Liberation Days

Thoughts on what next after Trump's SCOTUS defeat, why Macron is right on eurobonds, could Blue Owl be a canary in the coalmine, is Japan's PM Thatcher or Truss, and how close is Russia to collapse

Here is this week’s newsletter. Sorry, it is a bit longer than I meant it to be. But there are some important issues here that I wanted to write about, not least because writing about them helps me work out what I think. Anyway, if you get to the end, please do consider spending the equivalent of a cup of coffee by paying for a monthly subscription, or better still an annual one! At the very least, please do send this to anyone you think might be interested. As always, I look forward to your comments and feedback. And please get in touch if you have questions or ideas for future posts.

• Trump’s Tariff Slapdown: Liberation Day!

• Eurobonds: Macron is (Always) Right

• Blue Owl: Canary in the coalmine

• Japan’s PM: Margaret Thatcher or Liz Truss?

• Russia-Ukraine War: Grim Anniversary

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1. Liberation Day!

A few thoughts on the Supreme Court ruling against Trump’s emergency tariffs:

1. As with almost everything to do with the Trump administration, the verdict was a shock but not a surprise - though for once the shock was a welcome one. Given the conservative majority on the Supreme Court and its enthusiasm until now for the unitary executive theory, there was always the possibility that it would back Trump’s abuse of the International Emergency Economic Powers Act to wage economic war against the world, but his actions were so flagrantly unconstitutional, given that Article 2 vests powers of taxation squarely with Congress, that it seemed unlikely. Besides, any pretence that Trump’s tariffs were motivated by concerns over national security were blown apart by his recent boast that he had increased tariffs on Switzerland from 30 percent to 39 percent simply because he didn’t like the tone adopted by its prime minister [sic] on the telephone. The biggest surprise was that three justices still ruled in the administration’s favour.

2. Nonetheless, the decision deals a huge blow to the centrepiece of Trump’s economic policy agenda. Over the past few months, he had waged an aggressive public campaign to try to sway the Supreme Court, describing the decision as a matter of “life or death” and that over-ruling the tariffs would be an economic disaster. His argument was that the tariffs had already brought in $130 billion of revenues, which would have to repaid. The Supreme Court did not in fact say anything about the repayment of tariffs, so firms seeking reimbursement will now have to pursue their claims through the court which could take years. Even so, the risk of a wider budget deficit was enough to cause the dollar index to dip on Friday.

3. In reality, the SCOTUS ruling may not make much difference to US trade policy as Trump has a variety of other statutes that he can use to reimpose tariffs. He has already announced a new additional 15 percent tariff on all imports under Section 122 which allows tariffs up to 15% for balance-of-payments reasons, though only for 150 days unless Congress extends it. Other options include Section 301 (unfair trade practices) and Section 232 (national security), which are what Trump used to impose tariffs in his first term, though these require up to nine months of review before implementation, which may explain why he didn’t use them this time. Finally, there is Section 338 of the 1930 Smoot-Hawley Tariff Act, which allows tariffs up to 50% based on discrimination against US commerce. This, however, is untested in modern trade law, lacks procedural safeguards, and would invite immediate legal challenges, according to Carsten Brzeski at ING.

4. One open question is whether countries that have agreed one-sided trade deals with the Trump administration to ward off tariff threats will now feel emboldened to renege on those deals. That seems unlikely, not least because of the risk of new tariffs based on new legal bases. Some, such as Japan, which last week announced the first $36 billion investment as part of a promised $550 billion of inward investment into the US under its trade deal, may be reluctant to put at risk security guarantees with America. That said, the European Parliament has delayed ratification of the EU-US trade deal in the wake of the Greenland crisis and may now be even more reluctant to agree to a deal that it strongly resents. Meanwhile, there is no doubt that the ruling has somewhat restrained Trump’s ability to use the threat of tariffs as leverage against other countries. That, of course, is very welcome.

5. What would be even more welcome would be if Trump would abandon his ill-judged protectionist tariff policy altogether. But there seems no chance of that happening. Recent data has suggested the impact on the US economy may be greater than previously thought: GDP growth slowed sharply at the end of last year, weighed down by a record-long government shutdown last fall and slower consumer spending growth. Meanwhile a New York Fed study confirmed that 90 percent of the tariffs are being paid by US firms and consumers - causing White House economic adviser Kevin Hassett to demand that the authors of the report be “disciplined”. The only reason the damage has not been greater is that the tariffs are not being applied in full. Although the average headline tariffs is 17.3 percent, the effective tariff rate paid is 10.9 percent, partly explained by import substitution says Brzeski. Meanwhile EU trade officials tell me that some items are simply being waved through.

6. The SCOTUS ruling will raise hopes that the US guardrails are finally working to restrain a brazenly corrupt and increasingly authoritarian administration that has shown a flagrant disregard for the rule of law. The decision follows recent moves by Congressional Republicans to stand up to pressure from the White House on tariffs and the Epstein files. Wealth of Nations suggested last November that we may have passed peak Trump, even if that does not mean we are passed peak danger. The markets will be hoping the fact that a Supreme Court that granted the presidency wide-ranging immunity for official acts, thereby paving the way for Trump’s return to the White House, was now willing to put limits on his powers may indicate the Court will also take a tougher line with the administration on other cases before it, including Trump’s attempt to fire Fed governor Lisa Cook.

7. Also a relief is that Trump does at least appear to accept the verdict of the Supreme Court. But that relief must be tempered by his excoriating attack on those justices who voted against his tariffs, who he disgracefully accused of being swayed by foreign powers. He reserved his greatest venom for the two justices who he appointed who voted with the majority, Neil Gorsuch and Amy Comey Barrett, whose families he said should be ashamed of them. In an already highly polarised and febrile political environment, Trump’s determination to politicise the Supreme Court can only further weaken the legitimacy of American institutions and erode the rule of law. What is also means that there is no immediate end in sight to the uncertainty over US policymaking that has hung over the global economy for more than a year.

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2. Macron is (Always) Right

Last week Wealth of Nations asked whether we were witnessing the start of a European Spring, in which a continent that for the past two decades has been hamstrung by inertia and crippled by the centrifugal forces of populism may finally - goaded by Trump - be getting its act together. Clearly I am not alone in thinking that something may be shifting at last. Global investors are pouring record sums into European equities as a desire to reduce exposure to the US meets growing optimism over the state of the region’s economy, reports the FT:

European stocks are headed for their highest ever monthly inflows in February, following two consecutive record weekly flows of about $10bn, according to data from EPFR, which tracks ETF and mutual fund flows.

The continent’s blue-chip Stoxx Europe 600 index has punched through a series of record highs this month, as have indices in the UK, France and Spain.

Nonetheless, there is one step that the European Union can and should take if it is serious about shoring up its economic and geopolitical resilience: to issue more eurobonds to fund joint investments in areas such as defence and technology, as recommended by former Italian prime minister Mario Draghi in his report on the competitiveness of the single market and in subsequent interventions and more recently by French president Emmanuel Macron in an interview with various European media platforms. Yet so far, this remains off the table.

As I argue in my latest column for Euractiv, that is a mistake. The case for common borrowing to fund joint investment is overwhelming:

There are some public goods that only make sense to fund at EU level, either because national governments lack the scale to act alone, or because funding them nationally would deepen single market fragmentation when the goal must be integration. This is especially true of defence...

Common EU borrowing also brings a substantial benefit beyond what it can directly purchase. A deep and liquid euro-denominated debt market is vital to mobilise Europe’s vast private savings for domestic investment — a core objective of the much-discussed Savings and Investment Union proposals. Such a market is more likely to flourish if underpinned by a deep market in a eurozone safe asset that can provide a benchmark yield curve and attract global capital.

One of the reasons that any discussion of eurobonds is taboo in some member states is a fear of being drawn into a fiscal union in which countries become responsible for each other’s debts. But that is not what is being proposed today.

During the eurozone debt crisis, proposals did circulate for eurobonds to absorb part of national budget funding as a way to improve debt sustainability. Those were rightly rejected: they would have required a significant transfer of fiscal powers to the EU level – a substantial erosion of national sovereignty that requires treaty change. But… what Macron is calling for is the funding of specific projects, building on the precedent set by Next Generation EU.

A second objection is that joint borrowing creates a moral hazard – reducing the incentive for governments to reduce their own debt burdens. But as Gilles Moec, group chief economist at AXA, notes, the evidence does not support this:

The example of Italy – the NGEU’s main recipient – is encouraging. Italy’s budget bill for 2026 targets a deficit of 2.8% (this is also the latest European Commission’s forecast) down from 3.0% in 2025, laying the ground for a decline in the public debt ratio in 2027. Italy has outperformed the European Commission’s expectations: in the Autumn 2024 projection, Brussels was forecasting a deficit of 3.4% for 2025. Of course, it is easier to bring deficits down when drawing on European transfers, but the crux of the matter is that proper progress on the national public finances can be observed.

It is striking that some of the most vocal support for eurobonds is now coming from European central bankers, not least Joachim Nagel, the president of Germany’s Bundesbank, an institution long-regarded as the flamekeeper of Germany’s ordo-liberal orthodoxy. Yet the German government continues to set itself firmly against any increase in common borrowing, including comments just this weekend by finance minister Lars Klingbeil.

My guess is that this resistance will eventually give way. As The Economist’s Charlemagne columnist noted in a terrific column this week, Europeans are starting to realise that, on the big strategic questions, France - and in particular Macron - have irritatingly largely been proved right. Eventually they will reach the same conclusion on eurobonds. As I noted in my Euractiv column:

One of the EU’s most significant achievements in recent years has been to establish – largely thanks to NextGenEU – a large, standardised EU bond market. This has grown from €45 billion in 2019 to €780 billion today, making the EU the fifth-largest issuer of euro-denominated debt and the third-largest triple-A rated issuer in the world. Market appetite for this debt has been strong. As well as investing in post-pandemic recovery projects, it has enabled the EU to provide member states with €150 billion of loans to invest in defence procurement under the SAFE programme, as well as provide a €90 billion loan to Ukraine.

Yet as things stand, most of this debt is due to be repaid from 2028. Under current Multiannual Financial Framework proposals, 8% of the next seven-year budget – around €168 billion – is earmarked for debt repayment. Far better to roll this debt over and create extra headroom to allow the EU to borrow more to invest in its future security and prosperity. That would send a powerful signal that Europe intends to be at the table, not on the menu, in the new world order.

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3. Canary in the Coalmine

When you talk to people in the markets about what keeps them up and night, the answers are invariably the possible bursting of the AI bubble and the bursting of the private credit bubble. While the former gets plenty of attention in the mainstream media, among investors and regulators, it is the latter that is the more acute source of concern. But could the two bubbles be mutually reinforcing - and therefore doubly dangerous if they burst at the same time?

Difficulties at Blue Owl, one of the largest listed private credit providers, is rightly ringing alarm bells. Shares in Blue Owl tumbled last week as it was forced to permanently restrict investors from exiting a debt fund for retail investors. That is sending shivers through the industry, causing shares in other private credit fund managers including Ares Management, Apollo Global Management, KKR, Blackstone and TPG to fall. Mohamed El-Erian, the former CEO of bond investor Pimco, wondered whether this could be a “canary in the coalmine moment”, similar to the cracks in the market that appeared in August 2007 which turned out to be a harbinger of the the global financial crisis.

Private credit funds are large pools of capital that provide loans, largely to junk-rated companies, outside of the regulated banking system. They first emerged in the wake of the global financial crisis, mainly in America, as an alternative source of finance to the broken banking system. Indeed, I argued 18 months ago that the sheer scale of this credit expansion may account for some of the marked divergence between US and European economic outcomes post-global financial crisis (see No Wonder Europe Isn’t Growing). Since then, private credit has continued to expand, pulling in trillions of dollars of investor funds.

Yet the latest woes of Blue Owl suggest all is not well in the sector. There are real concerns about the quality of the loans that they have been extending and whether the funds are properly recognising credit risks and the value of their assets. Blue Owl tried to shore up confidence in its fund last week by liquidating $1.4 billion in assets to raise money to pay out individuals who bought into some of its funds in their heyday but now want to get out. But as the WSJ reports:

Instead, the opposite happened. Stocks across the private-fund industry slid as the deal raised questions about how much fund managers can count on individuals to stay invested in hard-to-sell assets for the long term…

There are other signs that individuals are souring, including a jump in redemption requests at the end of 2025. More worrying to stock analysts: the flow of new investments that were expected to fuel future earnings growth is also slowing.

It is hardly surprising that investors were not convinced when one of the buyers of the Blue Owl assets was its own insurance company. Indeed, Davide Serra, the founder of Algebris Asset Management, reckons that a private equity-owned insurer could be the next Lehman Brothers.

Meanwhile investors are right to be worried about what risks they may be exposing themselves too with these opaque funds. I wrote last week about the software stock apocalypse currently playing out in the markets amid fears that entire business models may become obsolete in the AI revolution (see The Solow Paradox). But as Paul Davies notes for Bloomberg, software is the biggest single industry among private-equity-backed businesses:

In mid-market CLOs, which package up loans to smaller companies and are a good proxy for private credit funds, software makes up 19% of portfolios, according to analysis by S&P Global Ratings. Another ratings company, KBRA, categorized borrowers using its own data on mid-market CLOs, BDCs, and bonds backed by companies that got credit based on their recurring revenue. It found that 22% of this debt by value was owed by software firms.

It’s not hard to see the dangers here. The recent wave of withdrawals from private credit funds shows that fresh funding might become harder to find as companies try to roll over their debt, forcing borrowers to pay higher interest costs:

That in turn could cut the value of their equity and make owners less willing to inject more capital to keep companies afloat — hence some are predicting an increase in defaults across private credit and leveraged loans beyond what has been acknowledged so far by investors…

Any resulting losses aren’t likely to remain contained within these corners of the credit market. With a combined $3.5 trillion worth of debt, leveraged loan and private credit markets are big enough to matter to broader debt and equity markets in the worst scenario, where systemwide losses could amount to $275 billion, according to UBS strategists.

If losses spike too quickly, that could lead to a wider financing crunch. Or as Davies puts it:

Maybe we’re headed for a debt-market singularity, where the disruption-inspired selloff contains the seeds of the AI bubble’s own bursting.

Yikes.

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4. Thatcher or Truss?

It is perhaps one of the more important questions in global finance at the moment: is Sanae Takaichi, who won a remarkable landslide victory in this month’s general election, Japan’s Margaret Thatcher or Liz Truss? The Japanese prime minister has long cited the former as her political hero, but there was certainly a moment shortly after she took office last year when the markets feared the latter. Her plans to cut taxes and increase spending to try to stimulate the world’s most indebted economy saw Japanese bond yields rising and the Yen falling - an ominously Truss-like market phenomenon.

Perhaps not surprisingly, in her first policy speech to the new parliament last week, Takaichi sought to reassure the markets. She promised on the one hand to break with “excessive fiscal austerity” while at the same time committing to pursue “responsible, proactive fiscal policy” aimed at increasing investment in areas like AI, chips and shipbuilding to lift Japan’s potential growth:

We will ensure the pace of increase in our debt is within the range of Japan’s growth and steadily lower the ratio of public debt to gross domestic product. That’s how we will ensure our finances are sustainable, thereby securing market trust.

Will it work? GaveKal reckons that the risks from Japan’s debt load are over-stated, and not just for the often-cited reason that most of the debt stock is held by domestic investors. Gross general government debt of more than 230% of GDP is in part offset by Japanese general government sector’s holdings of financial assets - mostly foreign securities - worth around 140% of GDP. These earn higher interest rates than the government has to pay on its own bonds.

This is not to suggest that Takaichi now has carte blanche to blow out Japan’s fiscal hole wider than it already is. Throughout her campaign, she has been forced to emphasize the “responsible” aspect of her “responsible and proactive public finances” policy agenda. Takaichi was also forced to issue a clarification in response to her unguarded comments championing the benefits of a weak yen for exporters while overlooking its inflationary impact on imports. But if Japanese voters are willing to give Takaichi a long leash to improve their livelihoods, it seems hard to see why investors—which are overwhelmingly comprised of Japanese voters—would not be willing to do the same.

If GaveKal is right, Takaichi may get her chance to play Thatcher and revitalise the Japanese economy, including via corporate governance reforms that could help lift the productivity of Japanese firms. That hope is partly what drove the Nikkei 225 index of leading Japanese shares above 57,000 for the first time in the immediate aftermath of her election win.

But for foreign investors, that raises a fresh risk. For the last three decades of Japanese deflation and rock bottom interest rates, Japanese investors in search of higher returns have also accumulated vast holdings of overeas assets - the appeal of foreign investment fuelled by a seemingly ever-weakening Yen. But if Takaichi succeeds and the Japanese economy starts finally to normalise, leading to rising bond yields and an appreciating Yen, will Japanese institutional and retail investors start to sell their foreign holdings and reinvest at home?

So far, Goldman Sachs sees little evidence of a large-scale repatriation trade. But there’s no question it is a risk hanging over western stock markets. One to watch.

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5. Grim Anniversary

This week marks the fourth anniversary of Russia’s full-scale invasion of Ukraine — a war that has now gone on longer than Second World War on the Eastern front. As things stand, there appears little prospect of a peace agreement emerging from the US-brokered talks. The consensus of those returning from the Munich Security Conference is that Russia isn’t remotely serious about peace, other than on terms that would amount to a Ukrainian surrender. That suggests the war is likely to carry on until either the Ukrainian state collapses or Russia’s economy collapses. How likely is the latter?

There’s no question the economy is suffering as a combination of sanctions, very low prices for Russian oil, higher taxes to offset a widening budget deficit and higher interest rates to tackle rising inflation take their toll. Inflation in particular is hitting Russians hard in the pocket, as the BBC reported last week:

Every other January since 2019, the BBC has bought the same selection of 59 basic goods from the same supermarket chain, Pyaterochka, in Moscow. The basket includes vegetables and fruits, dairy and meat products, canned goods and instant noodles, sweets and beverages, including beer.

In 2024, the basket cost 7,358 roubles (£63; $83). Last month, it cost 8,724 (£83; $112) roubles - an increase of 18.6%.

That tallies with Rosstat’s own 18.1% measure of overall accumulated food inflation from January 2024 to the end of January 2026.

But will growing popular discontent cause Putin to rethink the war? Here is what Pavel Daev at the Brookings Institute had to say on that this week:

The Russian economy’s troubles are deepening, and unlike the victory-promising generals, the government’s economists are delivering sober assessments to the Kremlin. State expenditures were reduced in 2025 and are set to be cut further, but the budget deficit is still vast, driven primarily by the decline in oil revenues. The war machine grinds on but cannot accelerate, while many civilian industries are in protracted recession. Concerns about falling incomes and rising taxes are reinforcing the public’s strong preference for hostilities to end. However, this discontent is unlikely to erupt in mass protests, and the economic decline will probably remain manageable. Yet, the stream of men ready to sign contracts to fight in the Donbas “kill zone” may dry out. Russians are tired of the war, and Putin won’t want to be seen as the main obstacle to ending it.

So I suppose the answer is don’t rule out a Russian collapse, but don’t count on it either. Of course, what we don’t know is what pressure the Putin-aligned Trump administration will put on Kyiv to force an iniquitous “peace deal” ahead of the mid-terms. The fact that both Hungary and Slovakia decided to start blockading fuel and electricity supplies to Ukraine - and are blocking the €90 billion EU loan to Kyiv - just days after they received a visit from US Secretary of State Marco Rubio is certainly worrying. That transatlantic rift keeps growing wider.