Watch: Trump is Horse-Trading Again
"We Can do This The Easy Way, Or The Hard Way"
The path forward is paved with more and cheaper dollars. As long as energy is cheaper, and we are not buying Chinese goods, then inflation can be tolerated somewhat mitigated somewhat. That concept is a whole other sales pitch Trump would have to sell
The following is a piece by Rabobank’s Bas van Geffen followed by our observation as it pertains to USD strength and Trump’s Plan B to MAGA
The Easy Way, Or The Hard Way
By Bas van Geffen, Rabobank
Davos got hard Trump treatment Thursday. He demanded that Saudi Arabia and OPEC lower oil prices to end the Ukraine war, and a rounded up $1 trillion in Saudi investments into the US despite those lower prices. Will Trump offer a US nuclear power and defence deal, and/or dealing with Iran, as quid pro quo?
But Trump may have another motive to encourage OPEC to lower the cost of oil: “When oil prices come down, everything is going to be cheaper for the American people.” Shortly after his demand for lower oil prices, Trump turned to the Fed, demanding that rate cuts should follow immediately after oil. And interest rates should come down “a lot.” The dollar will probably not like that: even though Trump demanded that other central banks follow suit, he has less traction over them.
The US president is certainly trying, though. Yesterday, Trump signed an executive order on digital financial technology. The decree primarily promotes private –and dollar-based– initiatives, but it also contains some sweeping actions against the efforts to develop central bank digital currencies, and not just in the US: “(v) including by prohibiting the establishment, issuance, circulation, and use of a CBDC within the jurisdiction of the United States.”
While this executive order technically does not seem to ban the offshore use of CBDC by US banks or multinationals (but I am not a lawyer!), I would certainly not want to be the one trying this first. That’s of course an attempt to stop the BRICS’ initiative to substitute central bank digital currencies for US dollars in their international trade.
Trump also had a message for global manufacturers: “Come make your product in the US, and we’ll give you among the lowest tax rates in any nation. But if you don’t – which is your prerogative – you will simply have to pay a tariff” that puts money in our Treasury.
However, markets were mostly in ebullient mood, ignoring everything Trump said to focus on one partial quote: “I’d rather not tariff China.” Just like he would rather not tariff Russia but says he will if they won’t come to the peace table. All Trump is saying is “we can do this the easy way or the hard way.” The market is either calling the US president’s bluff, or only ever understands the easy way.
Elsewhere, the Bank of Japan defied Trump’s call for lower interest rates, and hiked its policy rates by 25bp. Arguably, Japan is still Trump’s low-rates utopia, with the policy rate now at just 0.5%. That said, Japanese policymakers are more constructive on the inflation outlook: the Bank of Japan now sees CPI inflation of around 2.5% for FY2025. Governor Ueda recently also noted that real interest rates had become more negative, and today the Bank stated that they were expected to remain significantly negative. So, financial conditions are still accommodative, and this will continue to firmly support economic activity. The Bank of Japan concludes that if the forecasts presented in the January Outlook report materialise, policymakers will continue to raise policy rates and adjust the degree of monetary accommodation accordingly.
Trump is Horse Trading Again
Trump may be linking lower US rates to cheaper oil from Opec in a quid-pro-quo type deal with the Saudis. This certainly makes sense. Lower rates instigates inflation. More oil production from SA combats that. It makes alot of sense to package it that way.
If those two things happen, then Trump has breathing room to spend, and/or lower taxes, and/or raise tariffs.
Picture if you will two conversations.
Trump to OPEC: Lower oil prices and I’ll weaken the dollar helping your EM economies
Trump to Powell: Lower rates and inflation wont be a problem, I’ll get oil prices lower
We believe that is what is going on behind the scenes right now. Trump loves these type of situations. He also wrote a book about it. This type of deal-making is Horse Trading, and it is based on trust. Trust is something the world does not have with each other right now1
The Bottom Line is: Tariffs (while somewhat likely to happen but no cure-all), and tax cuts (not as likely) are the sizzle here. Lower energy and a weaker dollar are the steak. Just as Bessent is advising:
From Bessent to MAGA: A weak dollar powers a boom.
A weak dollar and plentiful, cheap energy could power a boom.
We find it unlikely that across-the-board tariffs would be enacted…The tariff gun will always be loaded and on the table but rarely discharged.
The path forward is paved with more and cheaper dollars. As long as energy is cheaper, and we are not buying Chinese goods, then inflation can be tolerated somewhat mitigated somewhat. That concept is a whole other sales pitch he’d have to make
We do not think this will work as presented however. Powell could not get services inflation down under Biden. He is still scarred by that. Meanwhile, What will Russia want in return for lower Oil prices…..? Horse trading is not easy, and while Trump likes it, sometimes he is no different than a gambler mesmerized by the spinning roulette wheel. Trump is addicted to dealmaking. We shall see how it turns out
Two disclaimers...
1: I admire Don, a lot less some of the people he chooses (or is compelled to choose by the self entitled demigods/senators) as his soldiers.
2: I'm venturing in something far above my pay grade, so... don't bash me too much.
As far as I like to see him bash a lot of P.O.S. (Wef....) I believe it's a lot posturing like, well, a new sheriff is arrived in the city.
Bashing them and then chitchatting friendly like the Obama bromance isn't something I like... Smell like a sham. When he bashes them or when he chitchat with them?
Shock and awe to have them lower to their knees and then start dealing again?
Honeymoon in reverse? I bash You now so You will appreciate me later?
It looks so much like a College sit, a new big guy arrives and kick someone just to make an example with the other guys...
GIGO: on geopol he is feeded by the usual otherwordly cloud of bad three letter people, so , garbage in, garbage out. 1 million russian soldiers dead? Come on, open Your eyes, maybe 100.000 to 1 million ukr sheeples sent to die by who? for what? Smedley got it right a century ago...
CDBC: they are evil, I agree, but can he have a voice on another countries decisions?
He's really trying to bully or it's the usual 5-d chess of Q-anon with a vengeance?
My fears are two: that he is ill informed and guided from the usual cabal to a point when he isn't got seriously anymore (spent like a card) or that he feels overpowered and in this case, what if the world would go to tell him... "or else"?
If one looks at governance as dealmaking, it amounts to a series of discrete zero-sum outcomes.
This method will de-emphasize relationships, predictability, and long-term planning.
Cooperation will be out of favour, squeezed out by coercion and bilateral self-interest above all.
However, blocks may develop even faster to counter-balance the influence being exerted. Hyper-bifurcation, perhaps?