump’s immigration policy, because many illegal migrants cross its border with the United States, and of his trade policy, because Mexico is home to factories that send their exports north under the United States-Mexico-Canada Agreement.
Mr Trump appears to have a special animus against the snooty leaders of the European Union. Many Republicans allege that, by footing the bill for American troops in Europe as part of NATO, America is in effect paying for European welfare. For Mr Trump, the EU’s huge trade surplus with America rubs salt in the wound. Europe can expect to pay.
The main target of a hostile economic policy will be China. Marco Rubio, at the State Department, and Mike Waltz, as national security adviser, both want the rivalry between the world’s two biggest economies to be at the heart of American policy. As firms move supply chains out of China, a few countries may benefit. Others may strike up a friendship with Mr Trump. As a rule, though, the separation of the American and Chinese economies would be highly disruptive.
Fore!
Countries would do well to prepare for what is coming. The eu has said that it will steer tens of billions of euros’ worth of spending to defence. But it has fallen badly behind in AI and has put off strengthening its own internal market for too long. China is in a better position, but it has foolishly delayed the stimulation of domestic demand.
If Mr Trump unleashes a salvo of tariffs, retaliation will exert a seductive pull, not least as a show of strength. It would, however, be an act of self-harm. Few countries are more insulated against trade shocks than America, with its large domestic market. Better to take the positive side of Trumponomics, and deregulate. If Mr Trump wants to tilt the playing-field, the best way to cope will be to become more competitive.
Read the full article HERE.
The 2024 presidential race is over, and Donald Trump is back in the White House. The Dow and S&P are celebrating, suggesting investors are optimistic about Trump’s effect on Wall Street.
But, for all the fanfare, we still face an ominous challenge: The nation’s unsustainable debt and deficit. Regardless of who won, with the path we are on, we are all in trouble, unless something changes.
America’s debt recently surpassed $35.88 trillion, a sum so large it’s almost incomprehensible. That is a stack of hundred dollar bills about the same size as the Earth’s circumference — over 24 thousand miles tall. The federal deficit alone for 2024 topped $1.83 trillion.
Year after year, we’ve operated on what feels like a limitless credit card, passing the bill onto future generations, spending like drunken sailors with limitless credit lines leaving future generations to wake up to the hangover of our reckless binge.
Oddly enough, back in 1999, it was Donald Trump who talked about solving this very problem. In his book “The America We Deserve,” Trump offered ideas for putting the U.S. on a more sustainable path.
Granted, his proposals weren’t great (they were actually kind of bad, in my opinion). But Trump’s message then was a rare acknowledgment from a public figure that our fiscal policy was reckless and needed reform. And, to be clear, that was back when the national debt was less than $6 trillion and we were headed into a couple years of deficit surpluses.
Now, he has a unique opportunity to confront the debt crisis head-on. Trump’s second term frees him from the usual political pressures. He doesn’t personally have to worry about re-election, pleasing donors, or maneuvering through the usual political calculus. This means he can make the hard choices that others might shy away from.
Trump can do what he claims he excels at — taking actions that those raised in the swamp refuse to. If he steps up, he could genuinely save America from what may be one of its most severe long-term threats.
This will require sacrifices. He can help push Congress toward making changes that will put the nation on more secure fiscal footing. This will require changing the tax code, cutting spending in ways that will be painful, reforming entitlement programs, etc. — everything should be on the table.
Many of these changes will be unpopular. In today’s polarized political environment, these actions are so divisive that they’re rarely even discussed by politicians. But this is precisely why Trump might be able to pull them off. He has never shied away from controversy or backlash. If ever we needed someone who is divisive and willing to break golden calves, it’s now. Trump might be exactly the kind of person willing the slaughter the cows sacred to both sides and put the nation on a more sustainable path.
Trump’s electoral victory will be much less meaningful if he leaves office in four years without addressing our debt and deficit problems. Without bold action now, we’re on a path toward economic instability. Trump has the opportunity — and the responsibility — to help us pivot away from this cliff. Here’s hoping he’s willing to take the leap.
Read the full article HERE.
Risk of financial sanctions prompts Beijing to rethink where it parks its massive foreign exchange reserves
Ever since the US dollar cemented its role as the backbone of the global financial system following the second world war, it has been a weapon of choice for American presidents waging economic warfare.
But as the United States’ use of sanctions has proliferated in recent years, concerns have grown in China and elsewhere over whether the US dollar can remain a safe haven currency.
Now, following Donald Trump’s victory in Tuesday’s US presidential election, a fresh wave of uncertainties looms over the US dollar and US dollar-denominated assets.
“We’re still a safe haven – [offering] flight to safety in a messy dangerous world – and that’s a huge benefit,” former US treasury secretary Timothy Geithner told Bloomberg News in July.
He then cautioned that “people in policy have to understand: that position the dollar enjoys, there’s no entitlement to that. It’s not like a guarantee”.
When the governments of the world’s most-advanced economies, led by the US, froze nearly half of the Bank of Russia’s foreign reserves following Russia’s invasion of Ukraine in February 2022, it was a stark reminder to China that its foreign exchange reserves, the world’s largest, could also be affected by US sanctions.
The probability of a worsening financial relationship between China and the US is “high” now that Trump is heading back to the White House, according to Yang Siyao, a researcher at Tsinghua University’s PBC School of Finance.
It will mean bigger risks for China in holding US dollar-denominated assets, Yang said, adding that China should be prepared for the “worst case scenario”.
“For example, the risk of a forced sale or freezing of related [US] assets also needs to be considered,” Yang said.
Trump started a trade war with China in 2018, a year into his first term as US president, and promoted American “decoupling” from the world’s second-largest economy.
At a campaign rally in September, he threatened to slap 100 per cent tariffs on countries that shun the US dollar – a move seen as part of his plans to protect the currency’s dominant role in the global financial system.
The US dollar serves as the primary currency for international trade, central bank reserves and global debt issuance. And bonds, bills and notes issued by the US Treasury – held by central banks and institutions around the globe as marketable securities – have been viewed as a safe haven asset.
China’s foreign exchange reserves started to grow in the 1990s as part of its transition towards a more open economy. The 1997 Asian financial crisis, when Asian currencies were devalued, prompted Beijing to build a financial war chest to protect against external shocks.
Its foreign exchange reserves increased as its international trade and foreign direct investment expanded over the years, with State Administration of Foreign Exchange data showing they totalled US$3.261 trillion last month, down from US$3.316 trillion in September.
While China does not disclose where it parks its money, a significant proportion is invested in US government debt, according to official US data. As of August, China’s holdings of US treasury securities totalled US$774.6 billion, making it the second-largest foreign holder of US government debt behind Japan’s US$1.13 trillion.
But the rising risk of sanctions means questions have long been asked in China about whether Beijing should continue to invest in US treasuries.
Yu Yongding, a former adviser to China’s central bank, has urged Beijing to curb its investment in them, warning about the growing risks of a US debt crisis and the “weaponisation” of the US dollar in international trade amid geopolitical tensions.
The US’ worsening debt problems could trigger a crisis of confidence in the US government’s creditworthiness, Yu said. The US government sells US treasuries to finance its deficit.
US President Joe Biden’s administration racked up a budget deficit topping US$1.8 trillion in the financial year that ended in September, up more than 8 per cent from the previous year and the third-highest on record, the US Treasury Department said on October 18.
The banking system is another concern for China when it comes to relying on the US dollar, following repeated threats from Washington that it will kick Chinese banks out of the Society for Worldwide Interbank Financial Telecommunication – the formal name for the Swift messaging system that facilitates rapid cross-border payments – if they deal with Russian entities that have been subjected to sanctions.
US Treasury Department data shows that China began cutting its holdings of US government bonds around 2014, after they peaked at over US$1.3 trillion in 2013. In 2022, China’s holdings of US treasuries fell below US$1 trillion for the first time since 2010.
Brad Setser, former US Treasury Department economist and a senior fellow at the Council on Foreign Relations, said China could also be holding US treasuries through the use of custodians outside the US, which would not be listed as Chinese holdings in the department’s data.
“But in the last couple of months of data, China’s reported US holdings have been steady or increased just a bit – so there isn’t even a fall in the headline numbers right now in any meaningful sense,” Setser said.
In addition to its reported foreign reserves, China has maintained a substantial exposure to US dollar denominated assets through its large state commercial banks, the state policy banks, and its sovereign wealth fund, China Investment Corporation (CIC).
China launched CIC in 2007 to better manage its ballooning reserves and diversify investments beyond US dollar holdings, targeting higher-yielding opportunities abroad .
CIC said its total assets were valued at US$1.33 trillion at the end of last year, up 7.46 per cent year on year, with nearly 50 per cent of its overseas portfolio invested in alternative assets such as hedge funds and property, and a third invested in stocks – 60.29 per cent of them US-listed, up from 59.18 per cent in 2022.
Robert Greene, a vice-president at financial services consultancy Patomak Global Partners, said China is likely to maintain “very large holdings” of US dollar assets in the near term.
“China’s monetary policy approach and trade imbalances inherently bring about Chinese demand for foreign currency assets,” said Greene, who is also a non-resident scholar at the Carnegie Endowment for International Peace.
“Moreover, China’s foreign exchange reserves are so sizeable that there are structural impediments to meaningfully reducing the dollar’s share of these reserves while holding the level of reserves relatively constant.”
The Official Monetary and Financial Institutions Forum (OMFIF), a London-based finance think tank, has predicted that the US dollar’s share in world currency reserves could decline to 40 to 45 per cent by 2050 from around 60 per cent at present. It said emerging economies could become more aggressive in promoting the use of non-dollar currencies amid questions over the US’ persistent budget and current account deficits and their impact on the sustainability of US debt.
According to the US Treasury Department, America’s national debt stood at US$35.46 trillion at the end of September, giving it a debt to gross domestic product ratio of 124 per cent.
Vitor Gaspar, director of the International Monetary Fund’s fiscal affairs department, told a news conference on October 23 that while the US’ debt has grown steadily, it is still sustainable.
“We do believe that the situation in the United States is sustainable because the policymakers in the United States have access to many combinations of policy instruments that enable them to put the path of public debt under control,” Gaspar said.
For China, there are other things to consider when it comes to US treasuries, apart from their role as safe haven assets, Wu Guoding, an associate researcher at Chinese Academy of Social Sciences, wrote in an article in Shijie Zhishi, a semi-official foreign affairs magazine, in September.
“In addition to the economic significance, holding a certain amount of US debt also has certain political significance for China,” Wu wrote.
“Given the importance of US debt to the US, China can maintain its influence on the US capital market and even on US politics by holding US debt, making the US cautious in dealing with China-US relations.”
Zerlina Zeng, head of Asia strategy at CreditSights, which conducts research on credit markets, said China was likely to promote the use of the yuan – also known as renminbi – globally to reduce its reliance on the US dollar.
She said it is already promoting the use of the Chinese currency in trade and financial transaction settlement to further its internationalisation.
“In the offshore debt market, Chinese state-owned enterprises and the Chinese government are increasingly using offshore yuan, non-dollar G3 [the euro and Japanese yen], or even emerging currencies for refinancing and new debt,” Zeng said.
“We expect these trends to continue post the US election.”
Read the full article HERE