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Winter is Coming

Published in Articles
Monday, 27 August 2018

The Tariffying Prospect of a Trade War

Published in Blog
Friday, 20 July 2018
July, 2018

David Letterman, Oprah Winfrey, Phil Donahue, and Larry King – future President Donald Trump hit the talk show circuit extensively in the 1980’s and 1990’s.  These interviews provide an insightful look into his core beliefs.  Consistently, the most passionate commentary concerned foreign nations “taking advantage” of the U.S. – either by failing to contribute more to their own national defense or by running significant trade surpluses (U.S. trade deficits).  In these interviews, the latter of which was usually directed (given the time period) at Japan.  Today it is China.

Some argue that President Trump is actually in favor of free trade but wishes to renegotiate various trade treaties.  That is, by embracing protectionist policies, free trade can be broadened on more “appropriate” terms.  For example, some of the stated NAFTA renegotiation objectives include the elimination of “unfair subsidies, market-distorting practices by state owned enterprises, and burdensome restrictions on intellectual property.”1  Perhaps this is indeed President Trump’s ultimate goal, but this interpretation is contrary to significant evidence in addition to his own talk show confessions.

First, protectionism is theoretically consistent with President Trump’s immigration position.  If one believes immigrants take away American jobs, then logically one would also fear cheaper foreign goods which destroy the profitability of American companies – and by extension, cost U.S. workers their jobs.

Second, the protectionist measures enacted so far have been consistently indiscriminate in affecting both allies (e.g., Canada, Europe, etc.) and potential foes (e.g., China) – and thus almost all trade agreements – alike.

Third, President Trump, almost immediately upon taking office, pulled out of the Trans-Pacific Partnership.  While one could easily argue this agreement actually hindered free trade given its excessively burdensome and complex rules and regulations, the rationale given for withdrawing was a protectionist argument: the preservation of American manufacturing.

Fourth, he has surrounded himself with advisors notorious for their protectionist policy advocacy.  Most notable among them is economist Peter Navarro who authored the book Death by China.

If President Trump truly believes in protectionism, and if such advocacy largely helped him win the election, then we should expect this trade war to continue, broaden, and deepen.  It likely would have begun last year but for the need to secure China’s cooperation in dealing with North Korea.  As evidence, note that the first major tariffs (March 1st) were issued just after U.S.-North Korean relations started thawing with Kim Yo Jong’s (sister of Chairman Kim Jong Un and special emissary) overtures at the Winter Olympics (which ended on February 25th).

If the trade war escalates, can it directly cause a U.S economic recession?  Many mainstream pundits, citing the infamous Smoot-Hawley Act of 1930, warn as such (which is odd, especially since the Great Depression was well underway before it was enacted let alone took effect).

It is rising interest rates which directly cause recessions as the origin of recessions lies in the preceding, artificial boom.  When a central bank increases the supply of money, interest rates are artificially lowered.  Since interest rates are a universal market signal to all businesses, investments which previously appeared unprofitable now make economic sense.  However, the attractiveness of these projects is a mirage.  These borrowed funds are actually being “malinvested” given the “true” level of interest rates absent the artificial stimulus.  When interest rates eventually rise as monetary stimulus is lessened, the disruptive liquidation of the malinvestments in the ensuing downturn is known as a recession.

But tariffs may indirectly cause a recession.  Currently, U.S. Treasury debt held by “Foreign and International Investors” is almost $6.3 trillion.  China alone accounts for almost $1.2 trillion and may not be interested in more.2 In May of this year, it was reported that China had halted its purchases of U.S. Treasuries.3

If foreign demand, led by China, for U.S. Treasuries cools (let alone if China liquidates its holdings); expect higher U.S. interest rates (all things being equal).  If this, combined with the Federal Reserve’s planned liquidation of bond holdings in the face of increased U.S. budget deficits, develops, interest rates may rise significantly.  A recession and financial market distress would surely follow.   It is a tariffying prospect.


1) “USTR Releases NAFTA Negotiating Objectives” Office of the United States Trade Representative.  July 2017.

2)  “Federal Debt Held by Foreign and International Investors.  Federal Reserve Bank of St. Louis.

3) “We Understand the Chinese Government has Halted Purchases of U.S. Treasuries”  ZeroHedge.  4 April 2018.


Winter 2018 Financial Market Update

Published in Articles
Wednesday, 07 March 2018

Interest Rates are on the Move

Published in Blog
Monday, 19 February 2018
February, 2018

Interest rates have moved up significantly.  The yield on the 10-Year Treasury, as of February 15th, stood at 2.9% which is the highest level in four years.  This represents a dramatic upward move from the 1.4% low reached on July 8, 2016.

Many investors are pointing towards increased inflation fears fueled by recently published statistics of average hourly earnings and consumer price indices.1 If the Federal Reserve adheres to its mantra of “data dependence,” then it should continue raising interest rates.

But the impact of any rate hikes by the Federal Reserve may be relatively benign compared to the forces of supply and demand.  As we previously discussed in our last Insights commentary (Autumn 2017), the commitment to “unwind” its balance sheet may curtail Treasury demand while significantly adding to supply – a recipe for lower Treasury prices (and thus higher interest rates).

This action by the Federal Reserve is truly unprecedented.  In a recent roundtable hosted by WindRock, the noted financial expert John Mauldin described Federal Reserve policy as having moved from “quantitative easing” to “quantitative experimenting.”

Worse, at the same time this buyer of Treasuries becomes a marginal seller, other influences on supply and demand are afoot.  Namely:

1) Increased supply due to ballooning deficits.  Budget Director Mick Mulvaney himself stated the recently agreed-upon budget deal should increase government spending by almost $300 billion with the potential for the deficit to increase to $1.2 trillion in 2019;2 and

2) Decreased demand from traditional foreign buyers.  The financial markets were rightfully distressed when Bloomberg recently reported that: “senior government officials in Beijing . . . have recommended slowing or halting purchases of U.S. Treasuries.3  China is not the only other major foreign bondholder to potentially pull back from this market, for both Japan and Saudi Arabia have substantial fiscal issues which could be ameliorated by selling Treasury holdings.

For too many years, investors have assumed that either the stock and bond markets appreciate in tandem, or perhaps, at worst, they act as counterbalances; if one went down, the other would go up.  Financial yin and yang.  But a downturn in the face of rising interest rates may very well result in something like the financial carnage of the 1970s.

Yet, despite these risks, the Federal Reserve appears intent on continuing its “unwinding.”  If so, while it may very well be data dependent, it is also judgement deficient.


1) “The Ghost of Inflation Reappears” Up & Down Wall Street.  Forsyth, Randall.  19 February 2018.  Barron’s.

2) “U.S. Budget Director Warns Interest Rates May ‘Spike’ on Deficit”  John, Arit and Niquette, Mark.  11 February 2018.  Bloomberg.

3) “China Weighs Slowing or Halting Purchases of U.S. Treasuries” 10 January 2018.  Bloomberg.


20 Minutes with Doug Casey

Published in Podcasts
Wednesday, 29 November 2017
Few investment experts have the unique background, opinions, and uncanny timing possessed by Doug Casey.
In this podcast, Mr. Casey discusses: what the future holds for European bonds and the euro given excessive debt levels and active secessionist movements; why the Federal Reserve's planned "unwinding" of its bond hoard is not feasible; what other risks may increase U.S. interest rates dramatically and derail the stock market; and why the future bull market in commodities warrants investment consideration.  November 2017.


Financial Market Update-1Q17

Published in Articles
Friday, 05 May 2017

How Low Can Interest Rates Go?

Published in Podcasts
Thursday, 21 July 2016

WindRock interviews Dr. Gary Shilling, editor of A. Gary Shilling's Insight, and a long-time Forbes magazine columnist.  As an expert in forecasting interest rates, Dr. Shilling is best known for his accurate 1981 prediction of the “bond rally of a lifetime."  The podcast discusses: reasons why U.S. interest rates should continue decreasing; implications of world-wide negative interest rates; probabilities of a global recession; and likely future central bank and government actions.  July 2016.

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