By now you’ve no doubt heard about US President Trump opening up a new front in the trade wars — Mexico. On Friday, our time, Trump sent out the following tweet:
‘On June 10th, the United States will impose a 5% Tariff on all goods coming into our Country from Mexico, until such time as illegal migrants coming through Mexico, and into our Country, STOP. The Tariff will gradually increase until the illegal immigration problem is remedied, at which time the Tariffs will be removed.’
And, soon after, this:
‘In order not to pay Tariffs, if they start rising, companies will leave Mexico, which has taken 30% of our Auto industry, and come back home to the USA. Mexico must take back their country from the drug lords and cartels. The Tariff is about stopping drugs as well as illegals!
‘90% of the Drugs coming into the United States come through Mexico and our Southern Border. 80,000 people died last year, 1,000,000 people ruined. This has gone on for many years and nothing has been done about it. We have a 100 Billion Dollar Trade Deficit with Mexico. It’s Time!’
I’ll discuss the politics of this in a moment. But first, the market effect.
The major US indices fell between 1.3% and 1.5%. The 10-year US bond yield plunged to 2.14%, down from 2.6% just six weeks ago. The bond market is starting to price in a rather rapid slowdown in the US economy.
The big winner was gold. The US dollar gold price jumped back above US$1,300 an ounce. As I explained in this video (from last week) gold looked like it was ready for another major move. Is this the start?
In the video, I showed a chart of the US dollar gold price and pointed out that it had formed a nice consolidation pattern. Friday’s price action in the US saw it break out of this pattern…a bullish move. You can see the updated chart below:
The start of a much bigger move for gold
This could be the start of a much bigger move for gold. There are two factors driving it.
There’s the short-term benefit of the fear trade. That is, global capital sees increasing risks around economic growth and moves from ‘risk-on’ assets like stocks to ‘risk-off’ assets like gold.
Then there’s the longer-term benefit for gold. This comes from the realisation that Trump’s tariffs are not simply a flash in the pan idea from a ‘mentally unstable president’.
The market may finally be realising that this ‘outsider’ really does play by different rules, and it’s not for show.
The tariffs on China are an attempt to reverse a decades-old policy that resulted in a relative shift of economic power to the Middle Kingdom. China played the US, and the US willingly played along.
Put simply, in exchange for short-term profits for US corporates, China built long-term economic power. The US are only now trying to wrest that power back.
In the case of Mexico, it’s a different story. And it’s one that might not be entirely clear if you only see it through the lens and commentary of the mainstream media.
Trump’s southern border wall, the media tell you, is a racist construct. And Trump’s supporters are all racist.
But it’s much more complex than that. Trump doesn’t have an issue with legal migration. But he does have a big issue with illegal immigration, and nearly all of it occurs through the southern border.
The Democrats hate the threat of a closed border because it cuts off a hoard of voters. That’s why the Democrats advocate for welfare, voting rights, and drivers licences for illegal immigrants, under the guise of ‘humanitarianism’. It gives them votes.
Cutting off illegal immigration would save billions in welfare spending, but more importantly to Republicans, cut off an important voter base for the Democrats.
More importantly, as Trump points out, drugs are also a major problem at the southern border. Given the huge toll drugs take on families and societies as a whole, you’d think there would be bipartisan support to encourage Mexico to gain control of its drug cartels.
That there isn’t just goes to show you the priorities of the establishment media. Bloomberg, for example, ran a story about how the tariffs mean Americans would now pay more for their avocados!
Good to see the media tackling the big issues…
Meanwhile, the Australian market doesn’t seem to be too concerned about the escalating tariff wars. On Friday, Aussie stocks finished up a few points. And in US trade on Friday, ASX 200 futures closed down only 24 points.
That’s what the expectation of interest rate cuts in an already relatively healthy economy can do. The RBA is expected to cut rates for the first time in nearly three years tomorrow, with the outlier call being a 50 basis point reduction.
That’s crazy. It ignores the fact that the economy already got a massive boost from the return of the coalition government. The RBA has read the tea leaves wrong. It’s expending ammo on a non-existent target.
More on that tomorrow…
Editor, The Rum Rebellion
PS: Click here to watch the full video interview with The Rum Rebellion’s Greg Canavan and Richard Hayes, CEO of The Perth Mint.