The Times They Are A-Changin’: America Sneezes and …… 

 

 

“Oh yeah, a love for each other
Will bring fighting to an end”  

 

We are now only weeks away from the mid-terms, and the possibility of a political deadlock, leaving  Trump a lame-duck president. This could, in-turn lead to increased polarisation, shutdowns, budget confrontations, and delays to effective policy. 

 

However, the results might be closer than expected if Trumps oligarchs use their financial muscle to buy a result. There is also voter suppression, a constant and pernicious underbelly to the elections, and representing a threat to US democracy itself. 

Trumps’ travails are entirely of his own-making. 

His pre-election bragging was going to see him save the world in 7-days; resurrecting US industry, banishing inflation, ending the war in Ukraine, and keeping the US out of wars. 

Instead, he was hoodwinked by Israel into starting a war with Iran, which the US is losing. This has seen inflation, which had already spiked upwards because of his tariffs, worsen.  

In this week’s speech to the UN, he commented on the war, saying:  “I have a big decision to make. Will a deal be made with Iran that lets them rebuild and create a far greater country than it ever was before, maybe one of the greatest in the Middle East or even the world? Or do I annihilate the Islamic Republic and do it quickly, never giving them a chance to kill and destroy people and countries again? Do I drive them into hell with no chance of survival and no hope of future greatness or generations?” 

Much of the Iranian delegation walked out. 

 

‘Do I drive them into hell with no chance of survival and no hope of future greatness or generations?’

 

Turning his attention to Cuba, he said: “My administration is also seeking a fundamental change in the situation in Cuba,” Trump said, “where the communist regime is under great pressure, the biggest pressure they’ve ever been under. It’s an absolutely failed state. It’s failing like never before and it will fall. Marco Rubio is handling a negotiation. He’s deep into negotiations with Cuba. Let’s see what happens.” 

The Cuban delegation walked out. 

Trump then went full white nationalist, accusing the “U.N.’s top human rights officials” of wanting the U.S. “to open up our borders to gangs and criminals from [the] world’s most dangerous places.” 

 

‘His tactics included bullying and humiliating Ukrainian President Zelenskyy during his visit to the White House, followed by cutting-off military aid’

 

Turning to his pledge to end the war in Ukraine, this unravelled when it became apparent he expected  Ukraine to surrender. 

His tactics included bullying and humiliating Ukrainian President Zelenskyy during his visit to the White House, followed by cutting-off military aid. However, instead of forcing Ukraine to capitulate it pushed them further towards European democracies, whose support enabled them to take the fight to Putin, using their own, home-grown, drones and cruise missiles to strike Russia’s energy infrastructure. 

So effective have these strikes been that they have severely impacted refining capabilities, especially diesel, which has replaced crude oil as the key bottleneck in the global energy crisis; diesel currently trades at > $200 a barrel. 

Having betrayed Ukraine to Putin, Trump is now expects Zelenskyy to go easy on Russia because the impact of their attacks are hurting Republicans’ prospects in the midterm elections.  

As has been said previously, the crisis is now about petroleum products refined from crude oil, rather than petroleum itself. Matthew Dalton, in the Wall Street Journal, wrote: “Refineries Are Now the Main Chokepoint for Global Energy Supplies. 

“The diesel blocked in the Persian Gulf is around three times as large as supplies missing from Russia compared with before the Iran war.” 

 

‘diesel currently trades at > $200 a barrel’

 

Highlighting his desperation, last week, Trump prematurely announced an energy ceasefire under which Ukraine had agreed not to hit Russian energy targets and that “Russia has agreed to do likewise!” Unfortunately, no one told the combatants! 

The failures of  US and Russian militaries was highlighted by António Guterres, the Secretary-General of the UN, who said that the world’s superpowers have learned that “their power isn’t so super. That their power has limits.” 

Trump has been true to his word on immigration, although he is likely alienating a majority of the electorate with his ethnonationalist measures, which appear to be based on exploiting a loophole in US law. 

Specifically, it is illegal to send people back to countries where they are likely to be persecuted, therefore the Department of Homeland Security is deporting migrants and asylum seekers to third countries, with 35-deals in place. 

These deals are supported by state department using its foreign aid budget to sweeten them, allocating funds to UN agencies that support migrants in some of the third countries. 

Unfortunately, the net result appears to be the receiving countries deporting people them onwards to where they initially fled from. 

A US federal appeals court recently ruled unanimously that the policy was unlawful, violating due process by failing to give people enough notice of the decision to deport them, or the chance to legally contest it. 

Globally, Trump’s economic policy of tariffs, his needless wars, and encouragement of Russian belligerence towards Ukraine, has placed considerable strain on global economies.  

 

‘Trump’s economic policy of tariffs, his needless wars, and encouragement of Russian belligerence towards Ukraine, has placed considerable strain on global economies’

 

US government borrowing cost are close to their highest level since 2007, with knock-on consequences for the finances of households, businesses, and other governments worldwide. The fear isn’t only consigned to the inflationary costs of his wars, but also his tax and spending plans which has seen the national debt top $40tn (£29.9tn). 

John Higgins, the chief economic adviser at Capital Economics, said:“ While we aren’t convinced that 5% is that ‘magic’ number, higher Treasury yields would certainly pose a risk to the sustainability of the US public finances as well as threaten equities.”  

Whilst Bloomberg macro strategist Simon White argues that trouble would really start if the US 10-year Treasury yield rose above 5.25%. He has calculated that this is the “inflection point” where, historically, stocks and bonds have reinforced losses in one another. 

Analysts now expect central banks to increase rates to combat rising inflation: the ECB sand the Bank of Japan have already done so, and there are expectations that the BoE will follow them. 

Their rationale is that increasing to the cost of borrowing will weigh on the economy, preventing short-term higher inflation from becoming entrenched.  

 

‘Analysts now expect central banks to increase rates to combat rising inflation’

 

There are two issues here; firstly, there is no-way of knowing how sticky this inflation is as it largely predicated on external events they have no control over. Secondly, it is recessionary, and with households and businesses already struggling with a cost of living crisis, this will only exacerbate the problem, at a time when many governments are already sinking under their debts. 

Markets have been driven to all-time highs largely on the back of AI, based on expectations not reality.  

The reality is stark; research by Fathom Consulting shows that for the AI boom to turn a profit, it would need the AI-related sales of the tech companies involved to rise by between $600 and $800bn within two years. 

Worryingly, the CAPE ratio (cyclically adjusted price-to-earnings ratio) is close to 41-points, over double its long-term average of C.17, and approaching the record high of 44.19 points in December 1999, just before the dotcom crash.  

 

‘I don’t think outright collapse in a dotcom bubble type fashion. But could I see a slow release of air that doesn’t collapse the world economy, but slows it down? Yes, I could ‘

 

Whilst the S&P looks highly on p/e basis, economic data suggests that AI producers might be starting to  justifying the hype, as the technology is starting to power economic growth. The US economy has recorded a rise in productivity growth, while AI is also among reasons the UK economy has beaten expectations to grow at the fastest rate in the G7 in the first half of this year. 

Despite this, there are distinct parallels with the dotcom crash 2000, when many internet companies seen as the next big thing collapsed in value.  

Andy Haldane, the former Bank of England chief economist, when asked, “Do I think there’s a significant dose of reality though in that productivity miracle in AI? Yes.”.  

His view might be summed-up as fragile: “I don’t think outright collapse in a dotcom bubble type fashion. But could I see a slow release of air that doesn’t collapse the world economy, but slows it down? Yes, I could.” 

 

 

“Sometimes everything is wrong 

Now it’s time to sing along”  

 

Familiar themes emerge as we reappraise the old saying: “America sneezes and the rest of the world catches a cold.”

In 1929, it was irrational, exuberant stock market investors; in 2007 it was bankers too clever for their own good believing their house price models; today, it’s the president.

A catalogue of failure, but three are giving us all the sniffles:

1.       Tariffs have imported inflation into America and elsewhere, and destabilised global trade.

2.       His expectation that Ukraine would surrender was naive, and their ability to hurt Russia’s energy and refining capacity was overlooked.

3.       This energy crisis has been exacerbated by war with Iran, creating an energy crisis on par with the 1970s

And, as with the 1970s we have supply-side inflation. Only, this time around it comes on top of a cost-of-living crisis that has been slowly growing since 2008.

Central banks, seemingly expecting they are required to act will tighten monetary policy. This won’t squeeze out excess demand—there is none—it will simply squeeze out families.

What Trump’s epitaph will be is anyone’s guess, but I doubt it will be repeatable!

Lyrically, we start with “Stoned Love” by The Supremes, and finish with “Everybody Hurts” by R.E.M.

Unfortunately, too many will be hurt needlessly.

Philip.

 

@coldwarsteve

 

 

Philip Gilbert is a city-based corporate financier, and former investment banker.

Philip is a great believer in meritocracy, and in the belief that if you want something enough you can make it happen. These beliefs were formed in his formative years, of the late 1970s and 80s

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