I spent last week in Alaska, like Mary Daly, the San Fran Fed president (AK is part of the SF Fed district). In a Bloomberg interview she boasted that Alaska is a leading indicator for the US economy. Really?
Alaska’s economy since 2020 grew only 0.4% annually. Its high dependence on oil is a crude contrast with the US diminishing sensitivity to oil production (declining) but critical sensitivity to lower oil prices, a key part of Trump’s policies of hiking tariffs while keeping gasoline prices as low as possible for the people.
Trump will also visit Anchorage this Friday, not to participate in the state’s annual fair that week, but to try, again, to sway Putin towards peace with Ukraine something he was supposed to do in 24 hours.
Why Anchorage, a rather bland city, with square, dull, almost soviet-style buildings? Quite unlike the rest of Alaska where nature needs nothing else to impress.
Probably because the Alaskan capital is almost at the same distance from Moscow than from D.C., even though Alaska is but 53 miles from Russia. The flights are as long as the odds of success. Hopefully, they will avoid the fair’s “Demolition Derby” scheduled for 6:00pm on Friday.
But maybe also to celebrate the US purchase of Alaska from Russia for $7.2 million in 1867, a total Trump-style steal. Then Secretary of State William H. Seward’s deal, initially dubbed “Seward’s folly”, turned out a real bargain, especially after the 1896 discovery of gold in Yukon that triggered the Klondike Gold Rush.
That was nothing compared to the 1968 discovery of the Prudhoe Bay Oil Field, the largest conventional oil field discovered in North America that still holds some 25 billion barrels of oil.
Trump may also smartly remind Putin that the US got such a bargain because Russia was nearly bankrupted by the Crimean War (1853-1856) and desperately needed cash. How ironic!
Alaskans may take the opportunity to tell Trump that Alaska’s trade balance is positive thanks to its exports of seafood and metal ores to Japan, China and South Korea, its most important clients.
They might also mention that Alaska relies on imports from Canada for its critical needs of steel and aluminum products, now all subject to super high tariffs because of Canada “flooding” the US with fentanyl.
And, in passing, inform Trump of the recently approved large expansion of the port of Anchorage, “probably the biggest infrastructure project that the state of Alaska has ever seen since maybe the Trans-Alaska pipeline”. All imported steel stuff, including the 3 enormous cranes that can only come from Japan or China.
Who will absorb the 50% additional costs?
Meanwhile last week, economic news kept confounding most pundits, be they positive or negative, which may explain why equity markets reached new highs even with historically high uncertainty.
The S&P 500 Index rose 2.4%, while the Nasdaq Composite climbed 3.9%. The Russell 2000 small capitalization index gained 2.4% last week.
Earnings continued to beat expectations while potentially negative economic stats were simply received as precursors for lower interest rates by September and beyond. The 452 companies that have reported so far showed earnings up 12.4% on revenues up 6.2%. Strong revenues with exploding margins!
Yet, the economic background is not great. Trump’s firing of the BLS chief did not simply erase the stats indicating slower employment.
Initial jobless claims last week increased from 219K to 226K in the week to August 2. Continuing claims, for their part, rose to a near 45-month high of 1,974K. Not much firing but little rehiring as well. Unemployment benefits last 26 weeks…
Goldman Sachs reckons that US growth is near stall speed, reminding us that rising unemployment tends to feed on itself. It estimates that underlying job growth was only 28k in July.
Goldman says that US GDP grew at a below-potential annualized pace of 1.2% in the first half of the year, and expects growth of 1.1% annualized in 2025H2. “Our Fed call remains at three consecutive 25bp cuts in September, October, and December (followed by two more in 2026H1).”
The expected 125bp Fed cuts (-30%) assume that the growth slowdown is not accompanied, or caused, by higher inflation from tariffs.
With last week’s announcements, the average effective US tariff rate has hit 18.3% per Yale’s Budget Lab, the highest level since the Great Depression. Yale’s economists estimate a 1.5% increase in consumer prices (after substitutions with full pass-through) and a potential $2,000 annual hit to the average household.
If so, the hit to households and to inflation would be quite enough to negatively impact the economy, even if only “transitory” by economist speak, which means that the first year increase in inflation does not repeat. But in consumer speak, price increases carry on.
So far, so good the optimists say. But that may also prove only transitory. Goldman’s calculations are that
US consumers had absorbed 22% of tariff costs through June but that their share will rise to 67% if the recent tariffs follow the same pattern as the earliest ones. This implies that US businesses have absorbed more than half of the tariff costs so far but that their share will fall to less than 10%. This net impact on US businesses masks that some companies have absorbed a larger share of tariff costs, while some domestic producers shielded from import competition have raised their own prices and benefited.
Our analysis implies that tariff effects have boosted the core PCE price level by 0.20% so far. We expect another 0.16% impact in July, followed by an additional 0.5% from August through December. This would leave core PCE inflation at 3.2% year-over-year in December, assuming that the underlying inflation trend net of tariff effects is 2.4%.
So, Goldman sees a 0.8% hit to core inflation (67% pass through) but consumers’ purchasing power will shrink more due to the 3.3% additional inflation on food. Yale’s 1.5% hit to Americans’ budgets seems more likely.
Trump finalized his tariff scorecard last week. But does anybody care anymore? The largest customer of the world hikes access costs by 18.3% and investors yawn, even rejoice. So what? Taxes are cut, oil prices are low and Americans are wealthier than ever.
And not to worry about potential bad news, the stats minions have been warned. So have Powell and friends who will be “welcoming” Stephen Miran in September.
Nobody got fired on these news last week:
- Nonfarm business productivity grew an annualized 2.4% in Q2, more than offsetting the 1.8% decline recorded the previous quarter. On a 12-month basis, productivity was up 1.3%.
- That said, compensation costs rose at a 4.0% annualized pace in Q2. Since this rate outpaced productivity growth by a comfortable margin, unit labour costs increased 1.6% in the quarter. On a 12-month basis, labor costs rose 2.6%. But S&P 500 revenues are up 6.2%. Hence those surprising margins.
Hmmm:
What else happened last week?
Switzerland’s president failed to convince Trump that her country does not deserve 39% tariffs for its chocolate and watches, things the US is not famous for. “Dubai chocolate” will gain in popularity. Laos and Cambodia, poor as they are, could not even find money to even call the Trump team to ask what have they done to merit such treatment?
India got hit hard with 25% additional tariffs, on top of the initial 25%, for buying Russian oil. Indians are probably surprised that their country might be the only buyer of Russian oil. Rumor is that China is gobbling a few barrels as well. Is there something other than Russian oil in play here?
For some time India has been cultivating friendship with everybody and everybody was happy with the apparent neutrality of this huge country nestled in the middle of everywhere.
The so-called Quad group (US, India, Japan and Australia) seemed an appropriate counterweight to the Russia-China-Iran-North Korea axis.
Early in his new mandate, Trump said “the “relationship is the best it’s ever been between two leaders of the two countries,” while Modi called Trump “my dear friend.” Modi went as far as saying “MAGA plus MIGA (Make India…) becomes a mega partnership.”
Another example that partnerships with Trump-USA can be volatile.
So Modi has been trying to restore the relationship with China, recently sending several high-profile officials, including India’s foreign and defense ministers, to China.
Modi himself “plans to visit China for the first time in seven years and meet with President Xi Jinping on the sidelines of a regional security summit, according to officials in New Delhi. Xu Feihong, China’s ambassador to India, gave Modi moral support over the tariffs on Wednesday, writing on X: “Give the bully an inch, he will take a mile.””
Modi also invited Putin to visit India.
The two leaders spoke to each other on Friday, reviewed bilateral agreements and discussed Russia’s ongoing war on Ukraine, according to a statement from the Indian government. Putin has been invited to attend the India-Russia Annual Summit in India later this year. (…) In the wake of the US tariff announcement, India signed agreements with Russia to deepen cooperation in aerospace science and technology as well in rare earth minerals, aluminum, fertilizers, railway transport and other sectors. (Bloomberg)
It seems that Trump and Modi annoyed each other during the recent skirmish between Pakistan and India which Trump claimed to have stopped.
Modi felt humiliated. His government took the unusual step of publishing the minutes of a call between Trump and Modi, clarifying that “at no point” was there any mediation by the US and that the ceasefire discussions “took place directly between India and Pakistan.” Other Indian pundits were less diplomatic and almost poetic in their outrage over this “typical Trump overreach.”
Trump wasn’t pleased. He was all the more delighted, though, when Pakistan praised his peacemaking prowess and hinted that it would nominate the president for the Nobel Peace Prize he openly covets. Trump then hosted Pakistan’s top military official — whom India considers the mastermind of the recent terrorist attack — for lunch, and Pakistan promptly made the Nobel nomination official. Subsequently, Pakistan also bargained down the new American tariffs on its goods from 29% to 19% — relatively meek next to India’s rate.
None of this means that the US-Indian relationship is irredeemably broken. Trade negotiators are slated to meet again this month, and a deal remains conceivable. Still, Indians have taken note that Trump is cracking down hardest against India, a putative partner, for buying oil from Russia, and not on China, allegedly America’s main adversary, which imports even more Russian oil.
On Truth Social, Trump wrote
I don’t care what India does with Russia. They can take their dead economies down together, for all I care. We have done very little business with India; their Tariffs are too high, among the highest in the World. Likewise, Russia and the USA do almost no business together.
Forget Russia; India’s economy is growing 6-7% per year. A 50% tariff on Indian products could put a drag of a total 0.6pp on its GDP per Goldman Sachs.
Maybe Trump will broker another truce in coming days but the episode can only tilt India more towards China and Russia. That’s almost 1.5 billion people. Remember Vietnam? The US justified its military intervention in Vietnam by the domino theory, which stated that if one country fell under the influence of Communism, the surrounding countries would inevitably follow. The aim was to prevent Communist domination of South-East Asia.
America may find itself home alone, excluding itself from a free-trade zone in the rest of the world, and boycotted from ensuing negotiations triggered by nations believing that the US can now implement tariffs on any country, at any time, for any reason, disregarding any preexisting treaties or handshake agreements. (Hubert Marleau)
On July 28:
The president appeared before reporters at Trump International Golf Links near Aberdeen, Scotland, where he and his sons, Donald Trump Jr. and Eric Trump, opened a new golf course on Tuesday.
“I look forward to playing it today. We’ll play it very quickly. And then I go back to D.C., and we put out fires all over the world,” Trump said before cutting the ribbon opening the new course in the village of Balmedie on Scotland’s northern coast.
I wish Mark Twain was still alive…
Also last week:
- “On a country-by-country basis, the [US] goods deficit narrowed with China from $14.0 billion to a an all-time low of $9.4 billion), Mexico (from $17.1 billion to $16.3 billion), Canada (from $2.2 billion to a 56-month low of $1.3 billion), Germany (from $6.8 billion to a 59-month low of $4.0 billion) and Italy (from $2.6 billion to a 61-month low of $1.6 billion).” (NBF) That’s a 10.1B aggregate swing in one month. Imports are back on trend, not so for exports.
- The Trump administration is seeking more than $1 billion from the University of California at Los Angeles in exchange for releasing $584 million in federal research funding that the US froze last week. The $1 billion proposal dwarfs the settlements agreed to by Columbia and Brown, two private universities that have inked deals with Trump, and is higher than the administration’s reported $500 million floor for a settlement with Harvard University. UCLA is the first public university to enter talks with the administration over frozen funds.
What If the US Isn’t the World’s Most Innovative Country?
(…) Looked at through this sports prism, the innovation landscape is simple. The US is still far ahead. America is responsible for almost all the breakthrough technologies that define the current era (AI, smart phones, social networks) just as it was responsible for all the breakthrough technologies that defined the last era (PCs, the internet, semiconductors). Three of the world’s most consequential AI companies — OpenAI Inc., Anthropic PBC and Databricks Inc. — are headquartered within two miles of each other in San Francisco. Nvidia Corp. is so dominant in the market for high-end chips that one commentator remarks that “there’s a war going on in AI out there, and Nvidia is the only arms dealer.”
Yet China is breathing down America’s neck — and in some areas, such as surveillance and hypersonic rockets, it’s taking the lead. The most cited paper on AI, known as the ResNet paper, was written by four Chinese scholars who have never studied outside the country. More than 1,300 foreign companies have opened advanced scientific research labs in China to tap into the country’s growing talent pool. And Europe? The combined value of all the tech companies on the continent is far less than the value of just one US company, Microsoft Corp. (…)
The US might be good at breakthrough innovation in the private sector. But what about incremental innovation in the public sector? Feed in different measures, and you get different results.
If you focus on the dissemination of new ideas rather than their invention, China is arguably well ahead of the US. It is well documented that China excels as a fast follower thanks to its combination of engineering prowess and work ethic. China has twice as many miles of high-speed rail than any other country. BYD Co. Ltd sold nearly 607,000 EVs in the second quarter of this year compared with Tesla’s 384,000. SZ DJI Technology Co. Ltd sells more commercial drones than everyone else combined.
But today the country is doing something more exciting — taking ideas that exist in laboratories and commercializing them before anybody else. Beijing and Shanghai have hundreds of driverless taxis roaming the streets. Giant companies such as Alibaba Group Holding Ltd. and Baidu Inc. are best understood as innovation-and-execution machines. If America still leads the world in inventing the future, China leads in bringing it to life.
But focus on the public sector rather than the private sector, and a different innovation champion emerges: Singapore. Most countries count themselves as winners in the government-reform stakes if they can digitalize regular government functions. The government of Singapore conducts all its interactions with its citizens online but goes much further than this. It uses sensors in the streets to monitor and direct the flow of traffic, drones to survey areas affected by the outbreak of disease, and motion sensors in public housing to monitor the wellbeing of the elderly.
The government has a collective brain — the Smart Nation and Digital Government Group (SNDGG) — that attracts the country’s most brilliant citizens and regards itself as a public-sector equivalent of Google. If most countries contract out high-tech operations to the private sector, Singapore keeps them in-house to develop unique competences; if most governments play catch up, SNDGG acts as a pace setter.
Private sector-obsessed Americans might be inclined to treat Singapore’s excellence at government as a mere side-show to the real innovation race. But when the great political theorist Thomas Hobbes asked himself what it was that prevented life from being solitary, poor, nasty, brutish and short, he answered that it was the state, or Leviathan, rather than the East India Company.
(…) Germany excels in what might be called “deep” or “incremental” innovation: Its strength lies in middle-sized companies — the celebrated mittelstand — that produce highly specialized products and focus all their energies on making sure they are the best in the world. These companies, which are usually hidden away in small towns, are so focused on engineering excellence that they have little time for PR: Herrenknecht AG is easily the world’s most impressive tunneling company but has only attracted a fraction of the attention of Elon Musk’s cleverly-named The Boring Company.
Switzerland combines a similar enthusiasm for mittelstand companies with a genius for big public projects such as the Swiss railway system, surely one of the wonders of the world, the Large Hadron Collider, and CERN (the European Organization for Nuclear Research). Thanks to CERN, the world’s first web site was not a dot-com or a dot-net but a dot-ch, which stands for Confederatio Helvetica, Switzerland’s Latin name.
Can the case for Europe be extended any further than a few isolated areas of excellence? The classic argument for the European model is that it is much more sustainable than the American one — that it pays attention to things like sustainability and quality of life not just to billion-dollar exits.
What is the point of leading the world in AI if that AI is used to sell more cat food or get more clicks on cat videos? Some of these questions are even beginning to trouble people at the very heart of US tech: A recent book by Alex Karp, the chief executive officer of Palantir and Nicholas Zamiska, the company’s legal counsel, The Technological Republic, argues that the US innovation machine has focused too much on fripperies like delivery Apps and not enough on big ideas that will transform society. (…)
Today:
Trump Bid for Cut of Nvidia, AMD Revenue Risks ‘Dangerous World’
Even in an administration that has repeatedly pushed the legal limits of using economic statecraft to reshape the global business landscape, a new deal with two tech giants is raising alarm bells among trade experts.
Nvidia Corp. and Advanced Micro Devices Inc. agreed to pay the US government 15% of revenue from some chip sales to China. The chips — Nvidia’s H20 AI accelerator and AMD’s MI308 chips — were earlier banned by the Trump administration and require export licenses to sell.
“To call this unusual or unprecedented would be a staggering understatement,” said Stephen Olson, a former US trade negotiator now with the Singapore-based ISEAS – Yusof Ishak Institute. “What we are seeing is in effect the monetization of US trade policy in which US companies must pay the US government for permission to export. If that’s the case, we’ve entered into a new and dangerous world.”
The chip-payment arrangement is the latest legally questionable, heavy-handed government intervention into business since US President Donald Trump returned to the Oval Office in January. Along with his chaotic tariff campaign and persistent criticism of a sitting Federal Reserve chairman, Trump has used his Truth Social platform for everything from calling on CEOs to resign to offering commentary on corporate advertising campaigns.
Trump’s transactional policy approach saw him approve the sale of United States Steel Corp. to Japan’s Nippon Steel Corp. in a $14.1 billion deal that included caveats such as agreeing to US national security rules and a “golden share” for the US government. Japan, South Korea and the European Union all pledged to invest billions in the US, helping secure tariff rates of 15%, while companies such as Apple Inc. have also skirted levies by promising to invest hundreds of billions of dollars.
The Nvidia and AMD revenue-sharing deals may now prompt the White House to target other industries and goods, according to Deborah Elms, head of trade policy at the Hinrich Foundation in Singapore.
“The sky is the limit,” she said. “You could come up with all sorts of company-specific, country-specific combinations that would say, ‘No one else can trade, but if you pay us directly, then you get the ability to trade.’”
Although Nvidia and AMD agreed to the terms, there are questions about the legality of the agreement, Elms said. The arrangement looks like an export tax, which is forbidden by the US Constitution.
The Trump administration is already in the midst of a lawsuit related to his use of the International Emergency Economic Powers Act to levy what he called “reciprocal” tariffs on the world. On Friday, Trump warned of a “GREAT DEPRESSION” if US courts ruled that his tariffs were illegal.
Chips are at the heart of the US-China battle to dominate industries of the future such as AI and automation. The Biden administration restricted the sale of advanced chips to China, prompting Nvidia to develop the H20, which skirted such restrictions. Trump administration officials tightened export controls in April by barring Nvidia from selling the chips without a permit.
Last month, however, the White House decided to allow Nvidia and AMD to resume sales of chips designed specifically for the Chinese market, which are several rungs below the most advanced artificial intelligence accelerators. Commerce Secretary Howard Lutnick said the administration wanted Chinese developers “addicted” to American technology.
China has grown increasingly hostile to the idea of Chinese firms deploying the H20, particularly after the US called for the chips to be installed with tracking technology to better enforce export controls. Yuyuantantian, a social media account affiliated with state-run China Central Television that regularly signals Beijing’s thinking about trade, on Sunday slammed the chip’s supposed security vulnerabilities and inefficiency.
Still, Chinese companies could use the H20s because domestic firms can’t produce enough AI chips to meet demand. That potentially provides an opportunity for Nvidia and AMD to sell more — and now for the US government to earn additional revenue as well.
Trump has yet to extend a 90-day trade truce between the US and China, which is set to expire on Aug. 12. Lutnick said last week that the detente was “likely” to continue as the world’s biggest economies continue to engage in talks ahead of a possible meeting between Trump and Chinese President Xi Jinping later this year.
“There’s clearly a shift by the administration to take a lighter national security stance as these negotiations are ongoing,” said Drew DeLong, lead in geopolitical dynamics practice at Kearney, a global strategy and management consulting firm.
While the US has intervened before, including by taking stakes in private companies after the 2008 financial crisis, a similar deal like the one struck with Nvidia and AMD is hard to remember and — without proper oversight — could lead to a “crony capitalism state,” according to Scott Kennedy, senior adviser at the Center for Strategic and International Studies in Washington.
“It represents a huge shift in the way the American economy is supposed to operate,” Kennedy said. “It won’t make anyone happy except maybe the Chinese, who will get their chips and watch the US political system go through gyration and domestic tensions.”
Small US Firms Paying Trump Tariffs Face $202 Billion Annual Hit
Small US companies, the source of more than half of the country’s job creation in recent years, are struggling to comply with President Donald Trump’s new tariffs and cope with growing financial strains clobbering them from higher import costs.
Last week’s country-specific levies varying from 10% to 50% landed with a one-two punch: additional red tape issued by Customs and Border Protection, and a need to increase customs bonds — guarantees that companies must buy from surety providers to ensure the government receives its tariff revenue, other taxes and any potential penalties.
Big firms often have in-house resources to handle such administrative changes and costs, but compliance and forecasting in the new tariff regime are “where the smaller companies are really struggling,” said Erin Williamson, vice president of US customs brokerage at Levallois-Perret, France-based Geodis, a leading global logistics firm.
“They may not have that internal compliance group or the infrastructure to really sit back and say, ‘OK, this is going to be the impact to us. How do we pivot?’” Williamson said in an interview Friday.
The US Chamber of Commerce estimated this month that the country has about 236,000 small-business importers — those with fewer than 500 employees. The goods they bought from abroad were worth more than $868 billion in 2023.
Based on an estimate before Trump’s duties took effect Aug. 7, the combined annual tariff hit to those companies is $202 billion, according to the chamber, the nation’s largest business lobbying group. That works out to about $856,000 per firm a year. (…)
“Small businesses especially are grappling with the ability to stay in business,” NRF Vice President for Supply Chain and Customs Policy Jonathan Gold said in a statement last week. (…)
Businesses surveyed by the Financial Times in the Midwestern city of St Louis said their suppliers had hiked prices for a broad range of products in recent weeks, sometimes by as much as 30 per cent, leaving them with little choice but to pass the increases on to customers.
Many said they had stockpiled products priced at the pre-tariff level before the levies came into force, but have since run these stocks down. (…)
“We’re seeing an average 10 per cent increase in the retail price.” (…)
A small business optimism index released last month by the National Federation of Independent Business showed 32 per cent of companies plan to increase prices, the highest reading since March last year.
A census bureau survey in late July had a similar result, with 34 per cent of businesses expecting increased prices in the next six months, up from 29 per cent in mid-July. (…)
Small businesses employ 46 per cent of American workers, or about 59mn people, and account for 44 per cent of the country’s GDP. (…)
“I’ve been in business for 20 years and I’ve never dealt with anything like this in terms of price uncertainty,” Breckle said.
He compared the situation to the Great Recession of 2007-9 and the Covid-19 pandemic. “But this one we’ve created ourselves,” he said.
Builder China South City Ordered to Liquidate by Hong Kong Court
Developer China South City Holdings Ltd. was ordered to liquidate by Hong Kong’s High Court, making it the biggest Chinese builder by assets to be wound up since China Evergrande Group.
The ruling from Judge Linda Chan came after the liquidation petitioner asked for an immediate wind-up order. China South City asked the court for “one final chance,” but Chan said that no significant progress had been made on the company’s restructuring proposal.
The liquidation order shows how China’s years-long property crisis continues to shake one-time giants of the real estate industry. Despite government efforts to prop up the ailing sector, home sales are still weak, making any near-term recovery unlikely. Even UBS Group AG, which had been among the few firms predicting a recovery, is now expecting a delay unless Beijing introduces additional stimulus measures. (…)