In this week’s newsletter, we first examine the outlook on global trade, highlighting Trump’s potential trade wars and measures other countries could take in retaliation. Then, we move on to investment insights, from the Fed’s worries about US debt to investment ideas outside of the United States. We then shift our focus to the twin crises facing Europe; large countries’ stalling economies and the potential of another energy crunch in the cold months of winter. Finally, we end this week by touching on several international developments, highlighting the cases of Syria, Saudi Arabia, and Mexico.

Outlook on Global Trade

What Trump’s Next Trade War Could Look Like, a Guide 

Shawn Donnan and Anna Wong, Bloomberg

China’s Asymmetrical Tools for New Trade War Carry Global Peril 

Bloomberg

A New World Order Is Here, and It Looks a Lot Like Mercantilism 

John Authers, Bloomberg

The possibility of a renewed trade war looms large with Donald Trump’s return to the White House. Trump, known for his volatile and protectionist America First stance, has signaled his intention to impose a wave of tariffs, beginning in the summer of 2025. His administration plans to leverage existing lists from a Section 301 investigation launched in August 2017, initially targeting a range of consumer goods with a 15% tariff. These levies, however, are projected to escalate, potentially reaching 75% on certain Chinese imports by September 2026. This aggressive strategy, aimed at pressuring China to adhere to trade agreements and generating revenue for domestic tax cuts, is anticipated to severely impact US-China trade, with the latter facing a staggering 83% decline in sales to the US. While the ramifications for global trade are vast, the administration, guided by figures like Scott Bessent (Trump’s Treasury pick) and Jamieson Greer (Trump’s USTR pick), appears committed to prioritizing American interests, even at the cost of international partnerships.

China, in response to this looming threat, is equipped with an array of asymmetrical economic tools to counter US actions. Beyond conventional retaliatory measures, Beijing can weaponize its substantial holdings of US Treasury bonds, amounting to roughly $734 billion. A strategic sell-off could roil global financial markets, potentially driving up US bond yields and disrupting global finance. Additionally, China’s control over critical minerals like gallium, germanium, and graphite, crucial for various high-tech industries, provides it with significant leverage. Restricting exports of these materials could disrupt US supply chains and impede technological advancement. This dynamic, characterized by aggressive protectionism on one side and strategic economic maneuvering on the other, mirrors aspects of 17th-century mercantilism, where nations prioritize national wealth accumulation and self-sufficiency. The 21st-century iteration, however, distinguishes itself through its embrace of a less regulated financial sector, relying more on tariffs and strategic resource control than strict financial oversight. This emerging economic order, fueled by nationalist sentiment and a shift away from globalization, signals a departure from the free trade principles that have shaped the global economy for decades.

Investing Outlook

US Debt Load Tops Fed’s Survey of Financial Stability Risks 

Craig Torres, Bloomberg

BofA Watches Tech for Signs Investors Are Souring on US Stocks 

Farah Elbahrawy, Bloomberg

Why Our Best Investment Ideas for 2025 Are Outside the US

Philip Straehl and Michael Field, CFA, Morningstar

A recent survey conducted by the Federal Reserve between late August and late October 2024 highlighted some key risks to the financial system. The survey results, released on November 22, 2024, reveal a growing concern among market participants regarding the US government’s escalating debt levels. 54% of respondents now view US fiscal debt sustainability as a major risk to financial stability, a significant increase from the 40% who expressed similar concerns just six months earlier. This growing apprehension stems from the potential consequences of excessive government borrowing, which could crowd out private investment and limit policymakers’ ability to respond effectively during future economic downturns. In addition to the US government debt load, the Federal Reserve has also identified elevated valuations in financial markets, low liquidity, and high leverage among hedge funds.

In light of these risks and the potential for overvaluation in the US stock market, investors are increasingly exploring opportunities beyond US borders. Morningstar’s Investment Management arm suggests that emerging markets in Asia and Latin America offer particularly compelling investment prospects for 2025 and beyond. These regions are projected to deliver double-digit returns over the next decade, in stark contrast to the low single-digit returns expected from US markets. Within emerging Asia, Morningstar highlights Korean equities, especially Samsung Electronics, as an attractive opportunity. In Latin America, both Mexico and Brazil present compelling valuations for long-term investors. Bank of America, echoing this sentiment, advises investors to reduce their exposure to US equities and allocate more capital to markets outside the US, particularly China and Europe. The bank’s strategists, led by Michael Hartnett, warn that the Nasdaq 100’s current valuation relative to the S&P 500 is nearing a critical threshold that could trigger a significant rotation out of US stocks.

Europe in Crisis

Europe’s Economy Is Stalling Out 

Kenneth Rogoff, Project Syndicate

Once dominant, Germany is now desperate 

The Economist

Europe Is Already Facing Its Next Energy Crisis

Anna Shiryaevskaya and Priscila Azevedo Rocha, Bloomberg

As winter approaches, Europe finds itself grappling with a multifaceted economic crisis. Germany, once the continent’s economic powerhouse, is experiencing a severe slowdown, with forecasts predicting zero growth for the second consecutive year. The country’s industrial sector, particularly its automotive industry, is struggling to adapt to the global shift towards electric vehicles and is facing declining exports to China, whose economy is also faltering. Compounding these issues is the ongoing war in Ukraine, which has eroded investor confidence and led to the loss of cheap Russian energy imports, further impacting Germany’s industrial base. This confluence of factors has fueled fears of deindustrialization, with prominent figures like Danyal Bayaz, the economy minister of Baden-Württemberg, warning of the potential collapse of the German economic model. Adding to the uncertainty, Germany’s political landscape is in turmoil following the collapse of Olaf Scholz’s coalition government in early November. The upcoming elections in February will be crucial in determining the country’s economic direction.

Beyond Germany, the broader European economy is also facing significant headwinds. France is expected to grow by less than 1% in 2025, burdened by unsustainable fiscal policies that have pushed its budget deficit to 6% of GDP and its debt-to-GDP ratio to 112%. As energy prices surge due to escalating tensions in Ukraine, concerns are mounting about a repeat of the 2022 energy crisis. Gas reserves are being depleted faster than usual, and the potential loss of Russian gas transit through Ukraine when the current deal expires at the end of the year further exacerbates the situation. While LNG shipments are arriving due to higher European prices compared to Asia, a cold winter globally could intensify competition for supplies and drive prices even higher, posing significant challenges for the region. This precarious energy situation, coupled with persistent inflation and slowing growth, threatens to deepen the cost-of-living crisis for households and intensify competitive pressure on European manufacturers already struggling to stay afloat.

International Developments

Mohammed bin Salman’s Style Shift Sets Up a New World Order Strategy 

Bradley Hope, Bloomberg

Syria’s conflict is heating up once more | The Spectator

Charles Lister, The Spectator

The risk of Mexico being shut out of North America is rising  

Michael Stott, The Financial Times

Saudi Arabia’s Crown Prince Mohammed bin Salman (MBS) has embarked on a transformative journey to modernize his nation and position it as a global power player. In recent years, MBS has adopted a more strategic and patient approach to international affairs, shifting from his earlier, more impulsive style marked by extravagant spending and bold, sometimes controversial, reforms. The war in Ukraine, which began in February 2022, provided a pivotal opportunity for MBS to leverage Saudi Arabia’s oil wealth and assert its influence on the global stage. He resisted pressure from the US to increase oil production to ease rising prices, demonstrating his commitment to prioritizing Saudi interests. This strategic shift is also evident in his efforts to diversify the Saudi economy, investing heavily in sectors like tourism, entertainment, and technology, exemplified by the ambitious NEOM megacity project. MBS’s cultivation of relationships with key figures like Donald Trump has also proven prescient, as Trump’s return to the presidency in 2024 is expected to further solidify Saudi Arabia’s international standing. This new era under MBS is characterized by a “Saudi first” foreign policy, where the kingdom leverages its economic and cultural clout to pursue its own interests, independent of traditional allies like the US.

Meanwhile in Mexico, the return of Donald Trump to the US presidency poses significant risks for the country. Trump has already threatened to impose a 25% tariff on Mexican imports to pressure the country into curbing migration and fentanyl trafficking. Mexico’s new president, Claudia Sheinbaum, has taken a more confrontational approach to US demands compared to her predecessor, raising concerns about potential miscalculations on her part regarding Trump’s threat and willingness to carry through on them. This situation is further complicated by Mexico’s economic vulnerability, characterized by slow growth, high debt, and cartel violence. Trump’s protectionist policies and unpredictable nature create an environment ripe for miscalculations that could jeopardize the USMCA trade agreement and damage the Mexican economy. While in Syria, the long-running conflict has dramatically escalated with a surprise offensive launched by a coalition of opposition groups in late November. This offensive, dubbed “Operation Deter Aggression,” aimed to wrest control of Aleppo’s western countryside from Syrian regime forces. The operation achieved remarkable success within days, capturing over 80 villages and towns and ultimately leading to the fall of Aleppo city itself. This resurgence of the Syrian opposition, spearheaded by groups like Hayat Tahrir al-Sham (HTS), is largely attributed to their enhanced military capabilities and strategic planning. The Assad regime, though weakened, remains a significant force, fueled by its control of the illicit captagon trade, an illegal amphetamine, which generates tens of billions of dollars in revenue. The international community’s attention has largely waned, as evidenced by only 27% of the needed funding being provided for the UN’s humanitarian aid efforts in Syria. As Syria enters its 15th year of conflict, the country faces an unprecedented humanitarian crisis, with 90% of the population living below the poverty line and more than half still displaced.