It is really hard to see any logic in the self-harming US administrations’ approach to Tariffs right now.
It has been shocking to see how global markets have been utterly crashed by the actions of one US President. How can one man have so much power to cause carnage and why is he doing it?
I have given this a great deal of thought over the past week since the apparent insanity of ‘liberation day’. I have scoured the news – both mainstream and financial – for clues and I have been amazed at the lack of explanation.
Did Trump really just decide to wreck the global economy or is there some kind of method in the madness?
It got me thinking about a throwaway comment that he made right back in the first few days of his Presidency when he brazenly announced that ‘some US Treasury Notes may not be real’. This was on the basis that his friend Elon had ‘gone through the books’ and highlighted some kind of fraud at intergovernmental level.
The narrative goes that the US have just been getting stitched up for decades now. These ‘saver’ countries in the Far East have been rudely lending money to the land of the free – then selling them cheap stuff – for far too long and now the US is choked up on debt and it’s all the fault of those greedy foreign governments who had the nerve to buy up US Treasuries.
The US now owe some $12.1 trillion to foreign governments. Interestingly, there are three very large lenders. I am going to mention two of those now – and save the third one for you later!
The biggest owner of US Treasury debt is Japan who apparently hold some $1.1 trillion.
The second biggest owner of US Treasury debt is China with around $759 billion.
The US is in a big mess financially. They have continued to borrow relentlessly in order to keep their economy spinning and their population able to buy that cheap stuff.
The famous modern historian Niall Ferguson first spoke about the symbiotic relationship between China and the US back in 2006. He coined the phrase ‘Chimerica’ and he warned about the toxicity in this relationship.
He argues that China needed America to have a robust enough economy to keep buying its stuff – so it kept lending money to America – who in turn needed to keep borrowing to keep rates low and the economy ticking along.
Niall Ferguson explained that there would be utter carnage if China and America chose to ‘de-couple’. In other words, if China stopped lending and the US stopped borrowing – or worse stopped repaying…..
The US can’t just decide not to repay its debt. If they did this, the entire global financial system would collapse.
However, imagine you don’t have a President who thinks in global market terms. Imagine you have someone who just wants to magic away a phenomenal debt burden – and he doesn’t much care how he achieves this.
Would it be too far a leap to think that a ‘deal’ could be done behind closed doors which says something like ‘hey, we can take these tariffs off just as soon as you let us off some interest or even write off some of our debt…then we can get back to playing nice again’.
America exports around $144 billion in goods to China each year. In return, China exports around $439 billion to America. This whopping trade difference or ‘deficit’ means that China stands to be at least temporarily crippled by 104% tariffs on their exports. Unless… just maybe….some deal were to be done.
These are just my own rambling thoughts from a guy in Haverfordwest. Maybe I am totally wrong, but something radical is happening here.
I noticed that the price of a pair of US Nike Trainers have shot up overnight apparently from $120 to $160 IN THE US! This is a US company passing on massive increases to US buyers. Why? The simple answer is that even the US owned stuff is made elsewhere.
Here in the UK, our Chancellor has been given the greatest ‘pass card’ probably ever seen. Just study a FTSE 250 chart over the past year and the correlation between her tax announcements on UK firms and the fall in their fortunes is obvious to see. However, it will be the Trump madness that takes the blame.
Things are grim right now. The only good thing that I can state with some confidence, is that our client portfolios are holding up much better than the Equity indexes around the world. This is particularly noticeable within our more cautious client portfolios where the UK Bonds have started to offer some shelter.
Meanwhile, elements of Gold inclusion through funds such as our Orbis Global Cautious holding which Teleri posted about yesterday – certainly has helped to slow down the falls for our Level One clients.
My gut feeling at this stage is that things may get a bit worse before they get better – but as always – time is a great healer.
The White House juggernaut can’t roll on forever. If deals are not done fairly soon – the American people will soon have something to say about the end of their cheap stuff. Indeed, the respectable element of the Trump camp are sidling off into the exits. Notice that the influential podcaster Ben Shapiro has walked away over the Tariffs whilst hedge fund manager Bill Ackman has outright warned Trump over inflicting a ‘self-induced, economic nuclear winter’.
The White House response at the moment is to name call and scream abuse at anyone who disagrees with them. They have come up with the badge of ‘Panicans’ for any Americans seen walking away from their vision. This madness simply cannot last.
Meanwhile, to further support my personal theory on the US debt puzzle, we notice huge amounts of US Treasury Bonds being dumped into the markets today – especially by the Chinese who are then buying more Gold. I wouldn’t mind betting a Trump ultimatum is behind all of this.
Eventually, this situation is going to snap back around so our firm mind-set right now is to weather this storm and be ready to take advantage of the recovery when it comes.
And now to tell you who the third biggest lender is to the US government……It’s our country.
