Tag Archives: #rulesbasedorder

Clearly Explained

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The warmups in Davos for Trump
With Howard and Scott on the stump
Quite clearly explained,
While WEFers complained,
The US was, no more, the chump
 
The globalist world that existed
Is no longer to be assisted
Instead, US goals
Align with Trump’s polls
No matter the words WEF has twisted

 

As we await President Trump’s address in Davos this morning, it is worth recapping the highlights from yesterday’s US speakers, Commerce Secretary Howard Lutnick and Treasury Secretary Scott Bessent.   Starting with Lutnick, he explained the White House view as follows; “The Trump Administration and I are here to make a very clear point—globalization has failed the West and the United States of America. It’s a failed policy… and it has left America behind.”  The video is linked above in his name.  It is hard to misunderstand what he is saying, and that is very clearly US policy.

Turning to Secretary Bessent, he explained that the US has spent $22 trillion more than the rest of NATO since 1980 on defense while Europe and Canada created their welfare states.  “The Europeans have been spending the money on social welfare, on roads, on education, and it’s time for them to pay more, which they’ve agreed to do.”  The video clip is linked to his name in the first stanza.  The below graph is telling:

At the same time, Europe continues to buy Russian oil, funding Russia’s war against Europe.

Needless to say, Europeans were unhappy with the commentary as they appeared to be coming under attack from the US.  The market narrative quickly framed around President Trump going too far and how it was going to destroy the US as nobody will want to invest in the US. That is the explanation for yesterday’s decline in US equities (although they fell around the world), the dollar and Treasury bonds (although bonds, too, fell everywhere, notably in Japan).  

Yesterday I sought to disabuse you of the notion that Europe is going to sell all their Treasuries to hurt the US as the results would likely be either irrelevant or horrific for Europe.  So, the narrative pivoted to Trump is bad and destroying the US.  

And yet, remarkably, the world did not end either yesterday or last night, despite what many have explained is inevitable.  This morning markets are somewhat less catastrophic.  It makes sense that markets are going to remain volatile as the underlying theses for international relations adjust to the new reality of power politics and economic statecraft from the previous “Rules Based Order”.  And at this stage, there is no way to know which outcomes are most likely.  The only thing of which I am confident is that we have not seen the end of this play out.  

I must admit, that while I don’t think President Trump cares much about France and President Macron’s comments seeking more Chinese investment in that nation, I suspect that PM Carney’s efforts to cozy up to President Xi will be less welcome based on the Donroe Doctrine of US dominance in the Western Hemisphere.  But I also believe that the power structure between the US and Canada is such that it will ultimately bend to the US’s will.

So, let’s review market activity overnight as we await President Trump’s comments, which I understand have been delayed until 11:30 EST this morning.  Yesterday’s sharp declines around the world have been followed by less dramatic activity last night and so far today.  In Asia, Tokyo (-0.4%) slipped a bit further, but hardly dramatically, as FinMin Katayama focused on the JGB market in comments made in Davos.  “Since last October, our fiscal policy has consistently been responsible and sustainable, not expansionary, and the numbers clearly demonstrate that.  I’d like everyone in the market to calm down.”  I’m sure she would.  And it worked with JGB yields slipping -8bps and 30yr yields falling -17bps.  Elsewhere in Asia, China was flat, HK (+0.4%) rallied a bit along with Korea (+0.5%) while Taiwan (-1.6%) led the way lower across numerous other regional markets.  

In Europe, red is today’s color led by Germany (-0.7%) and Spain (-0.5%) although France and the UK have both only ceded -0.1% so far during the session.  The discussion here continues to revolve around President Trump, the trade deal, and potential new tariffs on nations that try to prevent the US from its Greenland desires.  As to US futures markets, at this hour (6:45) they are slightly firmer, +0.1%, so not yet, at least, indicating the end of the American investment thesis.

As to the rest of the bond market, away from Japan, yields are basically -1bp lower across Treasuries and European sovereigns as investors await Mr Trump’s comments.  Again, the mooted collapse in the US bond market has yet to appear.  However, there is a popular meme about the Danish pension fund, Akademikerpension, which has announced that it will sell all its US Treasuries by the end of the month, a total of $100 million, due to its perception of increased credit risk.  This has been fodder, though, for those who continue to believe that Europe is going to ditch their Treasuries, and many are calling it a signal.  While certainly a trendy decision, I see it as noise, not signal.

Turning to commodities, one cannot be but impressed with gold’s consistency of late.  It has risen another 2.1% this morning and is now nearing $4900/oz.  I guess $5000/oz is right around the corner.  Looking at the long-term chart below, we have seen a monster rally for the past two years.  

Source: tradingeconomics.com

FWIW, which may not be much, I continue to see this as a commentary on all fiat currencies, not the dollar per se as evidenced by the table I created from data on goldbroker.com.  While you can see that the dollar has definitely underperformed during the past year (which we already knew given the early year 10% decline vs. the euro and pound, over time, it is hard to make the case that other currencies are any better.  In fact, I find it particularly surprising that the rand has performed so poorly given its seeming benefits when gold rallies.  And of course, it is no surprise that the yen which has been having a really tough time, is the worst of the lot.

 Historical Returns of Gold 
Currency1 Month1Year5 Year10 Year
EUR9.54%54.22%164.28%300.85%
JPY10.02%76.45%288.91%481.02%
USD9.62%73.45%154.49%331.44%
GBP9.13%59.31%160.26%357.37%
MXN7.04%47.93%127.14%305.03%
ZAR7.35%53.89%179.88%327.69%

As to the other metals, silver (0.0%) seems to be getting tired after its move and has done little over the past several sessions.  Platinum (+1.0%) seems to still have life as does copper (+0.75%).  Turning to energy markets, oil (+0.3%) is trying to figure out whether the geopolitics is going to blow up or fade away and remains right around $60/bbl.  But given the temperature here in New Jersey is 1° this morning, we cannot be surprised that NatGas (+21.5%) has exploded (no pun intended) higher.

Finally, the dollar is a touch softer this morning, but not very much.  The euro is unchanged, and the pound, after some lousy inflation data, has fallen -0.2%.  But JPY (+0.2%) is offsetting that, arguably responding to FinMin Katayama’s comments, although elsewhere, KRW (+1.1%) rebounded after comments from President Lee Jae Myung sought to sooth investors and explain that the government would continue to work to boost economic growth with new policies.   But once again, my recent favorite chart of the DXY shows that this is not a USD story.

Source: tradingeconomics.com

On the data front, aside from the President’s speech today, nothing but tomorrow brings the real data.

ThursdayQ3 GDP4.3%
 Q3 Price Index3.7%
 Initial Claims212K
 Continuing Claims1880K
 Personal Spending (Nov)0.5%
 Personal Income (Nov)0.4%
 PCE (Nov)0.2% (2.8% Y/Y)
 Core PCE (Nov)0.2% (2.8% Y/Y)
FridayFlash PMI Manufacturing52.1
 Flash PMI Services52.8
 Michigan Sentiment54.0

Source: tradingeconomics.com

Don’t forget that next week the FOMC meets, but on the Fed story, today Governor Cook’s case about dismissal will be heard at the Supreme Court, which is, potentially, a much bigger deal.  If the Fed is not protected from Presidential authority, that will certainly change many views on the future, and likely initially, see the dollar and bond markets decline while stocks rally.  But that decision won’t come for months, and remember, we are still awaiting the tariff decision.

There is much we don’t know and volatility remains the most likely outcome.  Be careful out there.

Good luck

Adf

In a Trice

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The calendar’s not e’en turned twice
Since Trump, with JD as his Vice
Have taken the reins
And beat up on Keynes
While weeding out waste in a trice
 
For markets, the problem, it seems
Is rallies are now merely dreams
So, equity buyers
Are putting out fires
While thinking up pump and dump schemes
 
For bondholders, it’s not so clear
If salvation truly is near
But one thing seems sure
The buck will endure
Much weakness throughout this whole year

 

We have not even reached 50 days of a Trump presidency as of this morning and nobody would fault you if you estimated we had three years of policies enacted to date.  The pace of changes has been blistering and clearly most politicians, let alone investors, have not been prepared for all that has occurred.

One of the things that I read regularly is that Trump is destroying the Rules Based Order (RBO) which was underpinned by the Pax Americana of the US essentially being the world’s policeman.  This is cast as a distinct negative under the premise that things were going great and now, he is upsetting the applecart for his own personal reasons.  Of course, market participants had grown quite accustomed to this framework, had built all sorts of models to profit from it and with the Fed’s help of monetization of debt, were able to gain significantly at the expense of those without market linked assets.  Hence, the K-shaped recovery.

But while that is a lovely narrative, is it really an accurate representation of the way of the world?  If the US was truly the world’s policeman, and we certainly spend enough on defense to earn that title, perhaps it was time for the US to be fired from that role anyway.  After all, there is currently raging military conflict in Ukraine, Lebanon, Syria, Congo, Sudan and the ongoing tensions in Gaza.  That’s a pretty long list of wars to claim that things were going great.

Secondly, the question of financing all this conflagration, as well as other economic goals, notably the alleged transition to net zero carbon energy production, appears to be reaching the end of the line.  While the US can still borrow as needed, (assuming the debt ceiling is raised), the reality is that the US gross national debt outstanding is greater than $36,000,000,000,000 relative to GDP that is a touch under $28,000,000,000,000.  On a global basis, total (not just government) debt is in excess of $300,000,000,000,000 while global GDP clocks in somewhere just north of $100,000,000,000,000.  Arguably, on a credit metric basis, the world is BB- or B+, a clear indication that all that debt is unlikely to be repaid.

If we consider things considering this information, perhaps the RBO had outlived its usefulness.  Arguably, the loudest complaints are coming from those who benefitted most greatly and are quite unhappy to see things change against them.  But as evidenced by the polls taken after President Trump’s speech last Tuesday evening, the bulk of the American public is still strongly supporting this agenda.  The idea that the president and his Treasury secretary are seeking to engineer a short-term recession early, blame it on fixing Biden’s mess, and having things revert to stronger growth in time for the 2026 mid-term elections is not crazy.  In fact, there have been several comments from both men that short-term pain would be necessary to achieve a stabler, long-term gain.

So, what does this mean for the markets?  You have no doubt already recognized that volatility is the main event in every market, and I don’t see that changing anytime soon.  But some of the themes that follow this agenda would be for US equities to suffer relative to other markets, as the last decade plus of American exceptionalism, led by massive deficit spending and borrowing, would reverse under this new thesis.  Add to this the sudden realization that other nations are going to be investing significantly more in their own defense, and money will be flowing out of the US into Europe, Japan and emerging markets around the world.

Bonds are a tougher call as a weaker economy would ordinarily mean lower yields, but the question of tariff impacts on prices, as well as reshoring, which, by definition, will raise prices, could mean we see the yield curve steepen with the Fed cutting rates more aggressively than currently priced, but 10-year and 30-year yields staying right where they are now.

I believe this will be a strong period for commodities as all that foreign capex will be a driver, as will the fact that, as I will discuss shortly, the dollar is likely to underperform significantly.  Gold will retain its haven characteristics as well as remain in demand for foreign central banks, while industrial metals should hold their own.  As to oil, my take is lower initially, as OPEC returns its production and slowing GDP weighs on demand, at least for a while, although eventually, I suspect it will rebound along with economic activity.

Finally, the dollar will remain under significant pressure across the board.  Clearly, Trump is seeking a weaker dollar to help the export industries, as well as discourage imports.  Add to this the potential for lower yields, lower short-term rates, and an exit of equity investors as US stocks underperform, and you have the making of at least another 15% decline in the greenback this year.

With this as backdrop, we need to touch on three key stories this morning.  First, Friday’s NFP report was pretty much in line with expectations at the headline level but seemed a bit weaker in some of the underlying bits, specifically in the Household Survey where a total of 588K jobs were lost and there was a large increase in the number of part-time workers doing so for economic reasons.  Basically, that means they wanted full-time work but couldn’t find a job.  Markets gyrated after the release, with yields initially sliding but then rebounding to close higher on the day.  Equities, too, closed higher on the day although that had the earmarks of a relief rally after a lousy week overall.  The thing about this report is that it did not include any of the government changes that have been in the press, so next month may offer more information regarding the impact of DOGE and their cuts.

The second story comes from north of the border where Mark Carney, former BOC and BOE head, was elected to lead the Labour Party in Canada and replace Justin Trudeau.  As is always the case, when there is new leadership, there is excitement and he said he will call for a general election in the next several weeks, ostensibly to take advantage of this new momentum.  It seems that President Trump’s derision of not only Trudeau, but Canada as well in many Canadian’s eyes, will play a large role with the two lead candidates, Carney and Poilievre, fighting to explain that they are each better placed to go toe-to-toe with Trump on critical issues.

Here’s the thing, though.  Despite much angst about the US-Canada relationship on the Canadian side of the border, the market viewpoint is nothing has really changed.  a look at the chart below shows that after a bout of weakness for the Loonie in the wake of the US election and leading up to Trump’s tariff announcements, USDCAD is basically unchanged since mid-December, with one day showing a spike and reversal in early February.  My point is that the market has not, at least not yet, determined that the Canadian PM matters very much.

Source: tradingecoomics.com

The last story to discuss is Chinese inflation data which was released Saturday evening in the US and showed deflation in February (-0.7% Y/Y) for CPI and continuing deflation in PPI (-2.2%).  In fact, as you can see from the below chart, PPI in China has been in deflation for several years now.  Recently there have been several articles explaining this offers President Xi a great opportunity for significant stimulus because no matter how much the government spends and how much debt they monetize, inflation won’t be a problem for a long time to come.  I would counter that given deflation has been the norm for several years, they have had this opportunity for quite a while and done nothing with it.  Why will this time be different?  Ultimately, the default result in China is when things are not looking like they will achieve the targeted growth of “about 5%”, you can be sure there will be more investment to build things up adding still more downward pressure on prices as production facilities increase.  

Source: tradingeconomics.com

The renminbi’s response to this news has been modest, at best, with a tiny decline overnight of -0.25%.  And a look at the chart there shows it is remarkably similar to the CAD, with steady weakness through December and then no real movement since then.  Given the dollar’s recent weakness overall, this seems unusual.  Although, we also know that China prefers a weaker currency to help support their export industries, so perhaps this in not unusual at all.

Source: tradingeconomics.com

Ok, this note is already overly long, so will end it here.  We do have important data later this week with both CPI and Retail Sales coming.  As well, the consensus from the Fedspeak is that they are pretty happy right here and not planning to do anything for a while.

The big picture is best summarized, I believe, by the idea that we are at the beginnings of a regime change in markets as discussed above.  Volatility continues to be the driving force, so hedging remains crucial for those with natural exposures.

Good luckAdf