There are few that would debate that today is not different than yesterday. Trade and tariffs are at the top of the list. For approximately 80 years trade was a cost-effective foreign policy strategy, that was much cheaper than waging war, which in many cases was waged anyway.
Immediately after WWII, the US resurrected former enemies such as Japan to have favorable access to the American economy. Initially the tag line” Made in Japan” was a common substitute for cheap and poorly made product.
It helped rebuild Japan as it did Europe and turned these countries into a military asset of bases and cooperation.
The US policy of ready access to US markets and initial aid was a powerful geopolitical tool that Russia did not have and was instrumental in winning the Cold War.
Is this strategy now obsolete?
After the death of Mao Se Tung, China adopted a “controlled capitalism” as China began to take Japan’s place as a low-cost, low-quality exporter. The decision to open its economy was one of the key factors in China’s breakneck growth in the late 20th century.
The US has/had become addicted to low-cost exports, and engaging China was believed to drive a wedge between China and Russia, the primary adversary of the Cold War.
Lower labor costs allowed for cheap exports and for the relocation of businesses to China. But a very deep problem developed. The US became dependent on imports of key components, sometimes entire alternative to US production, perhaps a threat to our national security.
Some say the US dramatic introduction of massive tariffs is thus geopolitically driven. Its method is an engineering decision intended to break the old system and open the door for a new one. It created a geopolitical crisis by design.
Will it work? The outcomes are unquantified.
At one time China used their excess funds generated by trade to purchase US Treasuries. Around 2012 China stopped purchasing the UST in mass and redeployed their excess funds into the “Belts and Roads” projects of Sub Saraha Africa.
Many believe this is neo-colonialism…exploiting underdeveloped countries for industrial good, a “policy” that has been around in some shape or form since the dawn of mankind.
In recent days, there has been numerous stories that China is dumping Treasuries, causing yields to spike, a story line that is thus far lacking any credibility.
Some have written that the 10-year and 30-year yields are “sky rocketing.” About one week before the inauguration, the yield on these respective benchmarks was 4.80% and 5.0%,. At the time of this writing the 10-year and 30-year Treasury are yielding 4.45% and 4.97%.
Many market luminaries including Buffet, Dimon, Marks, FRB Chairs Powell, Bernanke and Greenspan have adamantly stated the greatest issue facing the markets and the economy is our chronic budget deficits and soaring national debt where the interest alone may soon reach $1.2 trillion annually, up from about $350 billion five years ago. Trade is secondary.
It is a spending issue not a revenue issue.
In today’s acrid social media culture, one can readily find facts and information to support one’s preconceived view. The left is just as bad as the right and vice versa.
What view is more accurate?
Unfortunately, many also believe it will take a crisis to address the fiscal issues as to do so today is equivalent to political suicide.
The proverbial Bond Vigilantes have yet to surface given that yields today are lower than they were before the inauguration. Will they return with vengeance?
How will this week’s five- and seven-year Treasury auction be met? The two-year auction had “sufficient demand” to deliver a good result.
Changing to a more immediate topic, equites were robust yesterday as the President changed yet again potential tariff policies. Treasuries rallied as Japan indicated that it might scale back some long-term government bond auctions. The obvious question is how will they fund its deficit which is considerably larger on a GDP basis than the US?
Last night the foreign markets were down. London was down 0.09%, Paris down 0.06% and Frankfurt down 0.09%. China was down 0.02%, Japan up 0.01% and Hang Seng down 0.53%.
Futures are flat ahead of NVDA’s earnings which are posted today after the close. The 10-year is off 5/32 to yield 4.46%.
