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Roula Khalaf, editor -in -chief of the FT, selects her favorite stories in this weekly newsletter.
It is a mark of the way in which impatient investors are to put the idea of a trade war behind them that the markets increased last week to the news of a tariff “agreement” between the United States and China.
It doesn’t matter if it was a 90 -day break on higher rates that should only provide temporary alleviations. Investors bought the story that the secretary of the friendly treasure of the American president Donald Trump, Scott Bessent, was now firmly at the driving seat, China Hawk Peter Navarro had been pushed into a brushed cabinet somewhere at the back of the White House and we could all return to the budgetary “Liberation Day”.
I don’t buy it.
I think that we are much more volatility – not only over the next three months, because the American tariffs of 10% of the United States are shaking (and this is the best scenario of cases), but in the coming years, while long -term structural trends towards a new global economic paradigm are continuing.
Let’s start with immediate problems. Although it is too early to see inflation in the data (the price index of producers, a wholesale price gauge, fell slightly in April), there are many anecdotal warning signs on price increases related to prices on the horizon.
The beneficiary margins have been pressed and even the largest retailers do not seem to be ready to take a more blow. Walmart announced last week that it increased prices on goods such as electronics and toys due to Chinese prices, and warned that there would be more upcoming price increases.
“Given the scale of the prices, even at reduced rates … We are unable to absorb all the pressure,” said Doug McMillon, director general of the retailer. If Walmart believes that it must increase prices, you can bet that others will do it too.
Jay Powell, president of the American federal reserve, stressed in a speech last week that “higher real rates can reflect the possibility that inflation can be more volatile in the future than in the period between crises of the 2010s. We can enter a more frequent and potentially more persistent banks, a challenge of tenders – a difficult challenge for the economy and for central banks.”
Stagflation is of course the big risk here. Like the director general of TS Lombard, Steve Blitz, wrote it in a note last week to customers: “Even if a slight recession sets in, a result of higher inflation seems guaranteed given the addition of prices to the trajectory of ever greater budget deficits. Monetary policy alone cannot cancel the trend without reducing the deficit. ”
Indeed. The poor budgetary position of America is the elephant of the part. Even if you assume that the United States can collect between $ 200 billion and $ 250 billion in income from prices, this does not significantly compensate for a deficit of 1.8 TN.
Add to that the new budget bill before the House of Representatives, which would add 3.3 TN to debt over 10 years, and 5.2 dollars if you assume that all gadgette expirations are permanently extended, according to the committee for a responsible federal budget, a without-goal. A certain number of Républicains on the hard line rejected the first project at the end of last week, but the negotiations are underway, and the end result is unlikely to help the American tax image.
America’s debt problems are structural and long -term, and they can trigger others. What happens if there is a slowdown or a recession that means that the tax receipts are rushed while the interest rates remain high?
Although inflation can temporarily alleviate the burden of debt, it could also make business in the United States more expensive. As Blitz notes: “We can, in fact, imagine a scenario where the FED helps the dollar to strengthen itself to control the real interest rates necessary to maintain the necessary entries and all this, in turn, submerges prices as an obstacle to prevent companies from getting supplies in capital and foreign work.”
Trump will undoubtedly try to put pressure on the companies that subcontract – “Small problem with Tim Cook” Last week after Apple announced its intention to source from Iphones from India. But the rest of the world is not standing motion.
China and many other countries have made up to huge gold reserves in recent years, awaiting decoupling and moving away from the dollar. And while gold prices dropped somewhat after the rise of the market, I would not be surprised if there was another increase at some point. Costco, the retailer at a reduced price, put new limits to gold sales sales last week, allowing customers to buy one, rather than two, at the same time, because he cannot meet demand.
One of the particularly delicate things about the current moment is that you can imagine both an offer and a demand shock that occurs at the same time. The prices can disrupt the offer at the very moment when a slowdown negatively affects demand.
The last time a combined shock of supply and demand occurred during the First World War, according to Princeton Economic historian Harold James, who made a presentation on the subject recently at the Hoover Institution. The shocks of the offer tend to increase globalization to their consequences (which could support the stock markets), while the shocks of demand are the opposite. When they come together, we don’t know what can happen. Anyway, James told me that such shocks “put a bonus on government competence”.
The United Kingdom, with its “Liz Truss” moment, has already seen what can happen when it lacks. The United States can also also.
