Steadily rising bond yields in 2025 should take the air out the economy and financial markets. From Alasdair Macleod at alasdairmacleod.substack.com:
Rising bond yields will be the surprise, ending the largest credit bubble in history. Central banks will probably inflate in a vain attempt to rescue financial markets and the economy.
The background
It has been a time of political change, driven by electoral discontent of incumbent administrations. Thus, it was that Javier Milei almost exactly a year ago ousted the corrupt socialistic administration in Argentina, following Giorgia Meloni’s election in Italy. That was two for the right. In Britain, the Conservatives were ousted by a highly socialist Labour Party masquerading as moderates. In the USA, Trump trounced Harris, who had inherited the leftist administration of a bumbling Biden. On balance and given the US’s size, it has been a marginal win for the capitalists over the socialists which might be expected to lead to a better world.
However, this is unlikely to be the case.
We must focus on the US, because if she sneezes, we all catch colds. Under President-elect Trump, the outlook is of greater economic isolationism. Make America Great Again is aimed at protecting US industry from “unfair” foreign competition. The dismantling of international supply chains will accelerate, a post-covid process which started under Trump’s previous administration following covid lockdowns.
The killer for international outsourcing is trade tariffs. But we must admit that it is one thing to call tariffs “the most beautiful word” while campaigning for office and another when facing practicalities post-election.
The hope is that Scott Bessent, Trump’s nominee for Treasury Secretary is not so ideologically driven and that tariff wars with China and the EU are pre-election rhetoric. But this doesn’t account for how Trump works. He drives the agenda and Bessent was a hedge fund manager, almost certainly ignorant of the economics of trade and unlikely to argue against tariffs convincingly. Meanwhile, the tax agenda will almost certainly lead to higher budget deficits in the expectation that deficit spending will not only underwrite economic activity but cuts in income and corporation tax should lead to higher revenues in time.
