July 14th, 2025: A few thoughts on what gives, economy and geopolitics-wise, from a slightly chastened Andrew Hilton.
I have been thinking (always dangerous)… Maybe Trump isn’t such a disaster, at least for the US. Maybe he’ll get lucky. Maybe his policies (at least his economic policies) might work. Maybe jacking up import tariffs from an average of 2.3% to 14.7% (JPM) or 15.6% (Yale) isn’t so stupid. After all, remember that customs revenues were running at around $5billion/month under Trump 1 and Biden; now, they’re around $26 billion – and the US ran a rare budget surplus of $27 billion in June. (The deficit in June last year was $71 billion, which is some turnaround.) Tariffs are now the fourth largest Federal revenue source, running at 5% of government inflows, up from around 2% historically.
Ghastly, you might say (and Martin Wolf and Paul Krugman would surely agree). And it is true that free trade (as any fule no) is the best way to maximise the sum total of human welfare. But Trump wasn’t elected to maximise human welfare – just Americans’ welfare. Screw the Mexicans; screw the Vietnamese; screw the Brits… and, of course, screw the Chinese. Sounds brutal – and terrible. But, except in scale, it is how all politicians feel – Macron, Meloni, even Starmer. It is how we pay them to feel. Equally, it’s true that free trade is the best way of raising living standards for everyone in the long term – but Trump wasn’t elected for ‘the long term’. Yes, the US will be hurt ‘in the long term’ if scientists decamp for Canada or the UK, if universities are defunded, if R&D is downplayed, even if Washington reneges on its ‘net zero’ commitments (though you probably can guess my views on that). But Trump’s time horizon (quite properly, given that a Presidential term is four years, not 40) is a lot shorter. Even though Steve Bannon is still working on a way to subvert the 12th and 22nd Amendments, and even though JD Vance may see himself fulfilling Trump’s dream, we are looking at a max of six years – and I can’t see Trumpism surviving longer than that. In the short term, who is hurt if Harvard is de-certified? A few hundred pointy-head ‘intellectuals’; no loss there. And who is going to worry in Poughkeepsie if tariffs mean unemployment in Vientiane or Chiang Mai?
I am not endorsing this. And I think that Trump’s foreign policy decisions (which are not entirely orthogonal, a $10 word, to his economic decisions) are actually damaging to the US in the short, as well as the longer, term. But I do think that we have to accept that, in the short run, Trump’s economic policies (‘net, net’, as they say) have not hurt the US. After all, growth is still strong (or at least, better than most other advanced economies, as evidenced by the latest PMIs), equities are still super-strong (despite a very modest sell-off last week), bond markets may be wobbling a bit, but Treasury funding costs are still very low, and the next move in US interest rates is bound to be down – and, of course, inflation is showing up everywhere, except in the figures. So it all, sort of, makes sense. What doesn’t make sense to me is Trump’s willingness to alienate his blue-collar MAGA supporters by slashing Medicaid. I can see the appeal of abolishing taxes on tips, overtime and Social Security, as a sort of recompense for making the tax breaks of Trump’s first term permanent, but, as I have said before, there isn’t a demographic outside of (multi-)millionaires that thinks the cuts in Medicaid and SNAP were a good thing. Indeed, cutting Medicaid is apparently opposed by 77% of all voters, and 63% of Republicans. (Of course, Musk may be a supporter, in that his objections to the One BBB were strictly fiscal; fairness doesn’t come into it.) However, so far, Trump’s Congressional posse, and most of his acolytes in the (largely alternative) media are biting their tongues on this; they would, apparently, rather go after the leader for not releasing Jeffrey Epstein’s little list (if he ever had one) than for hitting his blue collar supporters where they hurt most. Odd.
But enough of that. What struck me most about Trump’s re-emergence last week as ‘Tariff-man’ was the blatantly transactional nature of the letters that he sent out to 14 (or so) world leaders – including the King of Thailand (currently resident, with his paramour, in Switzerland). Lula, for instance, was basically told that Brazil would be hit with a 50% across-the-board tariff if he continued his court case against Bolsonaro; the threats against Canada and Mexico were transparently ad hominem. As I say, there is an economic upside to tariffs (at least in the short run), but it seems to be the adrenaline rush that threatening them gives him that is the key for Trump. To personalize it, it is Stephen Miller (the power-hungry eminence gris) not Peter Navarro (the ideologue) who is Trump’s trade ‘whisperer’.
The other thing that struck me last week about the re-emergence of the tariff issue was the generally favourable reaction in the media (and within the economics profession) to the 50% tariff that he is planning to impose on copper imports. It seems that, in this particular case, the majority view is that there is a real national security issue – and that a swingeing tariff may be the only way to get US industry to boost smelting and refining (the US apparently has lots of copper ore). I am not sure how I feel about that argument, but we are going to hear it a lot more, I fear.
Whatever, the reaction of most financial markets to all this was a bit of a yawn. Yes, the Dow and S&P were down slightly for the week (Nasdaq was up), but all the major equity indices in the US are still well up for the year-to-date, and, in Europe, there wasn’t even a hiccup: the Dax was up 2.0% last week, the CAC was up 1.7% and the FTSE100 was up 1.3%. After all, what’s not to like? Even the dollar was up 0.7% on a trade-weighted basis (though it is still down almost 10% for the year so far, which apparently doesn’t bother Trump one iota).
I mentioned the PMIs last week, which were generally positive. There isn’t as much to say this week, but it is worth noting the latest quarterly WSJ survey of Wall St economists. The consensus forecast is now for real (ie inflation-adjusted) US growth of 1.0% in the fourth quarter, up from 0.8% in April, while the probability of a US recession in the next 12 months has fallen from 45% to 33% (which still seems high to me). As for inflation, their 12-month forecast is now just 3.0%, down from 3.6% - and (as I have been saying for years) ‘three is the new two’ when it comes to central bank inflation targets.
Elsewhere, Japan’s much-followed Ecowatchers’ survey for June came in better than expected, with both the current conditions index and the outlook index up – along with leading economic indicators, which also jumped quite sharply in May. There are Upper House elections on July 20, which have constrained Japan’s response to Trump’s threats, but the economy really isn’t looking too bad. Europe remains a bit of a problem – but the fact that inflation figures are coming in lower than expected for almost all the Eurozone member states does give the ECB room to cut rates again – which it will do, regardless of how things pan out with Trump.
We will learn a lot more this week about how the Chinese economy is coping with the New World Order, but my general feeling is that – for the moment – things are better than we might have expected.
Except, of course, in the UK…
Tuesday night is Music Night at the Mansion House, with both the Chancellor and the Lord Mayor singing for their supper. I have not been invited (damn), but it does seem as though the Lord Mayor will focus on the allegedly higher returns that are to be obtained from active fund management and on the need to get pension money into the latest spiffy AI/crypto start-up. Hmmm… though no surprise given his background as an equity broker. As for Ms Reeves, my guess she will say as little as possible – and will very definitely not give away what she is going to do in the Autumn budget (which I fear is going to include abandoning the ‘triple lock’, boosting IHT and imposing some sort of wealth tax - cheered on by her friends at the FT). There has to be a real fear that, if she puts a foot wrong (ie, if she gives the game away), markets will tank. Sterling is already showing a rather scary wobble, and the UK is one of (surprisingly) few advanced countries that is already having to pay more for its money in the markets. (I don’t claim any special insight into Treasury policy, but I was impressed by Fraser Nelson’s attack on the DMO for not taking advantage of ultra-low interest rates to issue ultra-long bonds – with the result that UK debt interest charges have gone up from £50 billion under Sunak to £110 billion now – three times what we spend on defence. I think he is too harsh on the DMO, which is an agency, not a department of Government. But there is no doubt that someone screwed up, and the result is that the UK is flirting with disaster even though our debt ratio is not that far out of line with our Euro-peers, and much better than Italy.)
You may feel I am too optimistic, particularly about the US (albeit not about the UK). I offer two caveats:
It could all go wrong – and not just ‘in the long run’. The sheer whimsicality (or, if you like, brutality) of Trump’s economic policies could turn out to be the exogenous shock that will finally end the decade-long bull market (which almost everyone accepts is grossly overvalued by any traditional measures). And, as we are apt to forget, when the stock market turns, it does so with a vengeance; average losses in a prolonged US equity downturn tend to be 60% or more – which will have a profound impact on Joe and Janet Public’s 401(K)s. Trump’s policies could also generate a panic over fiscal policy – a panic which could quickly become global, given that Europe’s fiscal situation (let alone Britain’s) is even worse than that of the US.
We (or at least the US) could easily get hooked on tariffs. They are, after all, terribly ‘moreish’ – particularly since (as I have emphasised) they do seem to work in the short term. It is kind of hard to see even a Democratic Administration (say, one led by California Governor Newsom, who is about as appealing as Trump, but without the modesty) deciding that a priority would be rolling back tariffs if that were to entail higher taxes (as it almost certainly would). So, I fear, we may be stuck in tariff-world for the ‘long term’ – which is when they will start to do real damage.
I note that, for once, I have said nothing about either Ukraine or the Middle East. I would like to think that I was just waiting for Trump to speak (as he did today), but that is not completely true; it is astonishing how easily one can overlook truly awful events as they become ‘normalised’. Still, I guess it is positive that Trump has apparently promised to ‘sell’ weapons (including up to 17 Patriot missile batteries) to NATO for some kind of on-sale arrangement to Ukraine. (Ultimately, I rather doubt anyone will actually ‘pay’ for this support, but Trump needs a fig-leaf.) I am not sure how I feel about the 50-day deadline he has also set Putin for a ceasefire, with the threat of ‘very severe’ sanctions, given that bilateral US-Russia trade is now less than $5 billion a year. Does he really mean tightening the screw on energy exports by targeting buyers of Urals crude? If so, that could be significant – but dangerous, given who buys it.
Whatever, now we’ll find out if the Kremlin really does have kompromat on Trump, as many people I know still believe.
As for the Middle East, it is (IMO) impossible to overstate how awful the situation is – and how obvious Israel’s end-game is. The latest announcement that Israel is to create a ‘humanitarian city’ on the ruins of Rafah in the South of Gaza is an obvious precursor to concentrating what is left of the Gazan population on the border, prior to expulsion into Egypt and beyond. Israel’s Defence Minister, Ephraim Katz, has been absolutely clear on this – but we still don’t want to hear. Look, I’m not blind to the Palestinians’ faults: pushy, clannish, corrupt. No one in the region likes them. But they do not deserve this. At the very least, Western governments should demand that Israel give independent journalists free access to Gaza; I really can’t understand why Jerusalem sets the terms on this. Another thing that caught my eye: a piece in the WSJ by Ruchir Sharma (a top Wall St fund manager, who runs Rockefeller International), who pointed out that, since the attack by Hamas on October 7, 2023, the best-performing stock market in the world has been in Israel – not least because of the financial support that has poured into the country and the spin-offs from its limitless spending on defence. I am not entirely sure why that upsets me, but it does.
I am off to the US next week. Hope to write something from the beach.
Thanks for reading, and best wishes.
Andrew Hilton
Sorry you weren't invited to the Mansion House dinner. One gets used to it. But in any case it is not a black tie event since 2023. Casualisation seeps into so much nowadays.