Trump, interest rates, and US-China ‘clash of the titans’ – Samy Chaar explores macroeconomics and geopolitics in interview with Handelszeitung

Does that mean you think Jerome Powell will make his next rate move on 16 September?

That is what I am expecting, from looking at the inflation figures and wage trends. Both are moving into a more normal zone.

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What about interest rates in 2025 and 2026?

This is where a President Trump, if he were to be elected, would come into play, and the question is what he would do with import tariffs against China. He acts in a transactional manner. My impression is he is very loud but he can also be incisive at times. So he could threaten tariffs and demand that the Chinese curb the export of certain products. Alternatively, he could introduce punitive tariffs.

Roughly speaking, punitive tariffs of 10% would trigger price rises of 1% in the US. In my risk scenario I assume 12% punitive tariffs and subsequently a price rise of 1% in 2025, which would prompt the Fed to refrain from further rate cuts. So, if the dispute with China were to escalate under Trump, we would see higher rates of inflation in the US in 2025 and a pause in rate cuts by the Fed. I do not see this risk in a scenario in which the Democrats win the presidency.

How long might a hard Trump stance towards China last?

In 2018, he introduced punitive tariffs of 15% and did not let them escalate further. If he follows the same pattern, and does not take it too far, these tariffs would expire after a year and the rate of inflation would come down again. The Fed could then lower interest rates further starting in 2026.

Trump lowered taxes – Biden has increased them for corporates. What would happen under Trump II, should he win the presidency?

I don’t think that he will cut taxes further, but he will extend the tax rebates which would otherwise expire in 2025.

What would happen in the markets if he were to lower taxes further after all?

In that case, the corporates would be happy and the equity market would receive a boost. However, the bond market would not respond favourably because it does not like rising deficits and more inflation. But I don’t expect this scenario to materialise. Even keeping taxes at 21% will require a feat of strength.

You are quite bullish with regard to the United States. What about Europe?

Rates of investment in Europe are lower, because it is dependent on energy and the European tech sector is not booming in the way it is in the US. This is why I think US capital investments are to be favoured, and why I would refrain from an excessively low exposure to US assets and tech.

Do you prefer dollars or the euro?

My favourites are dollars and Swiss francs – the euro slightly less so. I simply don’t see an ambitious growth and investment plan in the euro area – not in Germany, not in France and not in Italy. If ambitions are set low, opportunities also diminish. So I would always add dollars and Swiss francs to a euro portfolio.

Is it important to lower the risk profile?

From an economic perspective the situation is satisfactory, much better than it was during the pandemic. Many sectors have returned to normality – industry, real estate, retail. Last year, Europe reported hardly any growth – 0.4%; this year the figure is slightly above 1%. At present, I don’t see any risk coming out of China, the economy there is also growing faster than last year. On top of this, we have slightly rising productivity and falling inflation, and the central banks are lowering interest rates. This will improve earnings forecasts.

But the media are warning of a recession. What’s your view?

I am more upbeat than the headlines. Instead, following the Covid crisis, I see a return to normality. Rates of inflation are falling; wage growth is settling down; the rate of job changes, which was very high, is also falling; the same applies to delivery times, indicating well-functioning supply chains, both in Europe and the US. On top of that, elections have not produced the political and economic fractures many expected. As I see it, therefore, the headlines are shriller than reality. 

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France is reeling politically – what are the French saying?

As a French citizen one might feel nervous, because reforms are not being tackled and because there is no economic impetus in Europe. As an investor, however, I would be much more upbeat. For incisive, even disruptive, decisions to be taken, a political majority is required in Paris, and there isn’t one. We are therefore seeing a classic blockade by the parties. As an investor I appreciate this gridlock. I would prefer no new laws to be adopted than legislation that is excessive or hastily put together.

What about the pound sterling? It has lost almost half its value against the Swiss franc over the past 20 years.

After fourteen crazy Tory years we now have Labour’s Keir Starmer. His agenda so far has been reasonable – that is, he favours budget discipline, slightly higher taxes, slightly more investment, and he also wants to normalise the UK’s relationship with the EU. I think that after the wild years we are now seeing a return to slightly more pragmatism and less ideology. But, of course, the problem of weak infrastructure has been around for a long time and needs to be addressed.

In these turbulent times, Switzerland is seeing a switch at the head of the Swiss National Bank (SNB) – from Thomas Jordan to Martin Schlegel. What impact do you think this will have?

It won’t create any problems – it’s a seamless transition. Martin Schlegel knows the role. Antoine Martin is also experienced – he gained very valuable experience at the Fed. I expect a continuation of the SNB’s successful course.

Did the SNB respond too early when it lowered interest rates to 1.25% in the summer?

The central bank has a mandate to keep inflation below 2%. It currently stands at 1.3%. For me, this means it could even go down to 1% as early as September. This would still enable the SNB to raise or, if necessary, lower interest rates.

The SNB also knows that if interest rates are too high, investments will fall. It has to strike a balance here; I think it will ensure that the rate remains high, so as to avoid putting obstacles in the way of companies in a highly competitive environment. Given that we’re in a competition for capex it is important not to hit the brakes for too long, but also not to accelerate too much, which would lead to the economy overheating. The SNB has done a great job so far – I am sure it will continue to act with assurance. Furthermore, it is making active use of its balance sheet, which provides it with further flexibility.

What do you see as the geopolitical risks for Switzerland?

I have described the stiffer international competition which arises from the formation of geopolitical blocs, and which is also being waged via investments and innovation. Switzerland must take care to ensure its SMEs competing on the global markets remain competitive. These include many global leaders in niche markets – they must maintain their ability to invest. To achieve this, they need first-rate labour, infrastructure, technology, energy supply, and a helpful tax environment. Everything possible should be done to maintain or enhance these competitive strengths.

State debt is one of the swords of Damocles hanging over the global economy. It has been rising for decades, even though every government comes into power promising to lower it. What risk does this pose?

I don’t think the size of the debt is the biggest risk. If it were, Japan would have seen debt stress long ago, because its debt burden now stands at more than four times the country’s GDP. And yet Japan is not suffering from debt stress. Inflation is low, as are interest rates – and the economy is in good shape.

So the size of the debt is not crucial?

No. What is crucial is the purpose of the debt. If it is used to build up investment in infrastructure, education, tech, or energy security over the long term, then the market appreciates it, even loves it. The US has recently seen investments of between USD 3,000 and 4,000 billion, and the stock market is booming.

Are you referring to the Inflation Reduction Act?

Not just that – there are also other programmes. In my experience, it is not so much the size of the debt that is crucial. What matters is what you do with the money. The ability to absorb the excess savings in the private sector also plays a role.

We always talk only about public sector debt. But there is also the private sector: private households, banks, industrial companies, etc. If you compare the public sector debt with the financial clout of the private sector, a nuanced picture emerges.

Is this what we’re seeing in Italy and France?

Yes, the public sectors of both are heavily in debt and loss-making, whereas the private sectors are profitable and have enough cash for the two sides to balance each other out. The private sector is in good health, it puts a lot of cash into pension funds, which in turn buy government debt instruments. This position does not make me nervous as an investor.

Or let’s take Spain as another example – during the financial crisis the deficit on the national current account was 10%, today it has a surplus of 3%. These countries are able to cope with the amount of public sector debt because the private sector has a high savings surplus and the absorption chain is correspondingly high. It gets dangerous when this balance of public sector and private sector is minus 5%.

So, coming back to your initial question, yes, some countries are heavily indebted but the private sector is in very good shape, with private households gaining. Among corporates I see a lot of cash flow and healthy balance sheets. The flourishing private sector provides a safety net.

One major unknown factor remains: China and Taiwan. What’s your view on this hotspot?

I consider a global conflict highly unlikely, but an invasion would trigger an economic war and cause massive disruptions to supply chains. The United States would have a big advantage in this.

What is this advantage?

Under Barack Obama, the country ramped up its own oil production courtesy of fracking. Prior to that, the US produced less than 8.5 million barrels a day; this figure now stands at 13.2 million barrels. What this means is that no country today produces more energy than the US – not even Russia or Saudi Arabia, both of which produce between 10 and 11 million barrels per day.

The Americans realised early on that the energy market would experience disruption, and they took action. When Russia attacked Ukraine, the US was in a good starting position because they were energy-independent. Today we are seeing the same pattern when it comes to microprocessors. The US has hugely increased spending on innovation for microchips. We could also see this as a precautionary measure against a possible Chinese attack on Taiwan. A number of shifts started taking place some time ago, with Taiwan also relocating its production to other countries.

Do you believe the US would intervene in military terms, or just step up the chip war?

The Americans would not deploy troops in Taiwan, but they would impose harsh sanctions on China, ban it from international bodies and the Swift international payments system, and cut it off from US consumers. The Chinese know all this, but nevertheless their strategic objective is to absorb Taiwan at some point.

Is Europe asleep or too busy navel-gazing?

Europe failed to predict the consequences of its dependence on Russian gas and oil and did not diversify its energy sources. But at least it displayed a high level of flexibility when it came to replacing Russian energy. Europe is now overlooking the significance of the chip industry in a Taiwan conflict – the bloc does not foresee the coming disruption, but it should be able to respond quickly and adapt.

Why does Europe lack this foresight?

The EU is incapable of pushing through a new strategy at a time when the world is operating normally – then national interests take centre stage. Europe only responds quickly and decisively when it is facing a genuine crisis. This is what happened when it faced Covid and Russia.

Does this mean that Europe will forever be hanging onto the coat-tails of the US – that the US will set the pace? Macron has used the phrase “US vassal”.

I don’t know about forever. Emmanuel Macron said that if Europe wants to be strong it must become more autonomous and build up a joint and powerful army. But I can only see the very early stages of this happening, so I think the US will remain hugely important for Europe for the foreseeable future.

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