The trade war that did not happen

Businesses continue to show resilience, while the AI train keeps steaming ahead. By Kean Tan

- Kean Tan

Since US President Donald Trump declared “Liberation Day” on April 2, we have come a long way, gaining some understanding of the current trade negotiation dynamics.

First, the tariffs, which US customs statistics confirm are quite real, seem to be absorbed partly by foreign exporters, partly by US importers and mostly by US. consumers, who effectively experience a tax increase. In this respect, US real personal consumption growth seems to have come to a complete standstill despite positive asset inflation (which creates a positive wealth effect).

All in all, the evidence confirms the tariffs are somewhat stagflationary for the US economy and deflationary for the rest of the world.

We believe the US administration's rebalancing strategy, led by Treasury Secretary Scott Bessent, is to grow the economy out of the current public deficit. This approach to reducing the deficit requires the private sector to borrow again, stepping in as the federal government retrenches.

Trump needs a new private sector credit cycle, and the enabler is affordable loans, which require lower interest rates as housing reached unaffordability levels last seen in 2007 before the residential real estate crash.

The pitfall of this logic is lowering short-term interest rates is beneficial only if long-term rates follow suit. Sowing doubt about the Federal Reserve's independence, as Trump has done on several occasions, is risky in this respect.

PARTY LIKE IT’S 1999