Markets Drop After Fed Rate Cut

Stock market chart declining

The Fed just cut interest rates by 0.25%. Instead of the desired boost to a slowing US economy, we ended up with a market drop.

The economy is losing steam, and there’s no one at the helm to correct course. Job market stress is on the rise, manufacturing is shrinking, constant tariff changes have stalled investments, and there’s no relief in sight. With capital from the baby boomers leaving the system, foreign capital is the next place to turn; however, strained trade relations make this risky.

Unless the Fed wants to go full Venezuela and start printing money, we’re going to be heading into uncharted economic territory. And with the current administration, who knows what that could mean.

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Transcript

Hey, everybody. Peter Zeihan here coming to you from Colorado. And the news is the Federal Reserve has just dropped interest rates by one quarter of 1%. 

That means it’s a little bit cheaper now to borrow money. And the idea is it’s supposed to, like, boost the economy. But instead the markets have dropped, because the, well, we’re in shutdown, so most government statistics are offline. 

The Federal Reserve has its own system that is self-funded. Totally different topic there. And they seem concerned enough that they’ve decided to do a what’s, historically speaking, a relatively large cut. So what’s going on? What is it the fed sees? How is it going to impact all that good stuff? So number one, the economy is absolutely slowing. 

We’ve got a lot of stress in the job market. And most importantly, manufacturing has been dropping. One of the many impacts of the Trump’s tariffs is kind of generated, this, background of ambient chaos. We’ve had over 540 policy changes on tariffs since January 20th, and they keep stacking up. And so businesses don’t know what the rules are going to be tomorrow, much less a year from now. 

And that tends to discourage investment decisions. And we’ve certainly seen that in the data until the point that the, the shut down, shut off the data. We also have an administration in the Congress that really seems in no hurry to get things back on line. And so we’re going to have to wait until we have something very bad that happens, whether that is for example, many, many, many people stranded, during the Thanksgiving holidays or a general problem with, health care, because we have, announcements on the 1st of November as to what everyone’s premiums are going to be. 

Lots of things are going to get worse before there’s any chance of them getting better. And that is now reflecting in the general ambient chaos that is policymaking out of Washington and specifically out of this administration. So that’s kind of baked in. The bigger problem, much bigger than that, is what’s going on with capital supplies. You see, as a rule, most private capital is generated by people who are in their 50s and early 60s, when their kids have moved out and they’re preparing for retirement or the height of their earnings, but their expenses have gone down and that surplus is put into the retirement accounts. 

It’s about 70% of total private capital. And for the American baby boomer cadre, that’s about trillion, a lot of cash. Well, when you retire, you go into a more conservative portfolio with more cash and more property and more T-bills and less stocks and bonds. 

There’s a thousand ways that’s wrong. But all collectively, they’re like very, very small. 

That’s just the general trend. This is what people do as they get older and retire. 80% of America’s baby boomers have now retired, so about 80% of those finances have been turned into more conservative investments. And we’re moving into an environment where things like goosing interest rates down in order to increase lending doesn’t work because the money just isn’t available. 

And the only other sources of money that are available are, number one, foreign money. Where other countries have been dealing with this faster than the United States has. So it’s seeking someplace it’s more productive. You can only take that so far, especially in a high tariff environment where your economy is actively discouraging the mobilization of capital. And the second issue is if the Federal Reserve just massively expands the money supply, which is massively inflationary. 

So the concern in the mid-term is we might get the worst of all worlds, you might get lower interest rates, you might get a little bit more consumption from that. But in an environment where supply is being constrained because of a lack of business investment, very inflationary, which would force the fed to go the other direction. Now, I don’t mean that as a specific forecast, because we’re entering in kind of the unknown here. 

We’ve never had a demographic transformation like we’re seeing on a global basis or an American basis in modern history, certainly not in the digital age. And so we’re going to be living through this in real time for the first time. But what we understand of macroeconomic laws is that seems to be where we’re headed right now. And barring a significant change in capital availability or government policy, that’s kind of hard wired in at this moment. 

So the fed is in a bit of a box. The white House is part of the problem, and the baby boomers are no longer part of the solution. And that leaves the rest of us in an environment where investment is difficult, where consumption is expensive, and where inflation is rising.

And You Thought the Jones Act Was Dumb…

A mack truck on the highway

If you tasked me with creating a list of the greatest threats to America, I’m not sure cabinets, name-brand drugs, and semi-trucks would be on there…but the President disagrees.

So, get ready for a massive economic bulldozer to hit the US due to these new tariffs. With 90% of all US cargo moving by truck, these higher costs will create a ripple effect through every sector. This all started back with the Jones Act, which made domestic shipping prohibitively expensive, causing a shift in freight from ships to rail to (almost entirely) trucks.

Since those trucks are made across an integrated North American supply chain, dipping into Canada, the US, and Mexico, tariffs are hitting hard. That means everything Americans consume, from your food to your clothes, will cost a whole lot more.

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Transcript

Hey all, Peter Zeihan here coming to you from Colorado today. We’re talking about the newest hit to the American economy. We now have tariffs on cabinetry, semi-trucks. And what was the third one? Name brand drugs, all of which have been classified as national security threats. Cabinetry. That’s an interesting one. Anyway, we could pick apart this all day, but I’m going to focus on the trucks because that’s the one we’re all going to feel soon. 

And most deeply, right now about 90% of all cargo, all ten miles of cargo that are transported to the United States are transported on the roads by semi-trucks. Now, it didn’t used to be this way. If you go back to, the depression, we had something called the Jones Act, the Interstate Commerce Act, which said that any to any cargo transported between any two American ports, regardless of where they were, had to be on a ship that was American built, American captain, American crude and American owned. 

As a result, we saw the cost of transport on the waterways increase in terms of, cost per ten mile by a factor of five. And we went from transporting most of our goods and especially most of our intermediate manufactured goods, especially in places like, the Great Lakes in the upper Midwest. We went from that being the dominant mode of transport to basically at whittling away to today in terms of ton miles, we only use our waterways for about 1% of our total cargo. 

It has been, in my opinion, the stupidest law that the United States has ever adopted. And it’s now been in place for a century. As a result, things went places where those restrictions were not in place. first with train and now with truck. Now with the Trump administration policy, there’s 100% tax on those trucks, of which about 80% of the imports come from Mexico. 

Another 10% from Canada. And As with anything that involves NAFTA, nothing that just made in one of the three countries. It’s an integrated supply chain that uses all three. So basically what we’re doing with this new tariff is saying this multi-step supply chain that we have, where parts of the trucks go back and forth among the three countries, if the finished product is actually done in Mexico, which is the relatively low cost work we will then tariff the cost of the entire truck when it comes back. 

So, in essence, retrofitting American workers and American companies who are making American products, who just happen to have the bumper stamped on in Mexico, and since 90% of our cargo is transported by heavy truck, you’re going to feel this in every sector. It doesn’t matter if you’re a hog farmer in Iowa sending your hogs to market, or if you are just ordering something on Amazon, it’s getting shipped across the country. 

The only people who will not feel this are the people who are in a physical position where supply chains for imported goods do not use the trucks, and that means you would have to be in one of the major port cities that has a mega port. So those are New York, new Jersey, Miami, Houston, Savannah, to Colma and LA Long Beach. 

Anyone else? This is going to hit everything that you consume. So I have long said that the Jones act is the dumbest law we’ve ever had, but it’s got some competition.

Say Goodbye to the World’s Trade Routes

Cargo ship with containers

It’s always lovely when everything you’ve talked about throughout your career decides to happen all at once. At this critical decade, how will the globes trade routes fare? And which routes will fracture first?

There are three major trade routes that come to mind. Southeast Asia is made up of many regional states that rely upon each other, so none of them want this to shut down. While this should hold, there are some other players (China, Japan, and India) that could add some tension. The Persian Gulf and Strait of Hormuz are easy to disrupt and will likely be the first to go; this will have an outsized impact on places like Japan, Korea, Taiwan, and China, that rely on oil coming through here. And the last route to keep an eye on is the Baltic Sea; the Ukraine War’s outcome will likely determine what happens here.

Bottom line…get your s*** while you still can.

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Transcript

Hey all, Peter Zeihan here. Coming to you from the Lost Creek Wilderness. I have moved out of the jump on him into the narrows. So I like a one sided canyon sort of thing. Anyway, trail goes. 

Back in there somewhere. Anyway, taking a question from the Patreon crowd, specifically, as globalization breaks down and as military alliances fracture, which trade route will fracture first become unusable? 

We’re at the point in history where there’s a lot of things going wrong at the same time. Most of my work has been saying that all of these factors, whether it’s demographics, globalization, American isolationism, European fractures, the Chinese fall, whatever happens to be, they all come together in about the same ten year period. 

And we have now entered that ten year period. So the partial cop out to answering this question is, I really don’t know, because everything is going wrong. And all of these, routes are going to be in some degree of danger. But let me give you the two that I think. Well, let me do the three that I think are most concerning. 

First, the one that I think actually will hold together and that’s the Southeast Asian route through, Indonesia, Malaysia, Singapore, Strait of Malacca, the Luna Strait, that area basically connecting Northeast Asia with the rest of the Eurasian continent. This is an area with 15 countries, all of which have their own ideas of what should happen, and none of them have the ability to project naval power, far enough for the entire zone. 

The reason that I think it’s still going to work out for this area, though, is that most of those countries in Asean and then link in to, say, Australia, see the world through similar lenses. I don’t anticipate them launching wars of aggression against their neighbors. They know that they occupy different parts of the manufacturing supply chain. 

They know they need inter-regional trade and agriculture and energy and intermediate manufactured parts. So they have a vested interest in finding a way to make it work. The problem would be countries from out of region India, China, Japan who might see things differently. But even here, I think it’s pretty safe to say, that it’s going to hold. 

Japan might try to raid Chinese shipping, but they have no intention of shutting down shipping through the region as a whole. With Australia, you have the Americans of all to a degree. And India is really not a trading power. And China, of course, if it’s going to survive in any form, has to have access to this trade route. 

So that one’s probably okay. The second one, the ones absolutely hosted so opposite is coming out of the Persian Gulf here. You’ve got a number of countries with limited global reach, but missiles and jets and drones would have no problem closing the Strait of Hormuz. And even if you get past the Strait of Hormuz, you then have India and Pakistan, who in a globalized world would love to see the other one lose access to things like energy. 

And so I can see any number of scenarios where Iran or Pakistan or India or Saudi Arabia or even the United Arab Emirates find it in their interests, at least for periods of time, to close that entire route down. And that’s 20 million barrels a day of crude that could no longer make it to market. It would have catastrophic impacts for everyone further east, most notably Japan, Korea, Taiwan, and especially China, which uses more than the other three put together. 

And then the third route, depends on what happens in the Ukraine war. The Baltic Sea has always been a zone of commerce, but it’s always been a zone of conflict. And in times past, the countries that are either adjacent to the sea or just one step removed. So we’re talking here, all of the Scandinavian countries Finland, Sweden, Norway, Denmark, also Poland, also Germany, also the United Kingdom, also the Baltic, also Russia, have all at various times in their history tried to militarize their part of the sea, to shut it down for the people. 

At the moment, everyone is on the same side except for the Russians. And the Russians are using the Baltic Sea because we’re still in globalization, barely to ship 1 million to 1 million, a half barrels of crude out to the wider world around sanctions. Sooner or later, that’s not going to work anymore. Either. The Western countries are going to interfere with the oil shipments, which I’m a little surprised hasn’t happened already. 

Or the Russians are going to say screw it and basically Mess up, corporate shipping on the Baltic Sea. One way or another, this is likely to happen. The question is, how long will it last? If Russia does well in Ukraine, it can last a long time because you don’t need to be able to poke out. 

All that much pressure collapses in Ukraine that this is no longer concern. And the issue is how Europe evolves or devolves in the future, whiskey or any number of directions. So Middle East shipments, most notably through Hormuz, look really bad. Red sea is not much better. Baltic something to keep an eye on. But there’s reason for hope. And then Southeast Asia. That’ll only break if things go really horribly bad.

Immigration and Tariff Policies Stunt US Economy

Immigrants standing in line in front of an American flag | Licensed by Envato Elements

The Trump-era policies are going full Darth Vader and have the US economy in a chokehold (or force choke for the nerds out there). Today, we’ll be focusing on the policies covering immigration and tariffs.

Nearly all legal (and illegal) forms of immigration have been closed or drastically restricted. This includes high-skilled H-1B visas, which now have six figures in fees; most startups can’t go dropping that kind of dough. Once you mix in all the costly deportations and the retiring baby boomers, the US labor force is drying up quickly.

Tariffs are only adding to the problem. With 10-60% tariffs on imported goods (the Chinese sitting near the top with 50%), we’re beginning to see rapid price increases. Walmart and other retailers are reporting hikes that are only going to get worse.

Fewer workers, higher costs, and not enough domestic investment, all the things you don’t want to hear about an economy. The Fed warns that the only reason a recession hasn’t formally set in yet is because labor demand and the workforce are shrinking at similar rates. That has left the US economy dazed, confused, and highly vulnerable.

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Transcript

Hey, all Peter Zeihan here come from Colorado. Today we’re going to, look at the American economic situation, how a number of Trump policies are coming together in the current environment and where we should expect that to take us during the rest of the year. Short version is the picture doesn’t look great. Let’s start with immigration. 

There’s basically four paths to immigration that the Trump administration has, put the crimps on first. You’ve got your illegal, irregular migrants, who cross the border and then try to slip into the system somehow. Number two, you’ve got your people who try to follow the rules and do it legally. Third, you’ve got your folks who come in on a high skilled visa, something like H-1b, to get a specific job sponsored by a specific company. 

And then finally, you got your rich folk that just come because they went to all four of these routes are in collapse. We now have the Trump administration going into churches during services in order to round up Hispanics and kick them out, as well as intervening in courtrooms and going, where they’re having their hearing on things like asylum or even just to see if they’ve done the paperwork. 

Right. And, before the hearing can happen, escorting them out of the country comes out to about 17 grand per person to do extraditions this way. And it strongly preferences people who do not have criminal records because they’re more likely to be out in public. So the original promise of just going after criminals that has long in the past, and we’re basically going against the rank and file of people who came for jobs or to be with families. 

Regardless of what you think about this, from a legal point of view or an ethical point of view, it it has an absolute impact on the job market. We’ll get to that in a minute. Legal pathways, those are pretty much all been closed down. And that is not simply a Trump two thing. That’s also a trump one thing that is also a Biden thing. 

Most of restrictions that Trump won put on legal migration were actually codified by the Biden administration and now than doubled down on. So you wanna come to United States, there’s only two paths left. 

Number one is you get an H-1b visa. That is the visa that like, say, the tech industry uses to bring high skilled people in to help populate their workforces. The number of those being granted is being reduced by about three quarters. And the fee for it is going up to something between $100,000 and $2 million. What that means is not only are far fewer companies going to do it, but the companies that will do it are only going to be the really big ones. 

So your apple, your meta, things like that. And so if you’re a small startup, you’re now stuck with local labor. And as anyone who’s in the tech space will tell you, there is not enough local labor for a tech industry in any country of the world. There’s a global supply, but there’s only enough to man tech sectors in maybe one quarter of the world’s countries, of which the United States has always been the largest market. 

And by severing the United States from that labor pool, you’re basically guaranteeing that the pace of technological change, will arrest, significantly. And we’ll see impacts of that within a month. And then finally, the only other way to get in is a gold visa. Now, Trump’s original idea was a $5 million gold visa that would get you into the country and basically give you residency. 

There were no takers. None. That’s put too fine a point on it. But if you’ve got $5 million to spend for a green card, you don’t need a green card. So they’ve dropped the price now to $1 million. We’ll see if they get any takers from that. It’s pretty steep. Still has to be approved by Congress. 

So basically, almost every path, for bringing migrants, immigrants, vacationers, whatever you want to call it, you know, have to have a bond to travel the United States for tourism, has been severely crimped, if not closed down completely. And it’s leading to the first population reduction in American history. And, from an economic point of view, we’ve got two issues going on that are both really bad. 

Number one, for the first time since Vietnam, the workforce is shrinking. And for the first time in American history, the labor pool is shrinking. What companies are doing is in this sort of environment, they’re letting go their older employees as they retire the baby boomers, and they’re not hiring replacements. Now, that has happened before. But for that to show up in the data this time as a reduction in overall employment numbers, you’ve got to remember the scale here. 

The boomers were, until very recently the largest generation in American history. And the Zoomers at the bottom of the pyramid right now are the smallest generation in history. So for that to register as a collapse in jobs, the numbers is immense. And it’s the opinion of the Federal Reserve that the only reason we haven’t seen a formal recession yet is that the job market and the labor pool are shrinking at the same rate, and that it’s the fastest we’ve ever seen in any era of American history. 

Now, macroeconomic theory tells us that this will generate and, not particularly long order, a very, very crushing recession. But I’m not ready to say that yet. Jerome Powell, the Federal Reserve is not ready to say that yet because there’s so many things in motion. What we do know for certain is it makes the United States much more vulnerable to any sort of shock, because there’s just simply fewer pillars holding up the system. 

Well, we’re getting that shock because of the tariff policy. We’ve got tariffs ranging from 10 to 60% on various countries in the world. The tariffs are on China at 50%, which is where we get a lot of our consumer goods. And so just since September 1st, just in the last two, three weeks, we’ve now seen price increases across the board that will show up in statistics next month most likely. 

But we’re seeing in corporate earnings already, remind you’re that we went in and out and in and out and in and out of these tariffs from when they were, initially applied in April. There were extensions. There were there were holidays, and most of them are now in place. So we’ve really only had them now for about six weeks, but that’s an long enough time to burn through some inventories and jack up prices on shelves. 

So Walmart, writ large, is looking at a 30% increase in prices across the board, with some items being more than double that. Keep in mind that this is when people are still pulling inventory that they built up during those holidays in preparation, so that 30% increase is going to absolutely increase month on month unless and until these tariffs go away. 

So we have a far weaker employment situation. We have far smaller labor force. We have a far less skilled labor force. We are not seeing the industrial investment that would be necessary to replace the manufactured goods that we’re losing access to, and we have tariffs that are making everything more expensive. This will generate an economic adjustment, in the not too distant future. 

The question is how soon, how bad in which sector? If I were a betting man. Usually not, but here we are. I would say the manufacturing is a sector to look at first, because more blanket the tariff structure, the easier it is to relocate manufacturing supply chain steps outside of the country with the tariff structure and just do it somewhere else, because instead of having product going back and forth across borders, which is how we say produce cars, you then have to pay that tariff multiple times per vehicle, whereas if you build the car completely beyond your shores and then bring in the finished vehicle, you only have to pay it once. And we’re seeing that in the investment decisions of companies that will manifest as employment problems next year. I think we’ll have our economic correction far before that, though.

The Federal Reserve’s Dilemma

Photo of the building of the US Federal Reserve

The Fed is facing a catch-22. While they would typically lower rates when consumption and growth begin to slow, there are also competing policies that are shrinking the labor force and driving up costs via tariffs. Other countries have faced similar dilemmas due to demographic issues, but the US is in this pickle largely due to policy decisions.

With record deficits and no political will to cut entitlements, cooperation between Trump and the Fed isn’t going to happen. So, the Fed is stuck between a rock and a hard place…

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Transcript

Hey all, Peter Zeihan here. Coming to you from a breezy Colorado. This week we have a Federal Reserve meeting in D.C. where they’re going to decide what to do with interest rates. The idea is, if you lower interest rates, you reduce the cost of capital, which spurs economic growth, whereas if you raise interest rates, you dampen demand, which tends to get inflation under control and balancing growth versus inflation. 

That is basically why the Federal Reserve exists and why we have monetary policy in the first place. The real problem the Federal Reserve is facing right now is policy out of the white House. The combination of high and rising tariffs are increasing the cost of operation for American businesses and increasing purchasing costs for American consumers, which is reducing economic growth. 

At the same time, anti migration policies the Trump administration has implemented is shrinking the labor pool to the point that the American population is actually expected to shrink this year for the first time in American history. And that is triggering inflationary pressures throughout the supply chain that are complemented by the tariffs. So tariffs like 50% tariffs on steel, aluminum, copper drastically increase the cost of building for, among other things. 

And so the fed is kind of in a catch 22. The slower growth caused by the tariffs on the consumption side would seem to indicate that it wants to lower interest rates to spark growth, but the higher inflation, because of the tariffs and the immigration policies are raising the cost of everything or raising inflation, suggesting that the Federal Reserve should, if anything, raise rates in order to keep inflation under control. 

And there is no way to win this, there’s no way to make everybody happy and there is no balance to be found. So the Federal Reserve is in a catch 22. Now, this is not a unique situation. If you go back to the last 20 years in Europe and Japan, we’ve had somewhat similar situation, but largely caused by demographic issues as populations age out of the 2030s and 40s and into their 50s, 60s and 70s, consumption naturally goes down and eventually you lose people from the workforce on the tax base altogether. 

And when that happens, monetary policy is not nearly as useful tool. And you’re dealing with exactly these same issues, chronically lower demand and consumption because the population is getting poorer and older and ongoing inflationary pressures as the labor force shrinks. The difference between the European and the Japanese experience and the American experience is in the European. In the Japanese experience, it was primarily a demographic issue, whereas in the American experience, at least so far this year, it’s primarily a policy issue. 

Now, what has happened in the United States in the past is the Federal Reserve chair has sat down with the American president to discuss priorities and what it takes to get what you want. This was most famously done by Federal Reserve chair, former Federal Reserve Chair Alan Greenspan and former American President Bill Clinton back in the 90s, where the discussion was, if you can keep the budget under control, if you don’t do a lot of deficit spending, then I, the Federal Reserve chair, can keep interest rates low and generate a boom which lasted for the better part of a decade. 

Unfortunately, that is not possible this time around, and not just because the president doesn’t like the Federal Reserve chair. The other problem is simply that the fiscal deficit we have today is bigger than we have had at any time in American history, with the exception of a couple of hiccups during war time and getting that deficit under control would require basically eliminating Medicaid and cutting Medicare and Social Security by half. 

That’s how overextended we are. So it leaves the fed in a no win situation. Governance is hard, especially when you’re a quasi independent institution like the Federal Reserve.

While I Was Gone, Part 3: Economic Status

Person using Forex trading on a laptop and phone

Today, we’ll be turning our attention towards the economic moves that the Trump admin made while I was away.

Intel was partially nationalized (10% government stake); this move supports semiconductor security but could also turn the company into a defense contractor rather than an innovator driven by profit. The Block Island wind farm project was completely halted…despite being nearly completed; this undermines US energy reliability, trust in government contracts, and the need for rapid energy expansion. And of course, Trump had to throw in an out-of-pocket personal attack with a Fed board member (Lisa Cook) over mortgage discrepancies, which is just another step towards making the Fed a political tool.

All these economic actions nudge the US further away from free-market capitalism, and closer to something where the government dominates industry, contracts, and monetary policy. However, experimenting with new economic models is inevitable, it would just be nice to let some other countries be the guinea pigs.

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Transcript

Hey all Peter Zeihan here. Coming to you from a rainy lake of the Ozarks. We’re continuing our series on. What the hell were you guys thinking while I was gone backpacking? Today we’re going to talk about some economic issues in the United States. We’ve got three things that you guys decided were good idea to do. A certain green. Got three ideas that you guys decided were good ones while I was gone. 

The first one was that Donald Trump partially nationalize Intel. Intel is, of course, America’s premier semiconductor manufacturing firm, taking a 10% stake for the government. This does not give the United States a seat on the board, but it does obligate the United States to pay for a lot of R&D. And if your goal is to near-shore semiconductor fabrication, there’s some serious logic here. 

And if your goal is to deepen the government’s involvement in design and control the technology, there’s some logic there as well. But it does come at a pretty significant cost. When you start to nationalize companies, they treat the government as one of their stakeholders, and they start to optimize their operations to do whatever the government wants that might achieve a national security goal, perhaps, but it comes at the cost of the company basically letting everything else fly, and reducing the profit motive to actually make the company better. 

They become more of a defense contractor. So pros and cons, Second big item is that the Trump administration issued a cease order for the Block Island windfarm off the coast of Rhode Island, and it’s really hard to spin this as a positive. The money had already been allotted. Things have been paid for. Remember, you have to pay for green tech projects pretty much upfront. And so the financing was all in place. 

The project was already 80% completed and was about to start wiring power next year. And now it’s just completely stopped. So number one, this is an investment issue. Number two, this is a foreign investment issue because the Danish companies were involved. And number three, it’s a power issue for the eastern seaboard. But most importantly, the federal government has now decided to kill the project specifically because Donald Trump doesn’t like wind turbines. 

He doesn’t like the way that they look now. Wind turbines in the right spots are among the most efficient ways of generating power. This isn’t like solar, where the it’s dark half the year. Wind, especially offshore wind, is a very strong, reliable source of energy. But Donald Trump doesn’t like the look of them. So from the point of view of contract law, the federal government has now established itself as a relatively unreliable partner in the power sector. 

And no matter what your interpretation of America’s near term future, whether you’re like me and you see, we need to double size of the industrial space with your tech guy and you want to massively expand AI. Whether all you want to do is replace the old infrastructure with new infrastructure. The United States needs to expand its power grid by at least 50% over the next several years, and all of a sudden, the federal government is no longer a positive contributing partner to that. 

And everyone who is involved in government contracting in the power sector is now going to be wondering if there’s any reliability at all. That’s really bad. If you’re trying to do something quickly, because the federal government will always be the single largest economic entity in the United States. And now it’s got people wondering if they can be trusted of all, because there’s no scientific reason, there’s no economic reason, there’s no financial reason. 

There’s no national security reason for this contract to be canceled. It’s just been canceled because Trump doesn’t like the look of windmills. That is very, very Latin American. The third issue is that Donald Trump has tried to fire or has fired a woman by the name of Lisa Cook, who is a member of the Federal Reserve Board. Now, the US Federal Reserve is basically the central bank of the United States. 

They say interest rates and manage monetary policies in order to manage the American economy. And under existing law, you cannot fire a board member unless there’s cause. The cause that Donald Trump cited was that Lisa Cook now stands accused of falsifying some data, on free home purchases she’s made over the last 10 to 15 years. I believe. 

In total, the three mortgages in question have a total finance value of about $1 million. Have all since been paid off. And he’s saying that she lied about it being her primary residence in order to get a slightly better interest rates. And we’re talking here about less than a half a percent. This is kind of rich because no charges have been brought. 

It’s simply an accusation. No data has been presented. But Donald Trump has been convicted in a court of law of over a half $1 billion of real estate fraud. So you know, there’s a little bit of a ocracy here. Whether or not if she were charged and found guilty, is qualifies her as a being fired for cause is a really open question. It’s really questionable whether the Supreme Court would rule that way. And this is a court that will absolutely go all the way it up. But the core issue here is Donald Trump has found a way to remake the Federal Reserve in his own image. 

One of the problems that Trump is facing is a lot of the tariff policies that are in place at the moment are highly inflationary and are driving economic activity out of the United States by making the United States a less reliable partner in things like manufacturing supply chains in addition, things like steel and aluminum, copper tariffs to make it much more difficult to construct anything, whether it’s in the power grid or your house. 

And so we are set up for higher inflationary, lower growth environment moving forward. So Trump’s idea is if we can reduce capital costs significantly, then we will have more economic activity. And faster growth that people will get credit for. The Federal Reserve would never go for that because that would be wildly inflationary. Think about what happened under the Biden administration when we had a series of federal spending projects, none of which Donald Trump has really trimmed down. 

That dumped a lot of money into the economy post Covid and generated faster economic growth, but faster inflation because we saw demand go up and up and up and up without an underlying increase in supply. What Trump is doing is constructing supply and now trying to goosed demand with interest rate policies, achieving something that’s at least as bad, for political reasons, demand scarcity or a directed demand, something like that. It’s a lot like, like wartime mobilization, where the government takes a larger role in the system controlling the production, but it’s not driven by a crisis, is driven by a change in macroeconomic fundamentals, and it’s is focused on demand as it is on supply. 

And if that sounds not particularly capitalistic, that’s because it’s not even remotely capitalistic. But as we’ve seen from the Donald Trump administration so far, that is really not a major concern. Nationalizing companies, he sees as a plus, taking over direct control, personal control of the monetary authority he sees as a plus. And the sacrosanct nature of contracts is not something he seems even remotely bothered by. 

These are characteristics that have a lot more in common with, like the Latin American flavor of socialism or even modern day China. And one thing that they do not generate is efficiency, or private ownership or private decision making. But kind of that’s the point. 

So none of these steps are good. They all basically make the federal government part of the problem, in a way that five years ago we would have said something that the liberals prefer to do, but now Donald Trump is there. The reason that this bothers me so much, but the reason why I’m trying to maintain an open mind is that the models that we use to manage our economy and by our, I mean humans are changing and need to change. 

For the last century, we’ve basically had four overarching economic models. We’ve had free market capitalism, which is something the United States tends to champion. Not anymore. We’ve had a European social model that is more based on social placidity and equality, but doesn’t generate as fast of economic growth and as much economic dynamism. Europe, of course, is known for that. 

You get command communism, where you have a central authority that makes most of the economic decisions. That’s Maoist China, that is the Soviet Union. And then you have something called fascist corporatism, where there’s a fusion of corporate interests and government interests. And that’s classically Nazi Germany, but also like 1970s and 1980s Korea, maybe a little bit of, Japan and certainly China today. 

All four of these models are based on the relationship between supply and demand and capital and labor. And with the world going not just through a globalization phase, but a massive population phase, we are losing access to labor and capital in the volumes and in the ratios that we’re used to, because when people retire, they take their money with them and they are no longer working. 

So we’re seeing a change in the fundamentals that define our four economic models. And we need to try something new. What that something will be is very much in play. But what the Trump administration seems to be pushing us towards, whether it’s consciously or not, is something that’s kind of like a constrained, managed demand model where the government is the single largest player in determining who gets what, and because of problems with supply and consumption. 

They’re actively ratcheting down demand because there won’t be enough stuff to go around. But Trump is also constraining artificially the supply of product within the American market. So whether this, constrained demand model is something that is going to be a thing in the future, I don’t know, it’ll probably need to be a lot more cohered than what we’re seeing out of Washington right now. 

But it is something we shouldn’t reject out of hand because we know the old models aren’t going to work. The primary concern that I have at the moment is that the United States has the healthiest democracy of any major country in the world, which means we don’t need to make the adjustments first. We can wait to see what everybody else does first and then sort of pick and choose. 

The idea that we are needs to be the ones at the vanguard of this next phase of economic theory, I think, is a bit of a stretch. And if we are going to do it, I would like to see it be a system that is a lot more coherent and a lot more geared to American strengths and weaknesses than what we’ve seen out of the administration these last couple of weeks. 

Soooo…. 

Avoiding the Middle-Income Trap

Stacks of money coins and a green arrow pointing up. Increasing income and wealth.

There’s a point in many nations’ timelines where the per capita income stalls. This is known as the middle-income trap. And the way to avoid it is moving beyond basic manufacturing…

Success depends upon three factors: openness to foreign capital, broad-based investment, and the rule of law. Of course, you also need solid demographics to make this all sustainable. Countries like China will remain stuck because they have pursued the exact opposite of what is required. However, even countries that find the right mix (Germany, Ireland, South Korea, etc.) will eventually fail if the demographics aren’t right.

Prefer to read the transcript? Click here

Transcript

Hey all. Peter Zeihan here coming to you from Colorado. Today we are taking a question from the Patreon crowd. Specifically, how do countries avoid the middle income trap and become advanced rich countries? For those of you who don’t follow economic development like I do, the middle income trap is this concept that you can build the infrastructure, you can get into manufacturing, you can make a lot of stuff for export, but you’re never able to cross a threshold of roughly 10 to $12,000 income per person. 

The issue is eventually you hit a value add point that you can’t push past. You can only take manufacturing so far because the technology will eventually provide more of the value add than the people. And so you’re kind of stuck in a situation where people are working in the factories. They can’t do anything more advanced because I’m not educated enough and the machines do more and more, which bleeds off some of the income and sends it to the people who own them. 

So if you want to get past that, you’re talking about graduating to a fundamentally different economic tier, and it’s a different sort of cultural and industrial structure than what you have as a mid tier manufacturing country. So for that you need four things, really three things on one to make it stick. First you need to be open, very open, almost painfully open to foreign capital. 

The cost of building the physical infrastructure in the industrial plant is a big part of this. And if you can allow the money to come in, do its thing and then take some of the money out once profits start happening, that generates a degree of openness in your system that will enable more and more people on the outside to assist with your development process. 

But it’s more than just building the plant because the plant is what comes first. The plant is what the foreigners are first interested in. But as your income levels rise, that capital can be used for other things like credit cards and mortgages, and you start building a consumption driven society. And when you get a more broad base like that, then you can see the numbers start to go up as people have off of the manufacturing industries and start opening up their own firms and doing their own value added work. 

So that’s one capital number two, investment, which can come from foreign money, doesn’t have to, but not just investment in infrastructure and manufacturing plant, but in more advanced things like education that gets outside of the technical fields, infrastructure that is beyond road and rail and industrial facilities, basically making the money available to invest in different sorts of economic activities that are related to more than just making widgets. 

Again, that broad based unlocks the creativity of the people, especially if you’re investing in creative education so that people can kind of take it from there. 

one of the big secrets of getting past the middle income trap, is that you have to let go, because the more that the state is organizing, yes, the faster you can move, the more national enterprises you can, conquer. 

But that’s not where real high end growth comes from in the long term. It comes from having millions of people who are making decisions every single day about what is best for them, and then they put their back into a way that they just don’t do on an assembly line. Let’s see, what was the number three, rule of law? 

If you’re going to move into a system where the state is not the sole decision maker, if you’re going to allow capital, have a degree of rights, you’re going to allow people to have a say in what they do in their own lives. You need a system that gives them a leg to stand on. You need a legal structure of rule of law where people know what the system is. They know what their rights are, and they can prosecute to protect them and defend them. 

if you stay with a kind of single tier manufacturing system, you’re never going to get that, because people always are going to be facing the risk of challenging the system just to do anything. So these are these three things. 

These are the big ones. And this is part of the reason why China just can’t advance past where it is right now. Foreign capital has always been a little stingy with it wants to keep everything under control. It’s definitely not rule of law. It’s law by rules and the educational system they’ve built excels at the technical side of things. 

It’s stuff you can memorize, but giving people the freedom to go after what they want is a political threat. And so China’s stock roughly at that 9 to 12,000 range, and they’re never to get past it. And, one of the big reasons that we know they’re never going to get past it is number four. And that is have babies. 

I mean, this doesn’t sound like much of an industrial policy at work with me here. When you have people in their 20s, in their 30s who are willing to work 60, 80 hours a week, yes, you get a lot of productivity from that and you get wealth generation from that, but you can only do that once because if by the time they get 40, if they haven’t had kids yet, they can’t work 80 hour weeks anymore, at least not with the same degree of regularity, their productivity starts to peak and then eventually fall off. 

And there’s no replacement generation. So it’s all well and good if you can push past $12,000 a person. But if there’s no one coming up from behind, then does it really matter? Part of the problem, the world with some of the countries that have beaten the middle income trap. 

And I’m thinking here about Germany or Ireland or Korea, is it. Yes. They’ve made these jumps. Yes. They’ve respected rule of law. Yes. They’ve been open to capital. Yes. They’ve expanded their educational systems, but they forgot that it doesn’t end with the current generation. And now some of these places are facing the sharpest contractions in birth rates and national prerogatives, in human history. 

Now, here in the United States, we’ve done this process over several generations. And the drop in our birth rate is something that really didn’t even start in any meaningful way until the 1970s. But we now we have drop below replacement levels, and we are also ejecting millions. But the plan for the current administration is to reject millions of people from the workforce who have higher birth rates. 

So the United States is in this weird little situation where we’ve done everything more or less right to this point, and now we’re looking around the world and figuring out what didn’t work and applying that in force. And if that keeps up for any number of years, that is something that we are going to regret for generations to come.

Trump Wants a Second Opinion on Labor Statistics

Businessmen figurines standing and sitting on top of colorful plastic blocks forming a bar chart from Envato Elements: https://elements.envato.com/businessmen-figurines-standing-and-sitting-on-top--2YBGNE8

Imagine you go to a doctor and run some blood tests. A few days later you get the results and don’t like them. What do you next? Maybe you start eating more Cheerios to help with your cholesterol. Well, Trump would just dump that doctor and find a new one who would tell him he’s perfectly healthy…at least that’s what he did to the commissioner of the Bureau of Labor Statistics (BLS).

The US is known for having the world’s most respected, apolitical data systems. Trump’s undermining of this system could jeopardize US policymaking for decades and is eerily reminiscent of what Hugo Chávez did during his rule in Venezuela.

Getting rid of the BLS commissioner is scary enough on its own, but couple that with the echo chamber in the White House and you have a full-on horror movie brewing.

Rewatch the video on Economic Indicators here

Prefer to read the transcript? Click here

Transcript

Peter Zeihan here, coming to you from Colorado today. We’re talking about the U.S. economy from a numbers point of view. The issue is that a couple of weeks back, Donald Trump fired the commissioner of the Bureau of Labor Statistics, which is basically the institutional in the US government that generates a whole lot of the data that guides policymaking from a global point of view. 

U.S. government statistics are generally considered to be above world class. They’re by far the best on the planet because they’re differentiated, they’re apolitical, and the United States government collects touch points from local, state, and national policymakers in order to build a really good picture that businesses and government can use to help make decisions. Well, a number came out on new job creation that Trump hated, so he fired the head of the BLS within hours and says he’ll replace her with someone who can actually do the work, which is anyway, the idea are three things here. 

Number one, the idea that one person just decides what the day is going to be is beyond asinine. The only place that happens with any reliability is places like Russia, where they decide what the numbers are going to be before they publish them, and then just make them up. And they don’t even have a functional statistics section in the government anymore. 

The statistics are the end results of not just dozens of people, but thousands of people across the country. And the only way you can get a politicized justice stick is if you don’t just go after people at the head, but you go after the rank and file statisticians, which is something the Trump administration has already started, not just for jobs data, but GDP data. 

And that’s something that’s going to make it much harder for the US government to target policies for decades to come. It will take us a generation to rebuild that expertise. That’s problem one. Number two, if you’re going to get cheesed off about a statistic, this isn’t even the one you should be angry about. The jobs report is an estimate based on a series of estimates based on a series of surveys, which are in themselves estimates. 

It’s not a very realistic picture of the economy from my point of view. And it goes through phases of, revisions over three months. And so the idea that the number that Trump didn’t like is what it’s going to be like three months from now. I think it’s kind of silly in the first place. Anyway, if you’re looking for a more accurate statistic, you want to look for first time unemployment claims. 

So the jobs report indicates jobs that have been created, but based on estimates and estimates and estimates, the first time unemployment claims is based on people who have lost their jobs because they file for coverage. And that is a hard number. That’s a real number. So here’s the QR code. If that is a statistic you’re interested in. 

The fact that Trump doesn’t know this is concerning, because anyone who is working in, say, the Commerce Department is going to know which statistics are better than others, and the Commerce secretary is a guy by the name of Howard. Let make it will basically tell Trump anything he wants to hear. And so we have just gotten a very good example of the echo chamber that is developed in the Trump White House, where it’s not just that no one is speaking truth to power, it’s just the truth. 

Can’t even make it in the room in paper form. Okay, third thing, the president that is most similar to Donald Trump and going after the statisticians, isn’t g of China. Those people are dead. It isn’t Putin of Russia. Those people were let go 20 years ago. It’s Hugo Chavez, the deceased leader of Venezuela. When he became president in 1998. 

He basically went through the entire institutions of Venezuela, which at the time was generally considered to be the best well run of the Latin American states. High standard of living, good educational system, good infrastructure, pretty good policy. They basically had an oil largesse and they used it on the people. You’re crazy idea. And he basically went after the entire set of institutions that supported that system, root and branch, until the only information he got was the information he wanted to hear. 

It’s very similar to what we’re seeing right now. And if you look at some of the things that Donald Trump is doing with, say, energy policy, wanting to produce more crude, say, from public lands and only sell it to countries that he has a handshake deal with. This is very Hugo Chavez. Hugo Chavez would sell the crude at a discounted rate, only to markets that he was ideologically aligned with wherever they happen to be. Cuba, of course, with the top of that list, 

Donald Trump personally is basically setting up, trying to set up something similar where the crude is only sold to specific markets, where he feels he’s beaten them into aggressive submission with European Union. Be at the top of the list. That means less income by a significant amount and de facto subsidization of those countries for personal and political reasons. 

So this is not simply an issue of a few numbers. This is something that allows the US government to function, and allows it to function in a way that benefits the president. But until some people in the white House grow some spines and speak truth to power, which means I’ll probably be fired the next day, we’re probably not going to get a lot of that. 

Keep an Eye on Industrial Construction Spending

View above an industrial construction site

We’ve got another economic metric for y’all to keep an eye on. Today, we’re looking at total construction spending for US manufacturing capacity.

This metric helps us understand how quickly the US is preparing to rebuild its industrial base. Which, as we’ve discussed extensively, is going to be essential as the US faces deglobalization…and China going bye-bye.

But things are stalling. Trump has created a construction purgatory, and businesses are holding investments until they know the rules of the game. And as we prepare for the next chapter of the global order, a drop in construction spending could spell serious problems.

Link: https://fred.stlouisfed.org/series/TLMFGCONS

Prefer to read the transcript? Click here

Transcript

Hey, all. Good morning. From the Front Range foothills above Denver. Today I’m going to talk about one of these other economic statistics that I’m following very closely in the current environment. And it is something that is collected by the Federal Reserve. It is called total construction spending for manufacturing capacity. Basically, it tracks how the United States is spending to expand its industrial plant. 

Now, if you’ve been following me for any time whatsoever, you know that I am concerned that we are not getting ready for the Chinese collapse fast enough and that we only have a certain number of years left, probably no more than eight. And that’s before you consider the trade war and some of the policies of the Trump administration, which are greatly accelerating China’s fall. 

So basically, if we still want manufactured goods stuff, we’re gonna have to make a lot more of it here locally. And that means a lot more factories. This statistic tracks exactly what we’ve been doing for the last several years. And if you start at the beginning in 2019, 2020, it’s Trump one. You’ll see that it was really low. 

And honestly, that’s pretty historically normal. But that number makes it Trump look worse than he is by far. And part of it is simply Covid. We didn’t know what the rules of the game, where we didn’t know how long it was going to last. We didn’t know if was gonna be a lockdown. We didn’t know how many people were going to kill, because if you remember back to the early days, something like 3 to 4% of the people who were getting infected were dying. 

And none of the treatments we had, especially in that early outbreak in New York, were working. It was it was awful. And nobody knew what to invest for. Then we have the Biden years where we had a lot of government spending to boost industrial production. And this makes Biden look better than he is, because while things like the Chips act and the IRA did put money into the system and did build industrial plants, only about 20% of that rise can be attributed to government spending. 

Most of that was actually American corporations realizing that something was happening with globalization that was not just a one off. It was a trend, and they needed to build more capacity here. And so we saw a steady increase for those four years. More lately, you’ll notice that it has flatlined again. And this you can blame on Trump. This is the tariff policy. 

At the time of this recording, we’re now at our 149th tariff policy since the 20th of January. And the rules of the game are changing every day, sometimes every hour. And so while everyone is completing the greenfield projects that they started, very, very few new projects have actually began. Any sort of construction and all of the deals that Trump likes to brag about. 

None of them have moved at all. So this is the number that matters from my point of view. Here’s a QR code so that you can watch it yourself with live releases. Whenever the fed updates its data. This number goes up. You know we’re moving in the right direction. We’re getting ready for a future that is inevitable, 

And if it goes down, then we are well and truly screwed.

Key Economic Indicators to Watch: Retail Sales

Photo of a economic chart trending downward

The last time we discussed numbers to watch, we talked about first-time unemployment claims as a recession indicator. This time, we’re talking about retail sales as a key economic indicator.

Consumer activity accounts for some 65-70% of the US economy, so it is probably worth paying attention to. Retail sales give us a slice of the pie, covering purchases of goods and services. Sure, it doesn’t include housing, healthcare, and B2B transactions and it comes with a 6-week delay, but hey, beggars can’t be choosers.

Below is a link to the website where you can look at retail sales in the US.

Link: https://www.census.gov/retail/sales.html

Prefer to read the transcript? Click here

Transcript

Hey, everybody. Peter Zeihan here. Coming to you from Colorado. And today we’re going to take another question from the Patreon crowd. Specifically, how do I do what I do? And we’re going to talk about one of the economic statistics that I use to figure out where the world is going and what’s going on in the country at the moment. 

And that statistic is retail sales roughly 65 to 70% of the American economy is based on consumer activity. So anything that gives me some insight into that is something I’m all about. Retail sales is arguably the single largest chunk of that, but it’s nowhere near all of it. Retail sales is everything that you purchase, whether a goods or a service, up to and including vehicles. 

But it does not include things like health care and most importantly, housing, which for most people is their single largest expense. What it does is it gives us a relatively accurate picture in a sectoral breakdown on what Americans are spending their money on over a long period of time. So from a positive point of view, retail sales tells us what is up and how people are operating. 

But there are a couple really big drawbacks on the statistic. That means that you have to look at as one of a constellation of factors, rather than just the one thing that you look at. The first problem, in addition to, of course, the fact that it doesn’t include all spending like housing is it doesn’t include any sort of business activity. 

If it’s a business selling a service or good to another business that’s not in retail sales, it only covers business activities that go to consumers. So if you’re like me and you’re very concerned about an industrial and a manufacturing slowdown because of the Trump administration’s tariff policies, it’s not going to get you anything in retail sales. For that, you have to look for industrial construction spending. 

Second issue. It’s not a hard number. It’s an estimate based on surveys of thousands of companies. Which means that not only are you not getting a hard data point like you would with, say, first time unemployment benefits, which is another video we’ve done recently. 

It also means that it takes time to put it all together, because you have to wait for the month to complete, and then you do your surveys and your survey data back, and then you compile that into the overall number of retail sales. And so from the point that you start the process at the end of the month to the point that you have your final data point, it’s about six, almost seven weeks. 

So in just this last week, we got data finally about what went down in June and the June data was pretty good. It was a pretty strong expansion of retail activity, and after two months of negative growth, it was kind of a relief to see some activity with that probably meant is that we were on the backside of Trump’s just kidding. 

Tariffs where he originally had US high tariffs in April, which suppressed activity that continued into May, which suppressed activity. And then in May, he said, you know what, we’re going to give everybody a couple months to adapt to this, and we will revisit this in August. And so in June, the tariffs came off, people started spending again, and we got back to some version of normal, although I’m not sure what that word even means anymore. 

Anyway, June numbers came in looking pretty good, but we didn’t find that out until halfway through July. And again, it’s an estimate. So by the time we get to the other side of Trump’s tariff break in August, it’s not going to be until September that we have some idea of what’s going on. So it’s a great data point. 

It’s an estimate, it’s somewhat backward looking and it doesn’t give you the whole picture, but it’s better than nothing. So I watch it. And now with this QR code you can watch it to.