In this week’s newsletter, we first examine the future of global trade, given the uncertainty around Donald Trump’s return to the White House and growing protectionist impulses around the world. Then, we move on to investment insights, from the risks facing the bond market to potential Fed cuts in 2025. We then shift our focus to news in the chip-making world, highlighting the innovative way that artificial intelligence is changing fields from chemistry to pharmaceuticals, as well as the state of chip-making production in the US. Finally, we end this week on the latest G20 summit held in Rio de Janeiro that focused on issues that the Global South faces.

The Future of Global Trade

How will a Trump presidency transform global trade? 

The Financial Times

The world faces its worst trade wars since the 1930s 

The Economist

South America’s ‘made in China’ megaport prepares to transform trade 

Joe Daniels and Steven Bernard, The Financial Times

The return of Donald Trump to the White House heralds a period of significant uncertainty and potential disruption for the global trading system. Trump’s protectionist leanings, evidenced by his “America First” agenda and his stated admiration for tariffs, have sparked concerns about a resurgence of trade wars. During his campaign, Trump threatened to impose a 60% tariff on all Chinese goods, along with tariffs of up to 500% on Mexican cars and 10-20% on other imports. While these figures might be used as bargaining chips rather than implemented literally, his administration’s stated goal is to leverage tariffs to renegotiate trade deals and prioritize American industries. This aggressive stance is likely to provoke retaliation from major trading partners like China and the EU, setting the stage for a potential escalation of trade tensions reminiscent of the protectionist policies that crippled global commerce in the 1930s.

The inauguration of the Port of Chancay in Peru on November 16, 2024, adds another layer of complexity to this evolving landscape. Built by the Chinese state-owned shipping giant Cosco Shipping at a cost of $3.6 billion, and part of the Chinese Belt and Road initiative, the port is a testament to China’s growing economic influence in Latin America. Chancay will be able to handle 1-1.5 million TEUs (twenty-foot equivalent units) annually, eventually expanding to 3.5 million TEUs. This capacity, coupled with its ability to accommodate the world’s largest shipping vessels, positions Chancay as a potential hub for trans-Pacific trade, allowing goods to bypass traditional US ports on the West Coast. China is already Peru’s largest trading partner, with total trade reaching $23.1 billion in 2023, compared to $9.1 billion with the US. The US has raised concerns about the lack of transparency surrounding Chancay’s development and its potential use by the Chinese navy, adding to the strategic rivalry between the two superpowers.

Investing Insights

The Bond Market Faces 4 Big Risks 

Alec Lucas and Maciej Kowara, Morningstar

Souring S&P 500 Profit Outlook a Bad Sign for Stock Market Rally 

Jess Menton, Bloomberg

Goldman Says ‘Go for Gold’ as Central Banks Buy, Fed Cuts in ‘25 

Jake Lloyd-Smith, Bloomberg

Does Warren Buffett Know Something That We Don’t? 

Spencer Jakab, Wall Street Journal

The current global market environment is marked by uncertainty and potential volatility. Despite a strong rally in 2024, where the S&P 500 surged over 20%, analysts are becoming increasingly wary about the sustainability of this growth. A key concern is the deteriorating profit outlook for companies in the S&P 500. While third-quarter earnings in 2024 are projected to show growth, analysts are revising their earnings per share estimates downwards for the upcoming 12 months. This negativity stems from a number of factors, including the uncertain trajectory of potential interest rate cuts by the Federal Reserve, a slowdown in the Chinese economy, and questions surrounding fiscal policies in Washington. These combined pressures are casting a shadow over the stock market, making it increasingly difficult for companies to justify their current high valuations. The S&P 500, for example, is currently trading at 22 times its future 12-month earnings estimates, significantly higher than its long-term average of 18.4, suggesting that a correction might be on the horizon.

Adding to the complexity, the bond market is facing its own set of challenges that could negatively impact investor returns. The primary concern is interest rate risk, especially given the current low-interest-rate environment where even small increases in rates can cause significant drops in bond prices. This was evident between March 2020 and October 2023, when a rise in the 10-year Treasury yield from 0.54% to 4.98% led to a substantial 47.61% loss in the Morningstar US 10+ Year Treasury Bond Index. The specter of inflation also poses a significant threat to bondholders, as evidenced by the period between July 2016 and October 2023, which witnessed the longest stretch of negative returns for US government intermediate bonds since 1926. Additionally, credit risk, the potential for borrowers to default on their payments, adds another layer of concern, especially during periods of economic instability. Against this backdrop of market turbulence, legendary investor Warren Buffett has chosen a strategy of caution, accumulating a massive $325 billion in cash reserves, largely held in Treasury bills. This approach signals that Buffett is either anticipating market downturns or preparing for strategic acquisitions when valuations become more attractive. This cautious stance is further reinforced by his recent decision to halt buybacks of Berkshire Hathaway stock and to reduce his holdings in Apple and Bank of America. Simultaneously, gold is experiencing a resurgence in popularity as investors seek safe-haven assets amidst the market uncertainty. Goldman Sachs is predicting a significant price surge for gold, reaching $3,000 an ounce by December 2025. This bullish forecast is driven by expectations of continued central bank purchases of gold and an increase in investments in gold ETFs.

Artificial Intelligence Updates

A Powerful AI Breakthrough Is About to Transform the World 

Christopher Mims, Wall Street Journal

Inside the murky new AI chip economy 

The Editorial Board, The Financial Times

The US Had a Chance to Lead in Chipmaking Tech, and Missed It

Alex Webb and Ian King, Bloomberg

The artificial intelligence revolution is poised to extend far beyond the realm of chatbots, potentially revolutionizing fields ranging from medicine and materials science to robotics and transportation. At the heart of this transformation lies a powerful AI algorithm called a “transformer,” first unveiled by Google researchers in a 2017 paper. This groundbreaking technology allows computers to analyze and understand the underlying structure of vast datasets, enabling them to generate new information based on the patterns they identify. This capability has fueled the development of everything from ChatGPT, which was launched two years ago, to AI systems that can design novel protein molecules for applications in pharmaceuticals and synthetic chemistry. The significance of this innovation is reflected in the staggering number of citations the 2017 Google paper has received–over 140,000—highlighting its widespread impact across various scientific disciplines.

Despite the US playing a pivotal role in the early development of semiconductor technology, which forms the bedrock of AI advancements, the nation has missed crucial opportunities to capitalize on its leadership in this field. One glaring example is the extreme ultraviolet lithography (EUV) machine, a critical piece of equipment used to manufacture the most advanced computer chips that power AI applications. These machines, each costing upwards of $200 million, are exclusively produced by the Dutch firm ASML, making it the sole gatekeeper of this essential technology. This monopoly stems from a combination of factors, including misjudgments by Intel, the once-dominant US chipmaker, and the inherent complexity of EUV technology. Intel’s decision to stick with existing lithography technology rather than embracing EUV in the early 2010s ultimately allowed competitors like Taiwan Semiconductor Manufacturing Company (TSMC) to leapfrog ahead in chip manufacturing capabilities by using EUV. Recognizing the strategic importance of EUV, the US has successfully pressured the Dutch government to block ASML from selling these machines to China, effectively cutting off China’s access to this vital technology. However, this strategic victory comes at the cost of the US ceding its leadership in a critical area of technological innovation. Meanwhile, the financial ecosystem surrounding AI chips is rapidly evolving, with Wall Street institutions providing billions in loans to “neocloud” companies that are building AI infrastructure. These loans, secured by the companies’ holdings of Nvidia’s highly sought-after graphics processing units (GPUs), have raised concerns about potential risks, including the long-term collateral value of chips, inflated valuations in the sector, and increased market concentration in favor of Nvidia.

G20 in Rio

Donald Trump victory threatens to throw G20 initiatives into disarray 

Henry Foy and Michael Pooler, The Financial Times

Brazil’s G20 summit puts Global South agenda center stage 

CK Tan, Nikkei

Lula’s thwarted ambitions to place Brazil at the center of the world 

Bruno Meyerfeld, Le Monde

The G20 summit, held in Rio de Janeiro, was marked by a palpable tension between the aspirations of the Global South and the looming return of Donald Trump to the White House. Brazilian President Luiz Inácio Lula da Silva, seeking to position Brazil as a leader of the developing world, focused the summit’s agenda on combating poverty, reforming international institutions like the UN and IMF, and addressing climate change. Lula’s vision for the G20 aligns with a broader trend of Global South nations assuming a more prominent role on the world stage, as seen in the consecutive presidencies of Indonesia, India, and Brazil, and the expansion of the BRICS group to include new members like Egypt, Ethiopia, Iran, and the UAE. This shift reflects the growing desire of these nations to reshape global governance and address issues like sustainable development, economic inequality, and debt burdens that have disproportionately affected them.

However, Trump’s victory in the US presidential election and his expected arrival at the White House in January 2025 cast a long shadow over the proceedings. Trump’s past actions, such as withdrawing the US from the Paris Climate Accords and his close alliance with Argentine President Javier Milei, who threatened to block the G20 communiqué due to disagreements on taxing the wealthy and gender equality, fueled anxieties about the future of global cooperation. Trump’s skepticism towards multilateralism and his focus on an “America First” agenda has raised concerns that he might unravel attempts at consensus within the G20 and other multilateral forums on important transnational issues. This apprehension was further heightened by attendees’ feelings that Trump would be opposed to many of the summit’s planned conclusions, leaving officials and diplomats uncertain about the longevity and impact of any agreements reached in Rio. This summit highlights the challenges the G20 faces in navigating a world increasingly fractured along geopolitical and ideological lines, as the return of a figure like Trump threatens to intensify existing tensions and hinder collective efforts to tackle pressing global challenges.