An American Liz Truss Moment? Plus other global shitshows

Thoughts on rising anxiety in the bond market, can lame duck Trump get anything done, why Moscow and Beijing aren't scared, how Jimmy Carter won the Cold War, and a Rubicon is crossed in Austria

Photo by Natilyn Hicks Photography on Unsplash

This was supposed to be a single item on the markets but there is so much going on that I ended up producing a full newsletter. I apologise for putting much of it behind a paywall, but I’m offering a seven day free trial as well as a 20 per cent discount for those willing and able to pay. As always, I look forward to your comments and feedback!

In this newsletter

• An American Liz Truss Moment? Anxiety in the bond market

• Republican Party Shitshow: Can lame duck Trump get anything done?

• The view from Moscow and Beijing: Why no one is scared The Donald

• How Jimmy Carter won the Cold War: The importance of human rights

• Austria’s Broken Firewall: a Rubicon is crossed in Vienna

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An American Liz Truss Moment?

I said on Sunday that I would try to remain optimistic that the markets are right and the geopolitical gloomsters wrong in their wildly different outlooks on the prospects for the impending Trump 2.0 presidency at least until the inauguration on January 20th. I fear that is going to be harder than I imagined after Trump seemed to go out of his way yesterday to reinforce the geopolitical analysts worst fears: he refused to rule out military action to seize Greenland and the Panama Canal, threatened economic coercion to annex Canada and trotted out Kremlin talking points on Ukraine, fuelling fears of a disastrous sell-out.

Only the day before, Trump had roiled the markets when denied what had appeared to be a well-sourced Washington Post story that he was considering a watered down version of his across the board tariff plan. That report had briefly sparked a rally in the Treasury market and led to a weakening of the dollar - clear proof both that the market believes Trump’s tariff plans will be inflationary.

In a clear sign that investors are starting to become nervous about what may lie ahead, the yield on the 10-year Treasury bond has been surging, hitting nearly 4.7 percent yesterday, the highest level since April last year. That in turn has led to a sharp fall in stocks, with the Nasdaq down nearly two per cent on Tuesday. Remarkably, the 10-year Treasury yield has risen by 100 basis points in the same time that the Fed has cut interest rates by 100 basis points. Now some investors are asking whether the move in interest rates could be up - or even whether the US could be heading for its own Liz Truss moment.

One hope that investors may be clinging to is that Trump might moderate his policies if they trigger a negative market reaction. This resurrects a theory that was popular in his first term: namely that Trump sees the stock market as his primary barometer of success and he won’t do anything to jeopardise it. Unfortunately, Trump’s record does not bear this theory out. Gilles Moec, chief economist at Axa, notes that the stock market soared in the first two years of Trump’s first term on the back of tax cuts, but gave back most of those returns in 2018 when he unleashed his trade wars and launched a regulatory assault on the tech sector. Yet this market reaction didn’t lead to a course correction:

Quite the opposite. The criticism of “Big Tech” intensified in 2019... On the external front, Donald Trump did not reduce the pressure on China. In May 2019, he ordered an increase in tariffs from 10% to 25% on USD200bn of Chinese imports into the US. A “truce” negotiated with Beijing at the G20 summit in Osaka in June 2019 did not last long, and it is only in October 2019 that the “Phase One” deal was announced.

When the market did rebound in 2019, it had nothing to do with a “Trump mellowing” moment, but a the anticipation of Fed interest rate cuts, which duly began in the summer of 2019. Indeed, Trump stuck to his guns on his trade war even as the ISM manufacturing index fell below 50 in August 2019, signalling a possible recession. It is hard to disagree with Moec’s conclusion:

We think the best attitude is to take Donald Trump’s platform at face value, without trying to second guess how adverse market reactions could ultimately soften the blows, to focus on the probability that it is implemented after taking on board political constraints.

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2. Republican Party Shitshow