Do it yourself: Trump

Showing posts with label Trump. Show all posts

Wednesday, April 9, 2025

Tariff Tantrums – Where do we stand?

The global markets are shaken by the trade war initiated by the US by announcing arbitrary unilateral tariffs on all of its trade partners. Some large trade partners of the US, like China and EU, have reportedly threatened to join the war with full vigor, making the global market extremely jittery.

The prices of most risky assets and commodities have corrected sharply due to fear of widespread economic repercussions resulting in a global recession or even a depression like condition. The benchmark indices in most developed countries have corrected 8% to 18% in the past one month. Commodities, especially metals and energy, have also seen 7%-15% cut.

In my view, it may be a little early to assess the short-term impact of the latest events. Things are evolving fast and chances are that better sense would prevail and leaderships of the US and its trade partners would be able to prevent the current stalemate from becoming a game of ego between them; and arrive at a mutually agreed solution. Millions of research reports and several hours of media commentaries, analyzing the short-term impact of the latest tariff war, have already happened. I am in no position to add anything more meaningful.

However, if the situation does deteriorate and more people begin to think like Prime Ministers of Singapore (watch here) and the UK (read here), the global ‘reset’, we have been talking about since the global financial crisis (GFC: 2008-10), may take a tangible shape much sooner than presently anticipated. It is critical to make an assessment where would India stand in the new global order, if it were to take shape in the decade or so.

The impact of the GFC on financial markets was mitigated in a couple of years by collective efforts of the governments and central bankers. However, the social, geo political and economic impacts of the crisis largely remain unmitigated.

The "Reset" button pressed by the crisis has resulted in widening of socio-economic divide across the world. The geo political tensions have intensified materially. The rise in protectionism has adversely impacted global trade. The rising unemployment in Europe and most commodity dependent economies in Asia, Africa and Latin America, declining growth in China, substantial cut in developmental aid to least developed nations due to fiscal pressures, has caused widespread human suffering for over a decade now.

The onslaught of novel coronavirus (COVID-19) and Russian invasion of Ukraine, has accelerated the "Reset" process. I have written this before, but it would be in order to reiterate a brief account of the changes in world order that have taken place since the advent of the 20th century.

In 1917, the Russian revolution successfully dismantled the Tsarist autocracy and laid the foundation of the USSR. In the following decades, many smaller independent European states became subservient to a mighty Russian socialist army, and together formed one pole in the emerging bi-polar world, forever shrouded by the specter of cold war.

In the same year, the USA decided to join the War as an associate of the Allies - a development that tilted the scale in favor of the Allies, bringing the War to an end in 1918. In the following decades, the USA emerged as a formidable military and economic power, and led the democratic allies to become the second pole in the emerging bi-polar world.

The imperialist global order that existed in the preceding centuries began to dismantle. Many colonies of the European empires gained freedom. The British Empire that was built in three centuries and covered almost one fourth of the world population and area before the War, was completely dismantled in the following three decades. In these three decades (1918-1950), a new world order acquired a concrete shape. For the first time in modern history, the world adopted a rule-based order, characterized by multilateral agreements and institutions like the UN, NATO, WARSAW Pact, GATT, NAM, Bretton Woods, World Bank, energy cartel (OPEC), et. al. Mao, Israel, and the Cold War were key interludes in the main play. This world order lasted for about four decades.

The German Wall fell and the USSR disintegrated in early 1990s. This unleashed a new wave of globalization in a world dominated by just one superpower – the USA. Global Trade (WTO), Internet, dematerialization of assets, Europe integration into a single market, China's entry into mainstream global trade (through WTO), free flow of capital, G-20, BRICS, numerous FTAs, global war on Islamic fundamentalism, energy security, climate control and global financial crisis, dominated this phase.

Cracks started to emerge in the global order after GFC. The global economic behemoth China started to express its global ambitions in terms of domination over trade, technology and territories. Russia, which had become a dominant player in the global energy market, also expressed its ambitions. Both these countries now led by unchallenged, ambitious, and strong leaders were openly challenging the US hegemony; and looking for a rightful place for themselves in the global order.

In the past five years, the outbreak of a global pandemic and Russian invasion of Ukraine has accelerated the process of a reset in the global order. As things stand today, we could have a concrete shape of the new order emerging in the next 5-10 years. I personally do not believe that the emerging world order will be based on isolationism, parochialism, localization of trade and closed borders. Though smaller trade blocs, more regional blocs like the European Union, neutral currencies, and redrawn global maps may be some of the key features of such an order.

A more relevant point is where does India stand in this critical transition? I would share my thoughts on this next week.

Tuesday, April 8, 2025

Tariff Tantrums

Last week, President Trump announced a hike/imposition of tariffs on most of the USA's imports. As per the proposed tariffs that are presently scheduled to come fully into effect from 9^th April 2025, the Trump administration has proposed a 10% base tariff on all imports into the US. Over and above the base tariff, higher rates of tariff are applicable on several countries based on the trade deficit of the US with each such country.

The global reaction to the tariff announcement has been varied. Some trade partners like China have responded aggressively by announcing matching higher tariffs; whereas the others, like India, have adopted a wait and watch approach, hoping to find a middle path.

Apparently, the calculation of the proposed indiscriminate tariffs has been done through mindless spreadsheet application, using the recent US trade data. Though President Trump had made tariffs a key issue in his poll campaign, the administration appears mostly unprepared for this. The explanation offered by the US administration for taking steps is not convincing. For example, the arguments presented in an interview of treasury secretary Scott Bessant, remind of an old folklore that goes like this:

“Once a little lamb walked to the river to quench his thirst. At that time the king of the jungle, a Lion, was also drinking water from the river a few meters upstream of the lamb. The smell of this small soft lamb whetted lion’s appetite. He wanted to eat the lamb immediately, but the farce of being a just and kind king, he has perseveringly created over years, prompted him to look for a valid excuse to kill this small creature.

After thinking for a moment, he roared "How dare you make me drink dirty water?”. Not sensing the trouble, the lamb politely replied, my Lord, I am downstream, while you are drinking water upstream. It is me who is drinking your dirty water!”

Determined to kill the lamb, the lion retorted, “but why did you laugh at me last summer when I passed by your abode?". Now sensing some trouble, the lamb meekly replied, "My lord, it could not be me, because I was only born just a couple of months ago”. Unable to control his urge, the lion lamented, “If it was not you, it must be your mother. You must pay for her sins.” Saying this he jumped on the lamb and killed him.”

A career hedge fund manager, who has been feasting on the miseries of others all through his adult life, suddenly speaking the language of Karl Marx, and rooting for the hungry and homeless, would make sense only if he wears the rob of a monk and speaks from a monastery. It sounds even more unconvincing when seen in tandem with the DOGE’s move to end humanitarian aid, in some cases a couple of million dollars, to the world’s most poor and disease prone people.

Listening to President Trump and his team members, I get a vivid impression that Tariff tantrums they are throwing are just an ill-thought excuse being used for a bigger design. This is clearly a fight to stay relevant in the emerging world order. The US economics and demographics do not support its pole position in global geopolitics – a position they have enjoyed and greatly benefitted from for over 80 years now.

The US gained its pole position by dropping “Fat Man” (Nagasaki) and “Little Boy” (Hiroshima), eighty years ago, and has been repeatedly shocking the global community through economic, financial and geopolitical shocks to retain this position. The latest tariff tantrums may just be part of that series.

I do not subscribe to the conspiracy theory doing rounds on social media that this may just be a ploy to push the US yields down, to ease the fiscal pressure and facilitate smooth refinancing of the debt maturing in the next couple of years, for three simple reasons:

(i) The US mostly borrows in its own currency. A simple quantitative easing (USD printing) would be sufficient to refinance debt.

(ii) Bond yields are mostly a function of demand and supply for the underlying bonds. Tariff war would certainly weaken the US economy - at least in the short term (2-3years), if not structurally. Besides, it will also trade linkages of the US. Weaker growth (weaker USD) and declining external linkages would invariably result in poor demand for bonds, hence higher yields. To the contrary, a strong economy with contained inflation (cheaper imports) and stronger external linkages is more likely to stimulate higher demand for the US bond and hence lower yields.

(iii) Approximately, one third of the US public debt (US$8-9 trillion) is owned by the foreign entities. Out of this, Japan (US$1.1 trillion) China (US$800bn) and the UK (US$700bn) are major holders of the US debt (US Treasuries). A full-fledged trade war could result in these holders optimizing their UST holdings and might further reduce demand for the US debt.

There is also a serious disconnect between the immigration policies and the objective to make the US a manufacturing power again. The US wage structure, average US citizen skill levels, the cost of imported raw material and capital goods post tariffs, and a weaker USD may not be conducive for an efficient manufacturing ecosystem. The US would need cheap foreign labor, strong USD, strong trade linkages with suppliers of raw material and engineering goods for at least one decade to relocate manufacturing back to the US.

Notwithstanding the brouhaha over the US$5mn gold card, in the absence of an assurance of a free, liberal, diversified, inclusive and equitable society and stable policy environment, not many investors and highly talented workers may find the US a suitable investment/career/study destination. The European competitors may be happy to host these investors/workers.

In my view, Trump’s tariff tantrums are part of the traditional US ‘shock and awe’ tactics. They will test waters with this sometimes and stage a strategic retreat, if it does not show the desired effects, viz., reinforce the US position as undisputed superpower; achieve fiscal correction without triggering a deeper demand recession, and probability of putting Trump’s face on the Mount Rushmore. However, if it does show the desired results, no one should have any strong reasons for worrying.

In the worst case, if the US stays committed to tariffs and its trade partners prefer to contest rather than yield, we must be prepared for the end of the rule-based global order that has prevailed since the end of WWII. The age of Vikings returns. All powerful nations begin campaigns to acquire territories and resources. The weak nations get subjugated. Poor and starving people are made slaves. Indentured laborers would rebuild empires, before the disease and death destroys it all.

In this context, it is important to listen to the warning of the Prime Minister of Singapore.

Wednesday, March 26, 2025

Loving silver on my scalp

A friend recently remarked, “I don’t want to be young for the first time in my life”. He was alluding to the challenges Gen Z (born between 1997-2012) and Generation Alpha (born after 2012) children are likely to face in the coming years. I fully agree with him. The silver on my scalp gives me comfort that a relatively well lived life may end as comfortably for me, and many people my age. But young people in their 20s have no such comfort.

The people in their late twenties have already stood witness to three massive economic/market crises (dotcom burst, subprime burst and Covid-19 pandemic) that (i) were not caused by a war or natural disaster; (ii) did not cause human suffering which was anywhere closer to the crises witnessed during 19^th and 20^th centuries; and (iii) were brought under control through monetary and fiscal stimuli within a short period of time.

In the past twenty-five years, the governments across the world have increasingly become more socialist. While serving the interests of crony capitalists, they have made sure to provide basic necessities of life to the common people – not only in their jurisdiction but much beyond it. The central bankers across the world have remained accommodative – keeping the markets sufficiently liquid, and cost of capital low to fuel consumption, support higher asset prices and ensure availability of adequate risk capital to fund tech innovation.

This generation has mostly lived in low inflation, low interest rates, constantly improving productivity due to tech innovation, accelerating speed of everything, improving longevity, globalized economies, contained geopolitical conflicts, and an environment promoting individualism against the spirit of society. Accordingly, this generation carries a strong faith in the central bankers, governments, technology, medicine, and mobility. Personal savings, family, austerity, tolerance, sacrifice, social ethos, patriotism are only a few of the concepts this generation may not be sufficiently versed with.

A famous Chinese curse goes, “May you find what you wish for”. The Gen Alpha, perhaps is affected by this curse. Riding the broomstick of unhindered aspirations, they feel entitled to get freedom, liberty, comfort and convenience, despite being mostly selfish in their approach towards society in general. They take peace and society support for granted. The very freedoms and comforts this generation seek might become their undoing, as they may not be adequately prepared for tougher times.

The events of the past few years are suggesting that things may change rather dramatically for this generation in the coming decade.

· The governments are increasingly acquiring parochial character. The focus is evidently shifting to retraining fiscal profligacies. Frugal governments mean the younger people might have toll hard to make a living for themselves. This will happen when the technological developments would have eliminated most of the jobs requiring unskilled or semi-skilled workers.

· The central bankers, as evident from the recent Fed commentary, have developed the fear of the endgame of this unmindful monetary expansion. Cheap and abundant money may not be available to fund redundant fancy tech innovations.

· The efforts of the government to define the narrower contours of personal freedom and liberties are also conspicuous from the US to India. Conforming to social norms may become essential for survival, if this continues like this.

· Excessive use of chemicals and changes in lifestyles have severely affected the procreation capabilities of both men and women, adversely affecting the demographics. “Not having family” may soon become a disease rather than an option.

· Climate change may make food and water scarce for more than half of the world.

· Ultra nationalism may trigger a war, for which not many youths would be prepared. This could lead to several times more lethal digital, chemical and even nuclear attacks. The misery that would follow is unfathomable. Of course it is the worst-case possibility, not a baseline assumption.

I am certainly not suggesting an end of the road for Gen Alpha. I am just expressing my sadness for the fact that my children may have to learn a few life lessons rather painfully.

I am confident about the capability of the young generation to quickly adapt to the changing environment. Gen Z and Alpha have grown up with smartphones, not stability—they’re naturally used to disruption. They might lack the thrift or stoicism of boomers, but they’ve got agility and a native grasp of systems (tech, social, political) that could see them through. I am sure the pain would forge something new, not just break them.

I would be keenly watching the developments in the areas of food and water; particularly, how the food production shifts from the farms to factories.

Tuesday, March 25, 2025

View from the Mars - 5

Continuing from the last week (View from the Mars – 4)

For a small investor like me, whose investment spectrum is limited to the locally available instruments and opportunities, it is critical to assimilate the impact of the global events on the local economy and markets. A natural follow-up would be to assess if a change in investment strategy and asset allocation plan is required to factor in the impact of the global events.

In most cases, the impact of global events is temporary and does not warrant any change in the investment strategy and/or asset allocation. However, some global events could have a lasting impact on the domestic economy and markets. Such events often require material change in the investment strategy and asset allocation.

It is important to note that in the past three months, the world has not witnessed any event that was not widely anticipated. The shift in the US policy (fiscal and monetary) paradigm was widely anticipated and documented. The response of the trading partners is also more or less on the expected lines. The geopolitical developments, economic growth, currencies, equities, bonds, commodities, etc. are mostly moving in the direction as was widely anticipated. In my post about outlook and investment strategy for the year 2025 (shared in the beginning of 2025), I had shared my anticipation of these events and consequent adjustments in my investment strategy and outlook.

Notwithstanding, let me again note down the important current global events that could have a material impact on the Indian economy and markets. (Please note that I have taken some inputs from AI tool Grok 3 (beta version) in preparing this post.)

Opportunities for India

Supply Chain Shift: Trump’s tariffs are pushing U.S. firms to diversify away from China. There is an potential for India to grab this opportunity. In 2024, India’s electronics exports to the U.S. spiked 22%. The Bilateral Trade Agreement (BTA) framework, as discussed by the Prime Minister and White House during the PM's February visit, could open bilateral trade opportunities worth US$200bn by 2027.

Visa curbs (H-1B denials up to 35%) might force Indian IT to onshore talent, boosting hubs like Hyderabad—Wipro’s hiring 10,000 locally, providing impetus to local economies. Less immigration pressure might also redirect diaspora skills home, powering startups. As per NASSCOM, 1,200 new startups became operational in 2024.

Defense and Tech Edge: Trump’s anti-China could tilt trade balance in favor of the Quad. India has reportedly already moved forward with $5 billion arms deals with the US, since January. COMPACT tech transfers (AI, chips) could leapfrog India’s R&D. India’s premier defense research organization (DRDO) is eyeing U.S. quantum tech.

Energy Stability: Peace in Ukraine and the Middle East, after the US intervention, could steady oil at $70-$75. India, which is 80% oil-import-dependent, saves $10 billion annually if prices don’t spike. LNG from Qatar gets cheaper too.

Trade normalization: A calm Black Sea and Red Sea (Houthi attacks down 40%) unclog shipping, allowing India’s $45 billion EU exports to flow smoothly via Suez. Peace could also revive the International North-South Transport Corridor (INSTC) with Russia-Iran, cutting freight costs 20%.

China’s Retaliation Opens Doors: China’s counter-tariffs—25% on U.S. autos and tech imports and yuan devaluation (5% drop, PBOC) makes Chinese goods pricier. India’s textiles (now up to 20% cheaper than China’s) and pharma generics (40% of the U.S. market) could take some of the US’s market from the Chinese suppliers.

Investment Inflow: China’s economic slowdown as a consequence to slower exports could reverse the flows of global capital (FDI and FPI) towards India. Though FDI into India hit $70 billion in 2024, up 12% yoy, the rate of growth in FDI flows has been declining for a few years. Weakness in USD and sharp fall in the US treasury yields could turn the global investment flows towards the emerging markets. India being one of the major emerging markets, would certainly stand to benefit.

Cheaper Capital: U.S. 10-year yields dipped to 4.3%, EU’s at 2.1% (ECB). India, having over $400 billion of external debt does benefit directly from the lower yields. Even Rupee bonds could draw more investors if yields keep sliding, easing pressure on domestic banks which are constrained by an adverse credit-deposit ratio for many months.

Export Boost: Falling inflation (U.S. PCE at 2.7%, EU at 2%) lifts disposable income of Americans and Europeans. As per GTRI, India’s consumer goods (handicrafts, apparel) could see a 10% uptick in demand due to lower inflation and a weaker dollar.

Threats for India

Export Pain: India’s $77.5 billion U.S. exports face a $7 billion hit from tariffs. Textiles and gems bleed the most. IT’s $108 billion U.S. revenue stalls if H-1B cuts force wage hikes (Trump’s 50% proposal, per ORF). Remittances (~$10 billion from the U.S.) could be materially affected.

Retaliation Risk: Retaliatory tariffs on India’s exports to the US could potentially dent some of the $45.7 billion trade surplus India enjoys with the US.

Commodity Competition: As peace returns to Russia, Ukraine and the Middle East, India’s petroleum product export and wheat exports in particular, may be adversely affected.

Dumping Threat: If China floods global markets with cheap goods, India’s MSMEs could be adversely impacted. China’s ~$30 billion trade surplus with India could balloon, straining forex reserves.

Border Tension: China’s tariff war might spill into Ladakh and Arunachal Pradesh, straining diplomatic relations and further fueling tension..

Capital Flight Risk: If U.S./EU yields crash further, investments could flow to the developed economy bonds anticipating further gains. China’s stimulus could siphon even more funds.

Demand Softness: Deflationary pressure in the West might cap India’s export growth—gems and jewelry stagnate if wallets tighten.

Conclusion

India could materially benefit from the current global events, especially U.S.-China fallout—supply chains, tech, and peace-driven energy savings could push GDP past 6.5% by 2027. However, we need to see proactive policy response and strong execution to capitalize on this opportunity. A long-term strategy is also needed to mitigate the impact of frequent tariff and VISA threats. China’s countermoves might flood or flank India, and Western yield drops could make capital flows very volatile and unpredictable. Peace helps, but only if India diversifies fast—BRICS, EU, ASEAN—to offset U.S. volatility. Trump’s bluff might crumble by 2026 if China holds firm, amplifying India’s export risks but opening manufacturing doors. A Middle East flare-up could spike oil and ruin it all.

Overall, the situation, as anticipated earlier, is very volatile and unpredictable. For now, it does not warrant any change in the investment strategy, as shared in the beginning of the year:

“2025 may be a far more challenging year for investors as compared to 2024. The volatility and uncertainty may increase materially, requiring investors to focus on capital preservation rather than making some real returns.

I shall maintain a standard allocation in 2025 and engage in active trading in my equity and debt portfolio to optimize return using the benefit of large swings. At the same time, I would continue to look for opportunities in the emerging themes for the next many years and build a long-term portfolio. Returns will not be my primary focus in 2025.”

Wednesday, March 19, 2025

View from the Mars - 3

About 17 years ago, a global financial crisis (GFC) engulfed the global markets. The impact of the crisis on financial markets was mitigated in a couple of years by collective efforts of the governments and central bankers. However, the social, geo political and economic impacts of the crisis largely remain unmitigated even today.

The "Reset" button pressed by the crisis resulted in widening of socio-economic divide across the world. The geopolitical tensions have intensified materially with rise in nationalism, protectionism and parochialism. This has not adversely impacted global trade. The rising unemployment in Europe and most commodity dependent economies in Asia, Africa and Latin America, declining growth in China, substantial cut in developmental aid to least developed nations due to fiscal pressures, has caused widespread rise in human suffering.

The COVID-19 pandemic further accelerated the "Reset" process, paving the way for the emergence of a new global order.

To put things in a right perspective, it is pertinent to note the changes in world order that have taken place since the advent of the 20th century.

In the same year, USA decided to shed its long-held policy of isolationism, and joined the War as an associate of the Allies - a development that tilted the scale in favor of the Allies, bringing the War to an end in 1918. In the following decades, the USA evolved into a formidable military and economic power that led the NATO allies to become the second pole in the emerging bi-polar world.

It took three decades for the new order to consolidate. The imperialist global order that existed in preceding centuries began to dismantle. Many colonies of European empires gained freedom. The British Empire that was built in three centuries and covered almost one fourth of the world population and area before the War, was completely dismantled in the following three decades.

The new order was characterized by the UN, NATO, WARSAW, Mao, Israel, NAM, Bretton Woods, World Bank, Cold War, energy cartel (OPEC), WEF, et. al. The globalization that was a norm prior to the first War was completely overpowered by the forces of nationalism and protectionism. This world order lasted till the German Wall fell and the USSR disintegrated in early 1990s; unleashing a new wave of globalization. In this world order, ‘market’ and ‘multilateralism’ was the dominant theme.

For two decades, since early 1990s, the global narrative was driven by global trade (WTO), Internet, digitalization, dematerialization, Europe integration into a single market, China's entry into mainstream global trade (through WTO), free flow of capital, G-20, BRICS, numerous FTAs, global war on Islamic fundamentalism, energy security, climate control, until the global financial crisis pressed the reset button and Covid-19 pandemic added further impetus to the process and brough us on the threshold of a yet new global order.

The imperatives of the new world include—

· Necessity to exit the accommodative monetary and fiscal policies originally adopted to mitigate the impact of GFC, which have become completely unsustainable after further loosening to mitigate the impact of Covid-19 pandemic.

· Need to find an alternative to the USD, which continues to be the only global currency despite material weakness in the underlying fundamentals.

· An urgent need to correct the imbalances that have creeped into global trade in the past three decades, due to aggressive growth agenda pursued by China & OPEC, technology developments in the US, persistent low yields in EU and Japan, and economic sanction on Russia, etc.

· Weakening of old trade and geopolitical blocks weakening and emergence of new trade and geopolitical alliances, especially Russia, China and Iran nexus.

· China is accelerating the drive to assume global leadership through mega initiatives like One Belt One Road (OBOR) and China Pakistan Economic Corridor (CPEC) and enlarging BRICS.

· Weakening of the European Union due to the exit of the UK.

· The US withdrawing from conflict zones like Afghanistan, Iraq, Libya refusing to engage in Syria, and ignoring genocide in Palestine, signaling a paradigm shift in its policy towards globalization and, free trade.

· Worsening of the refugee crisis in the western Europe.

· India’s effort to emerge as an alternative manufacturing hub to China, for the developed countries seeking to derisk their supply chains.

· Growing irrelevance of the multilateral institutions like the UN, OECD, IMF etc.

It may be little early to speculate on the likely contours of the emerging new world order. However, I do believe that the new world may not be excessively localized, nationalist and/or protectionist. Nonetheless, it is entirely possible that several new trade and geopolitical blocks get form, and define the contours of the new world order.

….more on this tomorrow.

Tuesday, March 18, 2025

View from the Mars - 2

Continuing from my previous post (View from the Mars)

“Make America Great Again” (MAGA), campaign of President Trump has been one of the most successful political campaigns of recent times. The campaign won Mr. Trump and his Republican Party (GoP), a clear control of the white house, the Senate and the Congress.

From the campaign material available publicly, it is not clear what is the reference point for President Trump’s MAGA pledge. The campaign did not seem to have specified when did the greatness of the US begin to diminish and how much of the global stature, it supposedly enjoyed at some point in history, has been lost. For the lack of adequate information, it is safe to assume that the campaign of Mr. Trump, referred to the term of his predecessor, Joe Biden (2021-2025), as period of decline of America, and intends to revert to the status quo ante as on 19^th January 2021, when he vacated the White house after a four-year stay, and carry forward the unfinished agenda from his first presidential term.

A review of Agenda:47 (Trump’s campaign for the election of 47^th president of the United States), highlights that MAGA plan of Mr. Trump involves the following five key agenda points:

(i) Reverting to pre-WW1 policy of isolationism (no interference in the affairs of the foreign countries where the US interests are not directly affected), strengthening the military, building a missile defense shield for the US, de-pledging from the NATO and UN, etc.;

(ii) Assuming full control of government by eliminating agencies, departments, posts that can challenge the POTUS, using military for eliminating internal threats, and enhancing the powers of POTUS;

(iii) Limiting immigration into the US to the qualified professionals who can contribute positively to the growth of US economy & society, and systematically expelling the foreign nationals who entered the US illegally or are burdening the US economy in any manner;

(iv) Protecting and advancing traditional (Christian) values by curtailing liberal ideas of diversity, equity, inclusion, radical ideologies (e.g., gender affirmation), dealing strictly with the menace of drugs, etc., and a complete revamp of the education system, especially by dissipating the resources of private universities to fund a sate sponsored American Academy.

(v) Strengthening the US economy, mainly through – (a) energy dominance by diverting focus from clean energy to the conventional energy and producing more for export; (b) balancing the US federal budget and bring interest rates down; (c) turning current account positive by onshoring manufacturing at a large scale and disincentivizing imports through higher tariffs; (d) making large investments in rebuilding infrastructure; (e) revamping the healthcare system; and (f) reducing tax rates to support household consumption and savings;

This agenda certainly resonated with average Americans households, especially conservative rural folks; financially stressed (and unemployable) urban households and white supremacist. They have been led to believe that immigrants have stolen their jobs; Canadian, Chinese, Mexicans and Indians are responsible for inflation & unemployment in the US; liberals have snatched their conventional parental rights; and the US has been unnecessarily and involuntarily dragged into wars in middle east, east Europe, Afghanistan, Vietnam etc., and withdrawing from these wars will save the US trillions of dollars; climate change is a hoax and they can get their tanks full by paying $6.49, if the US begins to drill gain.

I am not at all competent to comment on the US politics, US economy, and their geopolitical strategies. Nonetheless, I feel that the MAGA agenda of President Trump is nothing but an extension of the nationalist agenda that became popular post global financial crisis and gathered significant momentum post Covid-19 pandemic.

Several countries across the globe have seen ultra nationalist (mostly right wing) political parties gaining power; governments have preferred bilateral trade agreements over multilateral engagements; and major players of WWI and WWII are no longer shying away from expressing territorial and/or economic ambitions. Brexit is one of the examples of isolationist tendencies capturing politicians’ and the common public’s imagination. President Trump may just be following the trend.

In my view, ‘unsustainability’ might be at the core of this tendency. The profligate fiscal and monetary policies followed in the past two decades have definitely resulted in unsustainable consumption patterns and ecological climate damage. Given the massive demographic and economic inequalities, at global level and within countries, it may be almost impossible to find a universally acceptable solution for this unsustainable growth paradigm. Perhaps, therefore, societies are looking inward to set things back on track.

These days, conservation of resources, protection of territories, reversing demographic decline, reducing debt, promoting patriotism & nationalism are some of the popular themes with politicians. They are not hesitant in using religion, traditional & cultural values to emphasize on the necessity of authoritarianism (or a weaker democracy) in pursuing their agenda.

Historically, similar situations have invariably resulted in major conflicts and emergence of a new order. The moot point is whether we have reached the break point yet, or it may take a few more years (or even a couple of decades) of shenanigans to reach there.

Thursday, March 13, 2025

View from the Mars

Have you ever wondered why—

· In the post WW2 popular movies and novels, all mischievous and malevolent inhabitants of other planets and galaxies (‘Aliens’) attack only the United States of America (the US), especially the richest cities of New York and Los Angeles!

Whereas, there is evidence of just one attack (9/11 WTC attack in NY) on the US soil by a non-US citizen, in the post WW2 period.

· Mostly, agents of the US secret services (or in few cases agents of the UK secret service) assume the responsibility of saving the earth from an imminent destruction (‘Apocalypse’) and always achieve the task successfully!

Whereas, there is overwhelming evidence of multiple failures of the US secret services. For example, they failed to prevent assassination of President Kennedy (1963); attack on WTC (2001); Capitol riots (2021); assassination attempt on Trump (2024). They also failed miserably in Vietnam, Cuba, Afghanistan, Palestine, Iraq, Pakistan, India, Maldives, Ukraine, etc. There are many instances of the US secret services or armed forces failing to prevent a major conflict or coup. In fact, the US is the only state to have used atomic weapon in the history of mankind.

· A vast majority of US citizens truly believe in supremacy and superiority of their country?

Whereas the fact is that a significant proportion of the US population is unhealthy, unemployable, financially insecure, and indebted. The country is being basically pushed by brilliant immigrants, lured from developing countries, through attractive scholarships, and promises of liberty, equality, inclusion etc. Without the promise of DEI (Diversity, Equality, Inclusion), half their universities could become unviable, making higher education even more inaccessible for a large majority of the local population.

To joke, the US is the boy, who is a poor cricket player but owns the only bat available to the team. He is entitled to play as the captain.

The short point is that the programs like USAID (mostly a disguise to bribe foreign governments and think tanks enjoying significant influence on their respective governments), DEI, NATO financing, birthright citizenship, generous contributions towards the IMF, UN and Red Cross etc., have earned the US a wider acceptability. The world has ignored all its misadventures, atrocities, and exploitations including Vietnam, Afghanistan, and Iraq.

If President Trump and his advisors want to end these programs, throw out cheap labor and brilliant students, weaken USD, alienate trusted and old-time allies like Canada & Germany, push the allies like India away and closer to the opposite camp (Russia and China), and risk the presence and security of the US resources scattered all across the world they ought to have a full proof plan that is still not known to us.

Who knows, maybe they are just testing the waters by bluffing the world and do not intend to carry out much of their threats. Maybe they would tactically unroll most of their actions taken in the past two months, changing the nomenclatures of programs like USAID.

Notwithstanding, one thing is very clear that the US economy is weakening and MAGA is a much longer project than Mr. Trump's presidential tenure. …more on this next week.

Wednesday, March 12, 2025

Trade war cannot quick-fix

In the year 1689, British monarch William of Orange put steep tariffs on French wine. He wanted to encourage the British to drink their own booze - make and drink. It was not a great idea because without wine, Britain turned to the hard stuff - gin. So, for the next 50 years, England was in the grip of the so-called gin craze. And newspapers wrote about the surge in crime and death and unemployment.

In the 18th century, Britain put trade restrictions and taxes on tea being shipped to the colonies. This eventually led to the Boston Tea Party, an iconic event in the American war for independence.

In the 1800s, the Brits were importing a lot of tea from China, and they didn't like the trade deficit, so they started to export opium to China, which caused an opium epidemic in China. China put a tariff on opium and then banned it altogether. This led to the very bloody Sino-British Opium Wars. The Qing lost the war. This defeat is popularly believed to be the first step in the direction of establishing modern day China.

Restrictions on the trade of cotton textile, indigo, salt etc. by the British empire on India inspired many key events in India's war of independence.

Soon after its unification in 1871, Italy turned to protectionism to foster its “infant” industries. It terminated its trade agreement with France in 1886; raised tariffs as high as 60 percent to protect its industries from French competition. The French government responded by passing the highly protectionist Méline Tariff of 1892, which famously signaled the death knell of the country’s flirtation with free trade. This eventually pushed Italy closer to Germany and Austria-Hungary in the years leading up to the First World War.

A famous example of protectionism gone awry is 1930’s Smoot-Hawley Tariff Act—which along with similar protectionist measures enacted around the globe—helped torpedo world trade, killing two third of the global trade, and exacerbate the Great Depression leading to WWII.

In the post WWII era, US trade restrictions on Cuba, Iran, Iraq, Russia, North Korea, Syria etc. have had a significant impact on global strategic balance.

Wider economic sanctions on India in the wake of 1998 nuclear tests, helped India develop indigenous technologies and evolve as a major power in space technology.

There is a strong view that America’s “trade war”, with Japan in the 1980s, was one of the best things that ever happened to American industry and consumers, because American businesspeople rose to the challenge of the time. The "quality movement" spread across the country. Businesspeople, previously outraged by the Japanese “stealing” trade secrets, decided to join the club and took to “benchmarking” on an industrial scale, often with Japanese companies as their targets. The benefits of all that attention to quality were large and durable for US businesses and consumers. In the end, the “war” did not prove to be destructive.

The short points are:

· Trade wars perhaps as old as the cross-border trade itself.

· Trade wars have often culminated in larger geopolitical conflicts and resulted in changes in the global maps.

· Trade wars have been mostly caused by (i) distress in the domestic economy of the aggressor, promising protection and assurance to the local businesses; and/or (ii) eroding credibility of the extant political leadership, resulting in such leadership raising the rhetoric of aggressive-nationalism and external threats to the national integrity to protect its position.

· There is evidence of trade wars causing structural shifts and paradigm changes in the global economy. However, there is little to suggest that but for trade wars, the world would have been a better place.

In my view, the latest specter of a wider trade war has been unleashed by the US administration to find a quick-fix solution to economic malaise, the US economy is suffering from nearly two decades of fiscal and monetary profligacies.

The US public debt has increased from US$3.41 trillion in the year 2000 (~35% of GDP) to US$29 trillion (~105% of GDP) currently. In this period, the fiscal deficit has risen from a US$236 billion surplus in the 2000 to a deficit of ~US$1.8 trillion currently. This is obviously not sustainable and needs to be corrected.

The moot point is “Whether trade war is a good solution for correcting historical mistakes?”

Tuesday, March 11, 2025

The master failing the first test

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

Wednesday, February 5, 2025

3D view of market – Deleveraging, Demographics and Deflation

“There are events in the womb of time, which shall be delivered in time”. (Othello, William Shakespeare)

Beginning of the current year, I commented that “the trend seen in the past few months is indicating that the conditions might change materially in the next 12-24 months. The macro trends may become ambivalent and unpredictable. Investors may need to make choices; and the return they would earn on their investment portfolios would largely depend on the choices they would make. Making right choices, in my view, would be the central investment challenge for the year 2025.”

Barely one month into the year and it appears that earth already witnessed many seasons. The conditions are becoming more uncertain with each passing day. The 47^th President of the United States (P47), appears in a tremendous hurry to deliver on his promise to Make America Great Again (MAGA). He is using all his negotiating skills to secure good deals for his country. How much success will he achieve with his aggressive approach, we would only know with passage of time. Nonetheless, with his initial actions he has created a fair degree of uncertainty in the minds of his political opponents, trade partners, strategic partners, competitors and markets.

While I continue to maintain that investors would be better off avoiding a macro trade and focusing on individual business stories in the next 12-24 months, the three macro trends worth including in the matrix for identifying and evaluating individual business stories are Deleveraging, Demographics and Deflation.

Deleveraging: The US Fed has contracted its balance sheet by US$2.1trn since the beginning of its monetary tightening (QT) program in April 2022. The total assets held by the US Fed are now lowest since May 2020. It would need to unwind another US$2.7trn to completely undo the Covid related monetary expansion. Besides the US Fed, most other central bankers have shown a tendency to tighten the money supply by reducing their asset holdings. The Bank of England balance sheet is following the same trajectory as the US Fed. BoJ has not expanded its balance sheet in the past couple of years and cut the size of its asset holdings in recent months. Even RBI’s balance sheet has contracted in the past few months.

If we take the plan of P47 at par value, we are staring at one of the biggest fiscal corrections in modern history. Most other major developed and developing countries are also progressing on the path of sustainable fiscal corrections.

This macro deleveraging at the global level might reflect in the corporate and household balance sheets sooner than later. But for a major natural or manmade disaster, we should be factoring in sustainable governments, lower rates and adequate household savings in our investment strategies.

Demographics: One of the most critical trends in a large part of the developed world is deteriorating demographics. Most European and LatAm countries, the US, Canada, Japan, China, South Korea, Thailand, etc. have their total fertility rates fallen below the replacement ratio (implying their population is now on a declining path). The proportion of the working age population in these countries is decreasing fast. The population in China has already peaked and the population in India is expected to peak much ahead of the previous estimates of 2050.

This demographic trend appears structural and irreversible. With deeper and wider integration of technological advancement in social and personal life, the need & space for human interaction is on the decline. Financial and professional constraints are adversely impacting the capability and willingness to commit to personal relationships. Stressed and hectic lifestyles are adversely impacting the fertility of humans. There is nothing to suggest that these trends could change in the foreseeable future.

Obviously, the demographic trends will reflect on the aggregate demand as well as the demand mix.

Deflation: The mix of deleveraging, ageing demographics and superior productivity gains through technological advancements may lead to resumption of the pre-Covid deflationary trend. The supply lines disrupted due to Covid related restrictions and geopolitical developments post 2021 have mostly been restored. Save for a totally unexpected development, the current trend appears that a workable global trade balance may be achieved within the next 12-24 months.

With almost all major global market forces (the US, China, Germany, Japan, South Korea, France and the UK account for ~40% of the global trade) focused on repairing and strengthening their domestic economies, it is more likely a mutually beneficial global trade framework will emerge after the initial aggression of the P47 brings all trade partners to the negotiating table. This framework would, among other things, will certainly dampen the inflationary expectations.