The Trade Wars have started and seemingly ended. As I wrote on ATW on Sunday, market volatility will be in store for Monday, and it didn’t disappoint. Rather than a panic move, markets were behaving quite orderly and then bounced when Mexico and then Canada were able to push the can down for a month. I don’t know what to make of it. Trump is clearly using the stick approach and then putting a timeline on the deal. Does it mean there are no tariffs coming? I’m not so sure. Clearly, he has gone against the advice of Bessent to invoke a more gradual approach. The end goal, however, still seems to impose tariffs no matter what. The president sees the trade deficits as the unfair evil which is holding back the US. He might have a point if you just look at domestic manufacturing. As for the overall country, I think he might miss a rather larger point. Domestic consumption demand is way above the capacity of the domestic economy to supply, so imports are needed to satisfy the thirst.
When was the last time the US had a trade surplus? According to the data below, that was last seen 50 years ago in 1975.
If he is still about re-arranging this 50-year-old fact, then massive macro shifts need to happen. Look at the 2017-2019, can you see the tariff impact? Me neither. Let’s cut to the chase: the tariffs aren’t really the issue here. There is a gargantuan elephant in the room that Trump should really be addressing if he is serious. It’s the US Dollar. If he were to devalue the reserve currency, trade balances would automatically adjust. Who would produce willingly in the US, given the strength of the Dollar these days? Not many. Looking at the chart below, I am envisaging an event similar to what has unfolded in the 1980s. A serious melt-up of the Dollar, sucking in global capital flows in the process and weakening all other economies in the process. The Plaza Accord settled those issues back then. What is it going to take to forcefully devalue the US Dollar? The global system is way bigger and more complex than 40 years ago. Sure, a US recession should help, but there are no signs. Besides, a US recession usually drives the US Dollar higher as all countries suffer. It’s the safe haven for a reason. How do you stop making it a safe haven? You need an alternative. An alternative with an equally deep capital markets. Currently, there is no competition. Not even close. Maybe the start of its devaluation has already started with Gold soaring, and I am watching this development closely. Regime shifts are upon us. Timing will be crucial. We might be months or years away. If Trump really wants to rebalance, he needs to bring down his own currency. See the chart of the long-term USD below.
Let’s now have a look at some updated charts after Monday’s swings. There is a big move building, and we are prepared. I am also publishing Macro D’s latest thoughts.
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