My sympathies to all of my Roman Catholic readers on the loss of Pope Francis. Having grown up in a Catholic country, the Pope was ever-present but, in the progressively godless 21st century UK, his striving to bridge the gap between the lives we lead and the platform on which he hoped we might place our moral compasses was a little lost. I am of course not a Catholic but a Jew and not a strictly practicing one to boot but that makes little difference when it comes to trying to do right by others. My father, though born in Germany, fought the evil of National Socialism for King and country and my Czech mother lost all but three members of her close family in the Holocaust. We were brought up under a constant beam of optimism that it’ll all come good in the end if one is honest, works hard and tries not unnecessarily to hurt the next man. That was not a good basis for a financially successful career in the City where dog eats dog and where I observed that, if one goes swimming with sharks, one must be prepared to get bitten.
I do wonder whether US Vice President JD Vance, one of the late Pope’s last visitors, will have left the Vatican reviewing some of his own moral shibboleths or whether he sees having met the head of the church as providing a free-of-charge Papal indulgence. One way or the other, Washington’s current direction of travel is becoming progressively less comprehensible, and the one which concerns me most, superannuated bond dog that I am, is the rising volume of President Trump’s attacks on Fed Chairman Jerome Powell. There was a very good reason for placing the Fed Chairman beyond the reach of the Commander in Chief, for isolating the Federal Reserve from the political desires of the White House.
Once again John Maynard Keynes, the master of the aphorism, to the fore: Keynes wrote to the War cabinet in 1945, “On such conditions, by cunning and kindness, we have persuaded the outside world to lend us upwards of the prodigious total of £3,000 million. The very size of these sterling debts is itself a protection. The old saying holds. Owe your banker £1,000 and you are at his mercy; owe him £1 million and the position is reversed”.
If, however, you owe US$ 35.755 trillion and are racking up a daily budgetary shortfall of around US$ 5.5 billion, the shoe is back on the other foot and especially if your lead creditors are nations you are targeting and declaring to be public enemies. Despite the general impression that China must be the largest creditor to the US Treasury, it is not and by some margin. Japan held at the end of February US$ 1.125 trillion as opposed to China at US$ 784 trillion. In total US$ 8.187 trillion of US sovereign debt are held overseas, in both cases more than it had been in January although we shall have to wait until 16 May to receive the March figures to find out whether rumours of a mass dumping of US Treasuries by both the Japanese and the Chinese are fact or fiction. The release of the TIC – treasury international capital – data is always set for the 11th business day of the month, with a two-month rather than a one-month delay.
There is much being made of the President’s vendetta against Chairman Powell but, as I learnt as a kid in Switzerland, nothing is ever eaten as hot as it is cooked, and US interest rates are not as such set by the Chairman but by the Federal Open Market Committee which is made up of a mix of regional Fed presidents and members of the Fed’s board of directors. The chairman might have the loudest voice but he – or she – still only has one vote. I have repeatedly questioned Mr Trump’s motivation when he declares that he knows more about monetary policy than Mr Powell, but can he rightly claim to know more than the entire collection of the FOMC? As a highly leveraged and serially bankrupt property developer who has somehow been able to talk himself out of ultimate financial responsibility, he no doubt believes that the best way to bamboozle one’s way out of debt is to let Mr Inflation do the heavy lifting. High inflation and low interest rates might be the Nirvana for real estate moguls, but it doesn’t work for most of the rest of the population. Having over the past three decades learnt that in the age of social media he who shouts loudest for longest ends up being right, he will surely stick to his narrative although firing the entire membership of the FOMC and replacing them with MAGA influencers might prove to be harder than he’d like it to.
The pro-Trump economic optimism that accompanied his election and inauguration have faded and, according to a CNBC poll over the weekend, his approval rating has fallen to 44% as opposed to 51% who disapprove although on economic competence his rating is 43% vs 55%, the lowest during either of his two presidencies. That he was seeking a lower dollar is no secret and his overall economic mantras have not changed since he first began to display political aspirations, albeit originally as a typical New York Democrat. Anybody with and hour to spare or even the ability to create an hour to spare might care to listen to the Engelsberg Ideas podcast in which Alastair Benn and Paul Lay discuss the development of Donald Trump’s worldview with Charlie Laderman, Senior Lecturer in International History at King’s College London. The making of Trump’s worldview – Engelsberg ideas.
But what has that got to do with the price of cheese? Whilst we Europeans were enjoying the four day Easter weekend, the rest of the world was busily dumping the dollar and talking about the Japanese and the Chinese doing the same to Treasuries. Sovereign debt prices falling at the same time as the dollar is losing ground is not a good look although the US 10 year note at 4.43% is still a long way away from being a panic level and even at 4.92%, the 30 year long bond is also still a few basis points below the pre-inauguration yield of 4.98%. Markets are I suspect more fearful of Trump finding a more or less legal way to have Jay Powell removed than of his actually no longer being in the chair. His disdain for court rulings that do not chime with his opinion of what they should be is no doubt the scary bit and I suspect that the weakness of the dollar has ultimately more to do with the potential weakening of America’s muchly lauded checks and balances than with anything economically more fundamental.
Meanwhile, with every passing day the trade war and the war of words between China and the US seems to ratchet up by a notch or two. The convention has it that in a trade war nobody wins and everybody loses. What the Washington administration is trying to create is remarkably similar to Napoleon’s Continental System which tried to effectively block Britain’s trade with continental Europe, but which ultimately ended up creating a much stronger British Empire which was to dominate the world for most of the following century. If Trump does not seriously believe that he can break China, why is he playing such a hard and fast game? The new levies on Chinese-built and/or registered vessels in US ports is pure Bonaparte and that ended up with him living out his days in a small house on a small island in the middle of nowhere.
It is argued that an America that can elect a Donald Trump not only once but twice is an America that can of itself no longer be trusted. It is a truism that a country will end up with the government it deserves. I shall leave it at that, watch the Swiss franc at its historic all time high of CHF 0.877/US$, wait for it to break through CHF 0.80 and repeat my long held belief that nobody has ever lost money by being long of francs. On the currency front, I yesterday evening spoke to my transatlantic crypto guru who told me of how he has to rein in his people when they get too enthusiastic about the strength of bitcoin. It’s not bitcoin that is strong but the dollar that is weak. The week before last, the franc also made an all-time high against the euro at CHF 0.9228. The euro has since then staged a recovery to CHF 0.9322 at the time of writing as has the pound from CHF 1.06 to CHF 1.08, well below the longer trend which has for the past year been sort of wrapped around CHF 1.13. The Swiss National Bank has over the weekend let it be known that it will not fight the strength of the franc. It has repeatedly done so over the years, not least of all when in 2011 it swore to defend at all costs the CHF 1.20/€ floor. Many billions of francs to the account of Swiss taxpayers later it eventually threw in the towel. This time it has advised that it will not revert to negative interest rates.
But back to Powell and Trump. The standoff is epic, and Powell will not budge. But is he right to be holding rates steady in light of markets beginning to price in a drift into recession? He knows that if, as and when US GDP growth turns negative, the President will blame him and nobody else. Is Powell really “Mr Too Late” as Trump has now dubbed him? With stagflation – coinciding with negative growth and inflation – a strong possibility, the Fed must, given historical errors, fight the “flation” before it fights the “stag”, something that is counterintuitive to a property developer for whom as noted above inflation and low interest rates are from heaven. Powell understands that central banks are to here to prevent recessions from happening but at best to flatten the amplitude in the cycle, both on the upside and to the downside. It appears that it would be easier to teach Mr Trump Navajo than to get him to understand this. I’d love to know where Treasury Secretary Bessent stands on this and whether he will be gone before Defense Secretary Hegseth. You couldn’t write the script.