Do it yourself

Ever since the self-proclaimed master in the “art of deal making” re-entered the White House, January 2025, after a hiatus of four years, the atmosphere has been filled with greater uncertainties. Each time, the great negotiator sits behind his newly acquired table in the Oval office, or holds a mike in the James S. Brady Press Briefing Room, he adds little more to these uncertainties.

The President of the United States (POTUS) is announcing a material hike in trade tariffs, pausing his orders, deferring implementation of his orders, and reinstating his orders as if he is ordering his evening snacks and not able to decide between coffee and soup. His administration, including the Alpha male, VPOTUS, and the Smartest man in-charge of DOGE, for some strange reasons, is not briefing the POTUS that changing tariff may, inter alia, require—

a)    some preparation on the part of trade and custom authorities to adjust their systems, documentation, and software;

b)    a lot of effort for the traders – who need to renegotiate the previous contracts and adjust the pricing accordingly;

c)     significant adjustments by the downstream value chain, including the ultimate consumer who might have to bear the impact of tariff hikes;

d)    monetary authorities to assess the impact of the changes in tariffs on the overall price curve and corresponding monetary policy response, if any required;

e)     counterparties to decide on the strategy to deal with the revised tariff. The response may be aggression (reciprocal hike in tariffs) requiring further adjustments by the importers, and downstream value chain; and

f)      financial markets to assess the impact on businesses, currencies and rates, and accordingly adjust the discounting factors, option pricing, etc.

The uncertainties created by frequent policy flip-flops of the POTUS, is also impacting the supply chains globally, as both the buyers and sellers are in a state of flux. If it continues like this, soon we could see a repeat of Covid like supply chain disruptions including logjams at ports, shortages of containers.

Sensing that the POTUS may be bluffing, the Chinese authorities have already placed a 2x blind bet by announcing that China (biggest trade partner of the US) is ready for any kind of war. Responding to the 10% extra tariff imposed by the US, China’s foreign ministry spokesperson Lin Jian said: “Exerting extreme pressure on China is the wrong target and the wrong calculation … If the US has other intentions and insists on a tariff war, trade war or any other war, China will fight to the end. We advise the US to put away its bullying face and return to the right track of dialogue and cooperation as soon as possible.” (see here)

Canada and the EU have also responded aggressively to the Trump Tariff threats.

“Canada’s initial retaliatory tariffs against the U.S. will remain in place despite President Donald Trump postponing 25% tariffs on many imports from Canada for a month, two senior Canadian government officials said. (see here)”

“We will not let ourselves be bullied, not with tariffs nor with threats about our legislation,” said Bernd Lange, a usually mild-mannered German Social Democrat who chairs the European Parliament’s international trade committee. (see here)

We would soon know whether the great negotiator is actually bluffing or is serious about his MAGA pledge; and is willing to make the US businesses and consumers (and the US economy) suffer medium-term pain, as the local manufacturing base is rebuilt (without the benefit of cheap and abundant immigrant labor) over the course of next 5-7 years.

Besides the tariffs, the POTUS has also threatened to withdraw from the multilateral institutional frameworks like NATO, the UN and IMF etc. The recent developments in Ukraine and Palestine indicate that NATO is no longer a potent deterrent to war, and the UN’s credibility is eroding at the fastest pace since the attack on Iraq on a false pretense of WMD. The withdrawal of the US (the largest fund contributor to these institutions) will only precipitate the inevitable.

…more on trade war tomorrow

The 45^th President of the United States of America (POTUS), Mr. Donald John Trump (Trump) has assumed office with an onerous promise to “Make America Great Again” (MAGA). In the past two months, POTUS and some of his team members have expressed their intention to implement radical policy changes in a variety of spheres.

A close study of the entire election campaign of Trump, his actions during his previous presidential tenure (2016-2020), his selection of team members for his latest presidential term, and his various utterances since the election results in November 2024, would reveal that as of this morning MAGA is mostly an aspirational slogan lacking a credible conceptual framework. For example—

·         Trump has spoken about strict border controls, tougher immigration rules, and restrictions on the skilled worker visa (H1B) program. Presently, many US corporations which would play a pivotal role in MAGA, have first generation immigrants as their top executives. There is an acute shortage of skilled tech workers in the US. MAGA would require a large number of new infrastructure construction projects requiring cheap labour. There is a sharp decline in the total fertility rate of the white native Americans; hence the demographic balance and stability of the US largely depends on the immigrants. Ironically, there is an abundance of immigrants in the governance team nominated by Trump. In fact, Trump is relying on South Africa born Elon Musk and Vivek Ramaswamy (born to Indian immigrants, and reportedly already considering withdrawing) to marginalize the infamous American Deep State.

·         Trump has been talking about adopting the pre-WW1 doctrine of isolationism (policy to not interfere in the geopolitical affairs of other countries) and making the US a dominant global force in the same breath. He has announced his expansionist agenda with élan. He apparently wants to buy Greenland, acquire Canada, control the Panama Canal and claim the entire Gulf of Mexico. With this intent, he may not only be sanctifying Russian claim on Ukraine and other countries claimed by the president Putin as historical Russian territories; Chinese claim on Taiwan, Northern and North Eastern Indian territories; Israeli claim on Palestine and territories of other neighboring countries; but also pushing the world back into pre-WW1 era of persistent conflicts, and colonialism.

·         Presently, the US derives most of  its power from (i) USD (being a global reserve currency); (ii) technological prowess (largely attained through luring talent from all parts of the world with a promise of great, fair and equal opportunity); (iii) profligate American consumers, largely fed on fiscal support and debt made possible by a huge trade deficit funded by the US trade partners by accepting USD (unsecured US Fed promissory notes) in lieu of their tangible goods and services; and (iv) the promise of the US to protect democracy and human rights, affording the US government a dominant role in the most multilateral agencies, and support of NATO forces in asserting its strategic supremacy. The proposed agenda of Trump directly hits at the core of all the pillars of support of the US.

I am obviously not very enthusiastic or unduly worried about Trump 2.0. I am expecting some disruptions in the next few months, before the tempers cool down, horses are tethered, and business becomes as usual. These disruptions will definitely reflect in the Indian stock prices also. It is for experts to slog and discern this impact. I have the privilege to approach the issue in a rather simple and nonchalant manner. …to continue tomorrow

In the past four days, my e-mailbox, WhatsApp message box and social media timelines have been inundated with copies of an Asia Pacific strategy report of a global brokerage. So far, I have received 127 digital copies of the 21 pages (5MB) report, with a rather Tharoorish title – “Pouncing Tiger, prevaricating Dragon”. (I needed to use a dictionary to find out the meaning of prevaricating). I am not sure how many of those sharing the report have actually read it. Most of them appear to have just forwarded it in the spirit of Diwali – just like Soan Papdi boxes exchanged on Diwali, which are never opened and tasted by intended recipients.

The strategy report makes two points that may be of any interest to the Indian investors – (i) Initiation of “Overweight China” trade in the month of September 2024 by some global brokerages was an error of judgement and needs correction; and (ii) the cut in India overweight from 20% to 10% was not warranted and is being restored.

It is important to note that brokerages remained overweight or equal weight on India, while leaning a bit towards China. This report is more about correction in China strategy and less about India. As of this morning no data is available as to how much selling the clients of this particular brokerage actually did in India since September 2024, and how much they would be buying in next few weeks to adhere to the brokerage’s strategy.

The reason cited for the change in strategy are:

a)    Trump will herald Sino-US trade war escalation. Chinese NPC stimulus is not reflationary. Elevated US yields and inflationary expectations would prevent the Fed from cutting further, thus limiting the scope for further stimulus by PBoC.

b)    India is amongst the least exposed regional markets to Trump’s adverse trade policy. FPIs are underexposed to the Indian equities and looking for buying opportunities. Valuations are now more palatable.

In my view, the brokerage might have committed another mistake to correct an earlier error. We still have two months before Trump’s inauguration and perhaps a few more months to see what his trade policies are going to look like, regardless of the election rhetoric. Six weeks may be too early to assess the impact of the Chinese stimulus. The latest earnings estimates used to derive the valuations of Indian equities might change in the next couple of quarters, if inflation does not ease and growth estimates are downgraded. There is no evidence that FPIs have remitted the dollars out of India in the past few months. The net FPIs flows have been positive (see here). FPIs may not rush to India with fresh bags full of dollars in the next few months. They may want to see how EM debt and currencies behave in 1H2025 in the wake of Trump and Fed policies.

In this context, I note the following, which makes me ambivalent about the impact of the change in heart of few global brokerages.

·         Trump has spoken extensively about onshoring manufacturing to the US. This forms the fulcrum of his trade policies towards China and other countries that run trade surplus with the US.

In this context, it is pertinent to note that the US is home to countless unskilled, obese, and unwilling workers asking for a raise in US$18-20/day minimum wage. Trump’s choice for health secretary, Robert F. Kennedy, Jr., is exactly not promising a program to make this workforce fit enough to work 50hrs/week. It is not clear how President Trump would propose to compete with US$350/month wage Chinese workers who are regimented, skilled and healthy enough to work 70hr/week.

·         In the year 2018, Trump imposed restrictions on export of high-end semiconductors to China. The Chinese government responded to this by investing massively in the high-end technology sector. Massive flows of capital were directed towards the industrial sector from real estate. Consequently, China is now close to attaining self-sufficiency in semiconductors. China has leapfrogged the US in several areas requiring high-end technology.

The point is that protectionist trade policies of the US may now help some of American businesses; but these policies may not hurt China in any significant way. China is even more geared now to export deflation to the western world, than before. The protectionist policies may impede India's interests noticeably.

·         Naseem Nicholas Taleb, regarded as a visionary by many market participants, has recently warned Elon Musk in no uncertain words. He wrote on X (formerly Twitter) “Business people want to make things function; bureaucrats like to perpetuate dysfunction. I fear for @Elon as he is stepping harder and harder on the interests of the Deep State. I will light a candle for him at the Monastery of Hamatoura.”

Obviously, there are reasonable doubts about the success of Team Trump in implementing their election promises, especially those concerning the bureaucratic reforms in the US.

·         The latest portfolio disclosures of Michael Burry, the legendary US trader/investor, suggest that recently he has been loading up on Chinese equities.