Diplomacy/Foreign Relations
We revisit our view on the “fiscal gravy train” as well as President Trump’s negotiating style. We re-print parts of our March 2024 net assessment, particularly for the benefit of our new clients who have joined us at BCA Research. Our analysis of President Trump’s first term is our guide into how the White House will negotiate future trade wars and skirmishes.
China barely hit its growth target in 2024 by shifting back to its old model of exports, racking up a record trade surplus with the world – right as Donald Trump walks back into the White House. Tariffs will elicit larger fiscal stimulus even as China rolls out innovations such as DeepSeek to meet its 2025 industrial goals, creating a volatile mix this year.
Simple games allow us to model several of the Trump administration’s most disruptive policies in 2025. We find that markets face an increase in volatility as Congress expands the budget, Trump implements tariffs on the world, China retaliates, and Taiwan tensions persist. A ceasefire in Ukraine is a marginally positive outcome for Europe, although it is not a long-term peace treaty.
In this Special Report, we outline the three themes that we believe will drive commodity markets this year: (1) demand growth will remain sluggish across cyclical commodities (2) supply-side developments will ultimately be bearish for oil prices, and (3) traditional relationships between commodity prices and financial variables may not hold.
Every year we highlight five low-odds scenarios that would have a major impact on global financial markets if they happened. This year we contemplate a total reversal of Chinese policy, a US-Iran nuclear deal, a breakdown of NATO, US military action across the Americas, and an internationally coordinated FX intervention.
- Congress will pass tax cuts by end of 2025 producing a fiscal thrust of about 0.9% of GDP in 2026.
- Trump will count on that stimulus as a basis for slapping tariffs on leading trade partners.
- China will retaliate against Trump and stimulate its domestic economy, while pursuing stronger trade ties with other countries. Europe will also retaliate.
- Geopolitical risk will shift from Ukraine-Russia to Israel-Iran, where the conflict will continue to escalate until a crisis point is reached within 2025.
Trump’s resounding victory brings a popular mandate that ensures deregulation and higher trade tariffs. Higher budget deficit and immigration reform are also in the cards as the Republicans look like they may squeak a thin margin in the House of Representatives. Foreign policy will become more unilateral, with US assets outperforming initially.
Over the next few months, Japan’s new government will ease fiscal policy, which will improve domestic demand on the margin. Monetary policy may tighten further in the short run but not too much over the long run. The geopolitical setting drives Japan into accommodative economic policy.
The global political system is destabilizing and the US will turn more hawkish in foreign policy, trade policy, or both, regardless of the election outcome. Tactically go long the dollar.
