Moment of reckoning in oil markets is at hand

I wrote in an earlier post that the oil markets are under-pricing the risks inherent in the Iran conflict and that a spike in oil prices is not far off.

Even as President Trump weighs the option of another strike on Iran, it appears that the moment of reckoning in oil markets is not far off. Another two or three weeks of the stalemate could push oil prices to over $120 per barrel. And another strike by the US? Well, the bets are truly off.

If that sounds pessimistic, here are two pieces, one by Martin Wolf on the prospects for the oil markets and another by Amos Hochstein on how oil prices can soon impact the US. 

Martin Wolf gives three reasons why we should be worrying:

• The problem is not just the closure of the Strait of Hormuz but the destruction of physical infrastructure in the Gulf countries
• The shortages are not just of crude oil but refined products. The US is a net exporter but it has requirements of imported crude of specific varieties.
• So far the price impact has been muted by the drawdown of stock. But stocks are finite. Moreover, there is not much spare production capacity.

Hochstein presents an interesting fact. Gasoline price has shot up to $4.5 per gallon. The highest level reached so far in the US is $5.02 per barrel which happened in June 2022. Gas prices are poised to rise because, given that jet fuel prices have risen even further, production capacity is being used for jet fuel and not for gasoline! The implications are clear enough:

Energy prices feed into the core consumer price index with a lag of several weeks. The pump pain of May will translate into inflation figures in July and August. The 30-year Treasury yield has risen to the highest level since the financial crisis and the 10-year Treasury yield is already rising. Mortgage costs, corporate borrowing rates and the cost of financing national debt all move with it.

The oil markets are still banking on a swift resolution of the conflict. If that doesn't happen, 'the largest energy shock in history' will wreak havoc on the world economy. 

Who is right about oil prices? The market or analysts?

 

The oil markets have been far more sanguine about the conflict in Iran than analysts. It took weeks for the markets to price oil at $100- and it hasn't venture very far beyond that.

The markets initially reckoned the conflict would end in four to six weeks. They have been proved wrong. What is even more baffling is that the markets seem relatively unruffled even today, some 11 weeks into the conflict. 

Analysts think that if the conflict lasts for another two or three weeks, oil prices will go through the roof. The futures markets don't reflect this. 

We should know soon who is right.

My column in BS, Oil markets wrong on Iran?

Oil markets wrong on Iran?

Despite the biggest oil supply disruption in history, markets remain slow to react

T T RAM MOHAN

There is one great mystery in the Iran conflict: The behaviour of the oil markets. This is said to be the largest disruption in the history of oil markets. Yet the markets have been pricing oil at levels well below what analysts believe the fundamentals warrant. Either the analysts are fools. Or the markets have been hopelessly myopic. We should know in the weeks ahead. 

After the Iran conflict erupted in late February, oil prices stayed well below $100 in the initial days. Experts concluded that the conflict would not last more than four to six weeks. The disruption to the world economy would not be considerable.

The notion that the disruption in oil supplies would cease immediately if the conflict stopped within four weeks or so was absurd. As The Economist (April 30) points out, production at oil wells cannot be switched on in a trice — it takes several weeks for production to return to normal. Tankers that have switched to other routes have to return to the Persian Gulf, again a time-consuming process. Refineries that were out of action for want of crude oil supplies have to be restarted. The disruption in oil supplies was bound to stretch well beyond any cessation of the conflict.  

The oil markets — and the experts who relied on them — were proved wrong. The conflict did not end in four to six weeks. It has stretched to over 10 weeks and is still on. The worry is whether the oil markets are reflecting the Iran situation adequately even now. Analysts do not think so. 

The oil markets’ big failure was not anticipating Iran’s ability and willingness to close the Strait of Hormuz. They seem to have assumed that because this had not happened in the past, it would not happen now. Iran’s leaders had issued very explicit warnings about how the country would retaliate to an American attack. These warnings were not taken seriously by the United States administration or the oil markets. 

The Economist estimates that the closure of the Strait of Hormuz in the last two months has taken out supply equivalent to10 per cent of global consumption over the last two months. Oil prices have been slow to react to a shortfall of this magnitude. In the past, smaller shortfalls in supply had caused much larger increases in oil prices. 

It took nearly three weeks from the outbreak of the conflict for oil prices (Brent crude) to touch $100 per barrel. At the time of writing, it is $112 per barrel. This is the price of a three-month futures contract for July 2026. Thereafter, the market sees the oil price dropping to $104, $99 and $95 in August, September and October respectively. 

What do the oil markets know that analysts don’t? The current oil prices are difficult to square with the supply-demand balance in the oil market. Still less do they square with the status of the conflict between Iran and the US-Israel alliance. Analysts believe that President Donald Trump’s upbeat messaging on the course of the conflict — “we are close to a resolution”, “it will end soon”, and such like — has had much greater effect on the oil markets than is warranted.  If the analysts are right, the world economy could soon be in serious trouble. 

Even at levels the oil prices have seen thus far, the impact on the world economy will be significant. The International Monetary Fund’s World Economic Outlook (April 2026) assumes an average petroleum spot price of $82 per barrel for 2026 in what it calls its “reference” forecast. In this scenario, global growth falls to 3.1 per cent in 2026, from 3.4 per cent in 2024. That is 0.2 percentage points below the IMF’s January forecast before the Iran conflict broke out. This fall does not capture the full magnitude of the impact of the Iran conflict. But for the Iran conflict, the IMF reckons, global growth would have been 3.4 per cent or the same as last year. 

How realistic is the assumption of an average price of $82 per barrel of oil for 2026 as matters stand today? In the first four months of this year, Brent crude has averaged $87. Most analysts believe that if the Strait of Hormuz remains closed for another four weeks, oil prices will shoot up to well above $125, perhaps even touch $150 per barrel. 

If that happens, the prospects for the world economy are truly dire. If oil prices average $100 per barrel, the IMF estimates global growth to drop sharply to 2.5 per cent. At a price of $110 per barrel, growth will drop to 2 per cent, which is close to global recession. 

Despite the conflict, US growth in the reference forecast would be 2.3 per cent in 2026, higher than the 2.1 per cent in 2025. While the world languishes, the US remains relatively unaffected. This may explain its appetite for the conflict in the first place. But it’s not as if the US has not been impacted by the Iran war. Before the war broke out, US growth in 2026 was projected at upwards of 2.5 per cent.

There is an important fact that has got obscured in the revised growth forecasts consequent to the Iran war. The war has impacted the world economy in a way in which Trump tariffs had not. Economists had warned of the folly of US tariffs and the grave consequences that would follow. They have ended up looking foolish. 

Three points are worth highlighting. First, world economic growth was unscathed by the Trump tariffs in 2025 and it was poised to remain unscathed in 2026. Secondly, US growth in 2026, following the tariffs, is projected to be higher than in 2025.

Most dramatically, world trade growth grew by a phenomenal 5.1 per cent in 2025, up from 3.7 per cent in 2024. Expansion in technology-related exports offset slower growth in other categories. China reoriented its exports from the US to Asia and Europe and recorded a new high in goods trade surplus of $1.2 trillion. 

President Trump’s instincts about tariffs have been proved right —they benefited the US economy without harming the world economy. What a pity his instincts have let him down on Iran. 

Trump tariffs are here to stay- Navarro

The US administration has been going out of its way to emphasise that the Supreme Court judgement striking down tariffs imposed by President Trump changes nothing. Tariffs will stay- and the trade deals done so far, including the one with India (done but not signed), will remain.

If anybody has doubts on this score, the article in FT by Peter Navarro should dispel these.  Navarro notes that the SC only struck down tariffs imposed under the International Economic Emergency Powers Act (IEPPA). It doesn't question the President's powers to impose tariffs using a variety of other laws.

The court did not declare tariffs unconstitutional. It did not strike down section 232 of the Trade Expansion Act. It did not invalidate section 301 of the Trade Act. It did not question the use of sections 122, 201 or 338. It did not revive the “nondelegation” doctrine. And only three justices relied on the “major-questions” doctrine, meaning the court created no sweeping precedent limiting presidential trade authority.  

In fact, even as the court struck down the IEEPA tariffs, it acknowledged that the president retains broad and powerful authority under numerous other statutes to impose tariffs.

......  Moreover, by narrowing the legal dispute in this case to the IEEPA alone, the court clarified the legal landscape. The authority under those other statutes is not in doubt. It is written clearly into law. That clarity will significantly strengthen the president’s tariff hand. 

The message is clear. President Trump will not back off from the tariff regime. Trump himself has clarified that the SC verdict will not change outcomes. He said at a press conference:

The India deal is on. All the deals are on, we're just going to do it a different way. 

And on Truth Social, President Trump posted:

Any Country that wants to 'play games' with the ridiculous supreme court decision, especially those that have 'Ripped Off' the U.S.A. for years, and even decades, will be met with a much higher Tariff, and worse, than that which they just recently agreed to. Buyer beware."

Indo-US trade deal: India's problem is not the current account but the capital account

Much of the analysis of the Indo-US trade deal centres on what India has gained or lost in terms of trade. But the point about the deal is not that it improves our export prospects while opening up selectively to American goods. 

It is that the deal improves the prospects for capital inflows, FDI and FII. These inflows have been distinctly unsatisfactory consequent to the US's imposing additional tariff of 50 per cent on Indian exports (barring a few specified items).

Foreign investors do not view favourably any emerging market towards which the US administration is ill disposed. That would have meant a downward pressure on the rupee indefinitely. Any further fall in the rupee had the potential to destabilise the Indian growth story. The rupee exchange rate rising to around Rs 90 from Rs 92 or so before the deal was announced is an indicator of how the attitude of the US towards India matters.

More in my BS article, Indo- US trade deal is not just about trade

Indo-US trade deal is not just about trade

The deal shifts the US posture towards India from hostile to neutral, and that matters for growth

T T Ram Mohan

The India-US trade deal, for which a framework for an interim agreement has been agreed, will not lack critics. The Congress party has called it a surrender. A farmers’ organisation has called for protests. Many will pore over the fine print once the details are finalised and argue that the deal is more favourable to the United States.

We need to be clear about a couple of things.

First, any nation negotiating a trade deal with the Trump administration must expect the deal to be tipped in favour of the US. President Donald Trump has made it clear that his priority is to reset America’s economic equations with the rest of the world. He is determined to use the economic and military might of the US to do so.  

For the entire post-War period until recently, the US was happy to let the advantage lie with many of its trade partners. It believed that it was economically strong enough to do so. Sharing prosperity with partners, the US believed, would make for world peace and it would also keep the world safe from communism. 

Not any more. Mr Trump rode to power in 2016 by insisting that the time had come to reorder trade relationships to the benefit of the US.  He didn’t quite manage to do so, partly because his initiatives were scuttled by Washington establishment status quoists in his Cabinet. In his second term, Mr Trump is determined not to make that mistake.  He has filled his administration with loyalists who will faithfully execute his orders. 

Last July, Mr Trump reiterated his perception of where matters stand. He said in a post, “The United States of America has been ripped off on TRADE (and MILITARY!), by friend and foe, alike, for DECADES. It has come at a cost of TRILLIONS OF DOLLARS, and it is just not sustainable any longer - And never was!” In any trade deal, therefore, it will be Advantage US.

Second, we must be clear that the overall relationship with the US is contingent on arriving at a trade deal that America approves. Not doing a trade deal means courting US hostility across the board. In negotiating a trade deal with the US, every nation faces a choice: Does it want the US to be a friend or a foe? 

Mr Trump’s trade deal with the European Union is an excellent illustration of the two points made above. For the EU, the issue was not just access to the vast American market. It was also American support to Europe in the Ukraine conflict, including the supply of critical weaponry and intelligence and America’s involvement in the North Atlantic Treaty Organization (Nato) itself. Faced with the prospect of jeopardising its defence relationship with the US, the EU settled for terms that were widely seen as humiliating.

The EU now faces a baseline 15 per cent tariff on its exports to the US. In addition, steel, aluminium and copper exports from the EU will face a 50 per cent tariff. Car exports would be subject to a quota.  The EU has also agreed to buy an additional $750 billion in US energy products over the next three years and make investments worth $600 billion in the US by 2029. The EU, for its part, will eliminate tariffs on imports of all US industrial goods and provide preferential access to a wide range of US seafood and agricultural products.  A more abject surrender is hard to visualise. Mr Trump has likewise signed deals with the UK, Japan and South Korea — all close allies of the US —that are conspicuously one-sided.  

The lesson for India is that the Indo-US trade deal is not just about access to the US market. India has weathered Mr Trump’s 50 per cent tariff on Indian exports much better than expected. India’s total exports are up 4.4 per cent year on year despite Trump’s tariffs. Nor have exports to the US suffered — they are up 9.8 per cent in April-December 2025.

The problem for India is that capital flows are flagging. This is happening at a time when India’s current account deficit of 1.3 per cent of gross domestic product (GDP) compares favourably with that of a range of countries, including Canada, the United Kingdom and Australia, as the latest Economic Survey notes. India had no difficulty financing current account deficits of a much higher magnitude in the post-reform era. Today, we are hard-pressed for capital inflows, and the rupee is under pressure despite a highly favourable set of economic indicators. That is not something to be treated lightly.

Gross foreign direct investment (FDI) fell marginally by 2 per cent in calendar year 2024. This may be in line with the general decline in FDI flows in recent years but it does not help us at all. At the same time, outward FDI from India as well as repatriation of profits by foreign firms in India have increased sharply. As a result, net FDI in April-November 2025 was a mere $5.6 billion. The bigger problem at the moment is with foreign portfolio inflows (FPI). It was (-)$3.9 billion in April-December 2026.  

There could be many reasons why FPI inflows have turned negative. You can be pretty sure, however, that the orientation of the US administration towards India is an important factor. When India is subject to a punitive tariff regime by the US, fund managers are unlikely to view India as a good place to invest in. The Treasury department houses individuals, including the Treasury Secretary, with strong links to Wall Street. They are known to work the phone lines with fund managers on a range of matters. 

Absent a trade deal, therefore,  we must reckon with rough weather in respect of capital flows, however good our macroeconomic indicators. (Using the future tense, as in the original version, because the deal is not finalised yet- TTR . And who knows, services exports to the US will not be subject  to punitive action as well? Also at risk are  defence collaboration, technology transfers and the entire strategic partnership that has been built over the past two decades. Thus, India’s strong economic performance in the present year is  no assurance that it can be sustained in the absence of an Indo-US trade deal. 

The point about the Indo-US trade deal is not that it involves compromises, such as cutting back on oil imports from Russia or scaling up imports of goods from the US to $100 billion annually for the next five years. It is also not just about getting a tariff rate of 18 per cent, one that is lower than that of many of our competitors. The substantive point is that it moves the US posture towards India from hostile to neutral. That is good news for the Indian economy.

 

Trump is right, the US economy is booming

 At Davos, President Trump said:

Growth is exploding, productivity is surging, investment is soaring, incomes are rising, inflation has been defeated. We are the hottest country anywhere in the world.

His remarks drew jeers from his detractors. 

Well, Trump's right.

In Q4, US gdp growth is projected at 5.4 per cent, according to the Atlanta Federal Reserve. Jason Furman, Harvard Professor and former Chairman of the President's Council of Economic Advisors is quoted as saying:

“Most advanced economies would be thrilled to have the US growth numbers." 

Which is more or less what Trump said at Davos. 

We have the IMF's revised forecasts for the world economy and the US. 

The world economy is projected to grow at 3.3 per cent in 2025, a shade below the growth rate of 3.4 per cent in 2024. US gdp will grow at 2.1 per cent, higher than the 1.8 per cent forecast last April (although below the unusual growth rate of 2.8 per cent in 2024).

Here's the juicy part: global growth and US growth are not one-off things in the face of tariffs- it's not that advance stocking by importers, implementation of tariffs late in the calendar year and absorbing of costs by importers have cushioned growth for one year. 

In 2026, global growth will again be 3.3 per cent and the US economy is projected to accelerate to 2.4 per cent (according to Goldman Sachs, to 2.8 per cent).

So, the doomsayers have been proved wrong for now about the impact of Trump tariffs- neither the world economy nor the US economy is collapsing. As Gillian Tett, FT commentator, puts it:

When Trump unleashed policy “rupture” a year ago, it sparked gloomy economic predictions. However, as the president crowed at Davos, the American economy is booming in 2026, due to a mixture of monetary, fiscal and regulatory stimulus.

Will 2026 be worse for the world economy?

 Gita Gopinath, Harvard prof and former Deputy MD of IMF, thinks it will.

She gives her reasoning:

So why hasn’t the world felt the sting of tariffs yet? The answer lies partly in actual tariffs being around half of what the US announced thanks to numerous exemptions. Yet at 14 per cent this remains a sharp escalation, the consequences of which had two offsets. First, AI spending and the stock market surge powered by AI optimism have propped up US growth and buoyed economies like Taiwan and South Korea that export AI-related goods. Second, fiscal policy has been more expansionary, not only in the US, but even more so in Germany and China. These forces masked the drag from American tariffs and Chinese retaliation. They also made 2025 look far more stable than it actually was. 

These favourable factors will not operate in 2026, she says. The AI boom is not sustainable. Importers cannot absorb 95 per cent of the higher costs, as they did in 2025. China cannot continue with its export-led strategy. The EU needs deep reforms that aren't happening.

Well, we'll see. Current inflation forecasts do not show a marked increase in inflation in the US for 2026. Stock market valuations for AI companies may get corrected but investment in AI is proceeding apace, particularly on the part of tech companies with large hoards of cash. China has diversified its exports away from the US and is growing exports to low-income countries at a much higher rate than before.

The thing is that many economists and commentators don't like the Trump administration. They want it to fail with its economic policy reset which includes protectionism, Buy American, Hire American etc. They disapprove of the massive fiscal deficit implied by Trump's Big Beautiful Bill for taxes passed last year.

It's not just that the real economy was not impacted as badly as experts had forecast- Gopinath's explanations may hold for the  real economy. But what about financial markets which are said to be forward looking? They should be factoring in the implications for next year and the years ahead? 

The aren't. Neither the US stock market nor the US bond market reacted anywhere as harshly as the commentators had forecast in 2025. Okay, stock market valuations may be influenced by AI stocks. But why have bond market yields hardly budged? 

2026 could be the year of reckoning for the experts and not President Trump!  

 

 

A paradigm shift in US economic policy in 2025

 

America’s economic policy changed in four ways in 2025.

·    -  The Trump administration effectively ended the free trade regime

·      - It revamped immigration policy to make it far more restrictive

·      -   It withdrew from the Paris Agreement on climate change

·     -    It passed a tax bill that ensures that America’s public debt remains at a high level in the foreseeable future, if not at a record level

To me, the astonishing thing is that these dramatic shifts have failed thus far to unsettle the world economy or the financial markets. Analysts have been coming up with numerous explanations for why this is so- after predicting economic apocalypse.

In 2025, we will know who was right: Mr Trump or the pundits.

More in my article in Business Standard.

 

Four US economic policy shifts of 2025 

 

In 2025, the world saw one tectonic shift in US economic policy and at least three others that are consequential. These shifts will not be easy to reverse even if there is a change in administration in the United States (US) down the road. How exactly they will impact the US and the world is unclear at the moment. What is clear is that the rest of the world will have to adjust to them.

First, the tectonic shift. The US under President Donald Trump has decisively upended the free trade regime that has underpinned the world economy for decades.  The world has to live with a US base tariff level of 10 per cent plus an element that will vary from country to country and from time to time, depending on how the US perceives its trade relationship with that country. 

This will be reinforced by even higher tariffs for sectors, such as steel and aluminium, which are perceived to be of strategic importance to the US economy. The weighted average tariff under President Trump has risen from below 3 per cent to around 19 per cent.

 During the year, major nations settled for deals with the US that are hopelessly one-sided. The European Union (EU), for instance, faces a tariff of 15 per cent (with higher tariffs on steel and aluminium) while US exports to the US EU face zero tariff. For the privilege of doing business with the US, the EU has committed to spending an additional $750 billion on US energy products (over three years), investing $600 billion in America, and buying US military equipment worth “hundreds of billions of dollars”. 

Japan too will face a baseline tariff of 15 per cent and will invest $550 billion in the US. The United Kingdom gets away with a tariff of 10 per cent because of the “special relationship” with the US.  China has secured a one-year truce with the US that allows tariffs to settle at a staggering 47 per cent for one year. In return, China has agreed to lift restrictions on export of rare earths to the US and buy more soyabean from the US. 

Switzerland was hit with a tariff of 39 per cent. Its President rushed to the US to negotiate a lower tariff but was rebuffed. Two months later, the US agreed to reduce tariffs to 15 per cent in return for $200 billion investment from the Swiss. India’s refusal to be rushed into a trade deal looks very brave in comparison with the abject surrender of nations that are incomparably richer.

The second shift has to do with immigration policy. The US administration has clamped down on border crossings, deported thousands of illegal immigrants, paused asylum applications, and attempted to limit birthright citizenship. 

Kevin Hassett, one of Mr Trump’s economic advisers and now a frontrunner for the post of Chairman of the Federal Reserve, has argued that the issue is the quality of immigration. He notes that the United States admits only 12 per cent of its immigrants on the basis of employment and skills, whereas 63 per cent of those admitted by Canada and 68 per cent of those admitted by Australia are selected for the skills they bring to these countries.

Mr Trump himself has lately spoken of the importance of H1B visas and foreign students in US universities. But the National Security Strategy document released by the White House recently makes the basic stance clear: “The era of mass migration is over”. There will be no retreat from the view that migration strains domestic resources, undermines social cohesion and threatens national security. 

A third shift is the Trump administration’s rejection of climate change and green energy as priorities. One of Mr Trump’s first acts after taking over as President in January 2025 was to withdraw from the Paris Agreement that committed all signatories to time-bound emission reduction plans. Mr Trump often calls climate change a “hoax” or a “con job”, renewable energy a “joke” and talks of “clean, beautiful coal”. 

The Trump administration is actively working to dismantle subsidies for renewable energy and electric vehicles, instead opening up more land and waters for oil drilling — “drill, baby, drill” is the motto.  The National Security Strategy document declares emphatically, “We reject the disastrous ‘climate change’ and ‘Net Zero’ ideologies that have so greatly harmed Europe, threaten the United States, and subsidize our adversaries.”

Mr Trump’s actions will mean higher costs for the rest of the world in battling climate change. It will also mean fewer resources with which to battle it as the Trump administration axes billions of dollars that support climate change projects. It could result in other nations withdrawing from the Paris Agreement as they view the burdens imposed on them as unfair.

A fourth shift is the rise in the level of public debt in the US as well as in other advanced countries. Public debt in the US and other advanced countries has risen relentlessly since the global financial crisis of 2007, and had averaged 104 per cent of gross domestic product (GDP) even before the pandemic struck in 2020. Mr Trump passed his Big Beautiful Bill that retained the tax cuts of Trump-1 and boosted defence expenditure. The International Monetary Fund projects US government debt to rise from 122 per cent of GDP in 2024 to 143 per cent by 2030. The corresponding figures for advanced economy debt are 109 per cent and 119 per cent, respectively.  

Commentators worry that rising public debt in advanced countries poses a threat to macroeconomic instability in the global economy. Mr Trump’s economic advisors, however, believe that faster economic growth, tariff revenues and lower interest rates will cause government debt to fall to 94 per cent by 2034. That is one forecast that will be watched closely. But clearly, the dogma about the unsustainability of high levels of public debt that advanced countries preached to the developing world has gone out of the window.

As the year draws to a close, the astonishing thing is that these massive shifts in economic policy have thus far failed to seriously unsettle the US economy or the world economy or the financial markets. The IMF projects growth in the world economy for 2025 at 3.2 per cent, just 20 basis points below last year’s. The US will grow at 2 per cent, compared to 2.8 per cent last year. US inflation is running at 2.8 per cent, which is way below what was feared following Mr Trump’s Liberation Day announcements. 

The US equity market touched an all-time high during the year, with a return of 13 per cent over the year. The yield on the one-year G-Sec in the US is a full 50 basis points below its level when Mr Trump assumed office. Pundits, who predicted economic apocalypse, are trying to find reasons why their forecasts went wrong. 

Has the moment of reckoning been merely deferred? Or is Mr Trump on to something? We should know for sure in 2026. 

 

The importance of being Scott Bessent

The financial markets have held up in the face of Trump tariffs and assorted shocks during the year. Much credit must surely go to the US Treasury Secretary Scott Bessent. 

Bessent is a financial markets player of repute. He made a huge fortune in the markets. He knows financial markets and, more importantly, he respects them. The calibration of various actions as well as the calibration of comments from the US administration are largely responsible for the markets not buckling under the upending of the free trade regime under Trump-II. 

To get into Bessent's mind, it's useful to read the FT story on Bessent that is based on two interviews with him.

Bessent sums up his approach succinctly:

We want the most America-first policies that are possible, without incurring market wrath.

Bessent is in the forefront of the transformation of the policy paradigm- and more:

In just nine months, Bessent has staunchly promoted Trump’s aggressive tariff policies, championed the president’s effort to overhaul the Federal Reserve — including his attempt to fire governor Lisa Cook — and ushered in a new era of sweeping deregulation and tax cuts, including the loosening of crypto rules and the promotion of stablecoins. But he has also brought Maga to the US Treasury in other ways: vowing to use the Internal Revenue Service to probe left-leaning organisations the government suspects of fuelling political violence

How does he differ from his predecessors?

Unlike most of my predecessors I have a very healthy scepticism of elite institutions and elite opinion, whereas I think they didn’t,. But I have a healthy regard for the market.

The critics have been wrong about the markets crumbling under the onslaught of Trump tariffs:

Since he was sworn into the job on January 28, the S&P 500 equity index has risen about 12 per cent, while the 10-year Treasury yield, a proxy for long-term borrowing costs, has dropped by slightly more than half a percentage point over the same period to 4 per cent. Please use the sharing tools found via the share button at the top or side of articles.  .... “Where the hell is the market risk? They’ve just been wrong.”  

What Trump is attempting has the potential to derail the markets. Give credit to Trump for choosing the right person to manage the markets.  

 

The pundits were wrong: Trump tariffs are not impacting the world economy

The IMF has upgraded its forecast for world economic growth a second time. It now projects growth of 3.2 per cent for the world economy, a tad below growth of 3.4 per cent in 2024. 

In April, the IMF had forecast growth of 2.8 per cent. The projection must hav been prepared ahead of Trump's Liberation Day announcement but Trump's stance of tariffs in general was well known. In September, tariffs went into effect. 

From the day, Trump assumed office, the pundits have been predicting apocalypse for the US economy and the world economy. Well, it ain't happening. 

IMF Managing Director Kristalina Georgieva offers several explanations but these are not entirely persuasive:

• Policy making has improved especially in the emerging economies: Well, the improvement didn't happen in the last six months. The IMF should have built this element into its foecasts
• Private sector agents front-loaded their orders to beat tariffs and corporate balance sheets are healthier than before: Again, the latter was known. As for front-loading, that too should have been expected. And that shouldn't make a difference in 2026- for which the IMF has a projection of 3.1 per cent global growth, 0.1 per cent below that of 2025
• Tariffs are not as bad as expected, the US weighted average tariff is at around 19 per cent, which is below the 30 per cent feared earlier: But it's still a lot worse than the 3.5 per cent level before Trump! The free trade regime is being upended and it's not a making a big difference. 
• Financial conditions are supportive, equity prices have surged thanks to AI stocks and the surge has boosted consumption: The AI revolution has been in the works for some time. If the AI effect is overwhelming the impact of protectionism, that too should have been taken into account. The dollar has depreciated but it hasn't collapsed following any exit by investors, as was forecast.

To put it bluntly, the IMF, like so many economic pundits, got it wrong. After the turbulence in the market following Liberation Day, Trump said hat things would settle down- and it seems he has got it right.

There's an interesting observation that FT commentator Chris Giles makes in his article on the IMF forecasts. He says the IMF as wrong is saying that pre-pandemic growth was 3.7 per cent and the world outlook has turned gloomy because we are now looking at 3 per cent growth.  

The reality is that the pre-pandemic average growth rate was 3.4 per cent when using the full set of data in the IMF database, not 3.7 per cent. The higher figure relies on giving much more weight to the boom years before the global financial crisis and limiting the sample to 2000-2019. The 3 per cent medium-term future growth rate relates to the average over six quarters, starting in the second half of 2025 to the end of 2026. After that it climbs back to an average of 3.2 per cent a year, which is hardly lower than the long-term average.

In other words, the IMF is fiddling with the numbers to tell a story it wants to!

 

Economists have been wrong about Trump's tariffs- so far

I had a post a few days ago about the Economist saying that the US economy is defying gloom. I had a post with my own analysis earlier in which I had argued that Trump was winning the tariff war- on X, the article evoked harsh comments and I was branded a Trump admirer. 

When economists say the US economy will crash or the world economy will crash on account of Trump's tariffs, it is no more than wishful thinking, I'm afraid. They don't like Trump for a variety of reasons  and they would like to see the economy crashing. Well, it ain't happening. The facts on the ground are otherwise.

The Economist acknowledges that six months into Trump's term, things look "surprisingly rosy":

Yet six months on the full reckoning has not arrived. There is no runaway inflation. America’s economy grew by 3.8% at an annualised rate in the second quarter; the Atlanta branch of the Federal Reserve expects similar in the third. Consumers are spending, firms investing and the stockmarket booming. The outlook has also improved elsewhere. In September the OECD lifted its forecast for global growth to 3.2%, up from 2.9% three months earlier.

And it proceeds to explain why:

One reason is that tariffs have been gentler than advertised. In April America’s average rate was estimated to be near 30%; today the same models put it closer to 18%. Mr Trump threatened China with tariffs of 145% but by September was imposing levies at barely a third of that. South Korea’s fell from a promised 25% to 15%. ....

....Carve-outs have blunted the impact further still. Nearly half of America’s imports have been exempted from Mr Trump’s tariffs. Electronics such as smartphones and computers were spared entirely. Brazil’s rate of 50% includes nearly 700 exemptions, trimming it to 30% or so. Canada’s headline tariff of 35% is nearer 6% in practice, according to Scotiabank, a local lender, largely because goods qualifying under the United States-Mexico-Canada Agreement (USMCA) are exempt. Even sectoral levies are riddled with loopholes. Mr Trump’s new pharmaceutical tariffs, announced at 100% and due to take effect on October 1st, excluded generics (which make up 90% of drugs sold in America) and branded firms with investment plans in the country. That day he paused the measures altogether as talks began.

There are other reasons. Firms rushed to front-load imports to beat the tariffs. There seems to be underinvoicing of imports from China; as a result, tariffs paid are much lower for the actual value of goods imported.

Most importantly, trade wars, such as those that erupted after the Smoot-Hawley, have been noticeably absent. Except for China, no country has retailiated seriously against American tariffs. The reason is that many countries find they can diversify exports. America accounts for only 8 per cent of world imports today compared to 20 per cent at the turn of the century. Countries are forging closer trade partnerships with like-minded countries so that there is a large area of free trade after excluding the US. 

The Economist thinks that with Trump spreading the roll-out of tariffs over several quarters, inflation in the US could become persistent. Well, the last month data shows a monthly inflation rate of 0.2 per cent of an annual rate of 2.4 per cent. 

I repeat what I said earlier: Trump is winning for now. 

Fed news: Economists back Waller, oppose Trump petition for Cook removal

Eight two per cent of economists polled by an agency want Christopher Waller to replace Jerome Powell. Only 20 per cent think it will happen.

Thirty nine per cent think Kevin Hassett, Director of National Economic Council, most likely to take over. 

Meanwhile, the who's who of economic policy have filed an amicus brief before the US Supreme Court opposing President Trump's move to remove her from office while her petition challenging her removal is pending before the Court. In other words, they want a stay on her removal untl her case is disposed of. 

The list of signatories includes for Fed chiefs Alan Greenspan, Ben Bernanke and Janet Yellen,  former Treasury Secretaries Larry Summers, Tim Geithner, Robert Rubin, Jack Lew and Hank Paulson and former members of the President's Council of Economic Advisers Jason Furman, Gregory Mankiw and Glenn Hubbard. 

Stephen Miran makes his presence felt on the Fed

Stephen Miran, who has joined the Fed board on leave as Chairman, Council of Economic Advisers, made his presence felt at his first FOMC meeting. He voted for a 50 bp cut in the policy rate while the others voted for a cut of 25 bp. 

Seven members of the FOMC indicate they do no expect any rate cut for the rest of the year. Another two expect  just one cut. Miran projects a drop of another 1.25 bp by the end of the year. Trump's two appointees, Michelle Bowman and Christopher Waller, voted for 25 bp cut. Waller did so despite being in contention for the Chairman's post when it falls vacant next year.

Trump's bid to get the Fed to make a steeper cut in the rate has not succeeded. Looks as though the Fed will not change tack as long as Powell is at the helm. 

What would be Trump's next move?

What experts don't want you to know: Trump is winning on tariffs

President Donald Trump's actions have truly stumped the pundits. He assumed office last January on a platform of imposing tariffs on goods imports into the US as a means of reducing America's chronic and ever-growing trade deficits. The experts denounced his plans saying it would take the US economy as well as the world economy into an abyss.

Mr Trump has been as good as his word. He first imposed "reciprocal tariffs" and then used these as a negotiating tool with leading trade partners who account for about 60 per cent of America's trade. The EU, UK, Japan and South Korea are among those who have been bludgeoned into submission. Those holding out have been hit with tariffs of up to 50 per cent. China faces a tariff of 30 per cent with a 90-day pause coming to an end in the next few days.

The astonishing thing is that the dire forecasts of experts have simply not come true. So far, Mr Trump has had his way without the world economy or the US economy going into a tailspin. Experts have now gone into overdrive to come up with reasons for why their forecasts have not come true. They are being dishonest. They must simply accept that they have been proved wrong.

More in my BS column, Trump is winning the tariff war hands down. 

FINGER ON THE PULSE
TT RAM MOHAN

Trump is winning the tariff war hands down

India is smarting under the tariff announced by United States President Donald Trump recently. It now faces a tariff of 25 per cent, plus an additional 25 per cent penalty for importing oil from Russia. Coming soon: Punitive tariffs on all pharmaceutical exports to the US, something that will bite Indian pharma companies. 

 Nearly 70 countries have been hit by tariffs on top of the universal 10 per cent levy. The tariffs are not just about reducing America’s current account deficit. Mr Trump has weaponised them to make a political point --- or even a personal one.

After announcing the 25 tariff on India, Mr Trump added insult to injury by calling India a dead economy. He flaunted the deal to explore oil reserves in Pakistan and hinted at Pakistan selling oil to India down the road, clearly a poke in the eye for New Delhi.

   India is not alone in being penalised and humiliated by Mr Trump for reasons other than trade. Canada faces a tariff of 35 per cent for not curbing the flow of fentanyl and other drugs. Mr Trump made it plain that Canada’s plan to recognise Palestine as a state is an aggravation. 

Switzerland has been hit with a tariff of 39 per cent, the highest for any European country. Mr Trump is irritated by the high prices Swiss pharmaceutical companies charge for their drug exports to the US. South African exports face a tariff of 30 per cent for “genocide” against whites. Brazil’s takes the cake. Its exports will be charged a tariff of 50 per cent  the highest for any nation (the same as India’s) because Mr Trump believes that his friend, the former Brazilian President Jair Bolsonaro, is being falsely prosecuted for political reasons. 

People everywhere are outraged by Mr Trump’s whimsical ways. Commentators fulminate against his actions. But here’s the bad news for Mr Trump’s detractors: Mr Trump is winning the tariff war hands down.

When Mr Trump announced “reciprocal” tariffs on April 2, pundits forecast a trade war in which other nations would retaliate by imposing tariffs on US exports to them. Everybody would be worse off as happened with the infamous Smoot-Hawley tariffs in the US of 1930, which led on to the Great Depression.

Nothing of the sort has happened. The United Kingdom, Japan, Vietnam, South Korean, Indonesia and the Philippines have all caved in meekly to Mr Trump’s dictates and signed one-sided trade deals. The European Union (EU), the second-largest economy in the world in terms of gross domestic product (GDP), too capitulated--and how. 

EU chief Ursula von der Leyen, flew to Mr Trump’s golf course in Scotland to work out a trade deal. Mr Trump kept her waiting until he and his son had finished their second round of golf. Thereafter, he took her on a tour of his mansion where he bragged about the magnificence of his ballroom. Ms Leyen sought to flatter the American President. “You’re known as a tough negotiator and dealmaker”, she said. “But fair,” said the US President. “But fair”, the EU head dutifully echoed. 

There followed the announcement of a US-EU trade deal. EU exports to the US would be subject to a 15 per cent tariff while the EU would remove all tariffs on US industrial goods. The tariff of 50 per cent on the EU’s exports of steel, aluminium and copper would stay. Further, the EU has committed to buy $750 billion of US energy over the next three years and to invest $600 billion in the US over President Trump’s term. In the phraseology of the Second World War, it was “unconditional surrender”. 

Mr Trump’s detractors had warned of the dire effects of his brand of protectionism. The US would face higher inflation and lower growth. Equity and bond markets would tumble. The global economy would come crashing down. 

None of these forecasts has come true.  In its July 2025 update for the world economy, the International Monetary Fund (IMF) raised its forecast for 2025 by 0.2 percentage points to 3 per cent, relative to its April 2025 forecast. That’s the rate at which the world economy has grown since 2011. As for the US economy, the IMF has revised its forecast for the US upwards to 1.9 per cent, from 1.5 per cent in its April forecast. That doesn’t look at all as if the US economy is hurting from Mr Trump’s policies.

The American equity market is close to its record levels of the past five years. Yields on government bonds are below those in January 2025 when Mr Trump took over, and broadly in line with bond yields in 2023 and 2024. Inflation rose to 2.7 per cent in June, hardly the terrifying level it was projected to reach.

Analysts are now trying to tell us why things have panned out very differently. Inflation staying low? American importers stockpiled goods in anticipation of higher tariffs, so the tariff increases are yet to translate into higher inflation. That may be true of current inflation, but why have forward-looking bond yields not moved up?    Mr Trump’s critics conveniently ignore the role of oil prices in containing inflation. Brent crude oil prices are at least $8 below those a year ago- and Mr Trump is keen to drive them down even further. 

Financial markets not rattled? That’s because markets had expected much higher levels of tariffs and are relieved at the levels at which these have settled. Well, the present level of tariffs is seven times the level before Mr Trump took office!  Stock prices are sky-high? That’s because of the Artificial Intelligence (AI)  frenzy. But the AI frenzy was known when commentators were warning us that Mr Trump’s tariffs would cause a meltdown in equity prices.

The Economist has been at the forefront of those castigating Mr Trump for his wayward ways and warning of the terrible consequences that will follow. It has now come up with an explanation for why apocalypse hasn’t happened yet. 

The world economy, it contends, has a better capacity to absorb shocks today for a variety of reasons. Supply chains have become more efficient and resilient; changes in oil prices are less unsettling because a more diverse supply of energy is available; firms have become more adept at dealing with shocks; the services economy is less susceptible to shocks than an industrial economy; and governments are quick to take measures to cushion the economy from shocks. Capitalism has produced a “teflon economy”. The analysis begs the question: If the global economy is so resilient, why   has The Economist got  worked up about the disruptive effect of Mr Trump at all? 

As far as Mr Trump is concerned, his tariffs are bringing him higher revenues while protecting American industry and getting foreign firms to invest and manufacture in the US. All this without destabilising the financial markets. It’s no surprise that the torrent of criticism Mr Trump faces has left him unfazed. Mr Trump sees himself as a winner, not a whiner-- and that’s not a minor difference. 

EU- US Trade deal: Unconditional surrender

"Trump ate von der Leyen for breakfast", an irate Hungarian PM Viktor Orban commented after the EU-US trade deal was announced.

It wasn't just the terms of the deal, it was the optics that led up to it. EU chief  Ursula von der Leyen had fly to Trump's golf course in Scotland. She was made to wait until Trump and his son had finished their second round of gold. Then came the "talks" and the announcement.

Under the deal, most EU exports to the US would be subject to a15 per cent tariff. There is a small list of exempted items. The EU, in addition, commits to buying $250 bn worth of American oil and gas over the next three years and will also invest ove $600 bn in the US (the time period for which is not specified). EU car exports will face a lower tariff of 15 per cent compared to the 25 per cent they now face. However, steel and aluminium exports will continue to face a tariff of 50 per cent. Trump has also indicated repeatedly that punitive tariffs on pharmaceutical imports into the US are in the offing. 

What does the EU get in return? Well, it doesn't have to face the 30 per cent tariff that its exports would otherwise have faced. EU exports and growth will be adversely impacted but less so than if Trump had hit EU with the 30 per cent tariff he had threatened in the absence of a deal.

It's hard to think of a more humiliating moment for Europe. The EU's commitment to raise defence spending to 5 per cent of GDP under pressure from Trump was humiliating but at least that could be defended as self-interest. It was meant to protect Europe from the alleged Russian threat. 

The Europeans fear not just for their economy in the face of Trump's determination to effect tariff walls but about the US exiting NATO if they rub Trump the wrong way. It's hard to tell what Trump would do if annoyed. But the Europeans know that he can seriously hurt them.

As WW2 headed towards a finish, the Allies (Europe, the US and the then Soviet Union) framed an objective with respect to Germany: Unconditional Surrender. 

That would be an apt characterisation for the EU- Trump deal

Libor-rigging: acquittal of two bankers

Post the Global Financial Crisis (GFC), the banking sector- and bankers- came under the scanner. The public was outraged that these men and women had laid low the entire global economy. (Never mind that the US Federal Reserve had contributed with its decision to let Lehmann Brothers fail).

The public demanded accountability. "Why are bankers not getting jailed?" was the general clamour.

In the numerous investigations that followed, the authorities discovered that the Libor rate, which was the reference rate for interest rates on various products, was being manipulated. This is how it happened.

Banks were required to submit their borrowing rates in the inter-bank market. The top 25% and the bottom 25% of the submissions would be left out and the rest would be averaged out to get the Libor rate. It turns out that bankers made incorrect submissions in order to benefit their trading positions. This was called the 'Libor-rigging' scandal. Harsh sentences were handed down on several bankers, quite low in the hierarchy but extremely well paid. The Libor rigging had little to do with the GFC but then this was all about throwing a few bankers to the wolves.

Two of the bankers convicted were Tom Hayes and Carlos Palombo. Hayes got a 14-year sentence, which was reduced to 11 years. Inmates his at his jail assumed he was a child sex offender given the severity of his sentence. Five and a half years later, Hayes has been acquitted. So has Palombo.

The Supreme Court of UK overturned their sentences recently on a technicality. The lower court judge, while giving directions to the jury, had said that taking commercial considerations into account while submitting Libor rates was a dishonest thing to do. The Supreme Court ruled that that was a matter for the jury to decide. For the jury to have taken that as a given meant that Hayes had faced an unfair trial.

Mind you, the Supreme Court did not exonerate Hayes of the charges. On the contrary, it said there was "ample evidence" to secure a conviction. However, since the process was flawed, he had to be acquitted. The Serious Fraud Office has said it will not appeal against the judgement. Hayes is now a free man. Other bankers similarly convicted are now planning to appeal.

The case is not about particular individuals. It is the banking sector that was on trial. The manipulation of submissions was widespread in the banking sector. Top management knew about it as did the regulators. It was what is called 'industry practice'. Nobody batted an eyelid when bankers manipulated the rates to suit their trading positions to benefit themselves and their banks. In proceeding after a few bankers, the Serious Fraud Office was seeking to satisfy the public's cry for blood consequent to the GFC. It has now covered itself with mud.

Dodgy practices continue to abound in the banking sector. There is a push once again for 'light touch' regulation instead of the stringent regulations that came about after the GFC. Will bankers, regulators and politicians ever learn? Perhaps not. The power of vested interest triumphs.

Court order on Trump tariffs: how much of a setback is it for Trump?

The Court of International Trade has ruled that President Trump wrongly used emergency powers to impose the tariffs he announced on Liberation Day, May 2. 

How big a setback is it for Trump? A column in FT indicates several ways open to Trump:

The so-called section 232 tariffs on cars and steel are unaffected by the ruling. Trump will appeal this decision to the federal circuit court; beyond that he has a pliant Supreme Court waiting for him if need be; there are other obscure pieces of decades-old legislation he can dust off to resume his tariff campaign. 

The American Congress has the legal powers to restrain the President of the United States. Over the years, Congress has progressively ceded these powers so that the President has a free run in most matters. Only Congress has the right to declare war. But American presidents have, for decades, initiated steps that led up to war without Congressional approval. There are numerous articles on the subject. Here is one:

President Ronald Reagan invaded Grenada. President George H.W. Bush invaded Panama and Somalia. President Bill Clinton used military force in Iraq, Haiti, Bosnia, Afghanistan, Sudan and Kosovo all without congressional approval. (President George W. Bush didn’t declare war on Afghanistan or Iraq, but Congress authorized the use of military force for those engagements). President Barack Obama ordered targeted military strikes in Libya in 2011 and dozens of unmanned drone strikes in Pakistan without congressional approval.

The courts have not stepped in either in these matters. So it's a bit of a stretch to think the courts will attempt to interfere in matters of economic policy, such as President Trump's position on tariffs. 

The difficulty for the Trump administration is that clearing the hurdles posed by the judiciary in this matter will prolong uncertainty and create turbulence in the markets. The challenge is not pushing through tariffs per se as ensuring that the markets do not spin out of control in the interim.