EMR April 2025
Dear Reader
SETTING
In our EMR March 2025, we dealt with the inappropriate stance taken by President Trump, imposing new tariffs on imports from Canada, Mexico and China, although, as announced in the meantime, these may not be implemented, as announced! In the present EMR, we set the focus on the implications of the measures, i.e. the impacts on economic activity, in order to make appropriate financial investment decisions. Of particular interest here are the economic laws, according to which demand falls or rises when the price of a particular resource, product or commodity changes. On the supply side, the opposite effect is postulated.
Contextually, we ask ourselves what the implications might be regarding the supply and/or the demand side. Fact is, that the demand principle states that demand falls when the price of a particular resource, product or commodity rises. Coherently, on the other hand, demand increases when prices fall. Taking the publicly known decree of the US government to levy specific taxes on the countries quoted in the above paragraph, we assume that prices for the specific goods will rise in the country levying the tax, the USA, while supply is likely to remain stable or even be reduced.
In the meantime, President Trump has signaled the reversal of his “logic” by announcing that he will suspend tariffs against Mexico from March 7, 2025. Despite this “glimmer of hope”, the US President announced two more tariff hikes to begin in April.
When reviewing the “politically induced” price announcements, we should not ignore the respective impacts on corporate fixed investment and consumer spending in the country levying the taxes. Specific reactions can be alleged in the following chart of selected equity indices. For comparison purposes, we have indexed each index to 1 as of January 2, 2020. We kindly ask the reader to take note that the indices are denominated in the respective country’s currency.
What does the chart highlight, any suggestion? To improve comparability let us set the focus on the following determinants:
- 2020: Outbreak of Covid.
- 2021: Signs of recovery, climate change, competition between China and USA.
- 2022: Start of the Russian aggression against Ukraine.
- 2023: End of Covid.
- 2024: US tax impositions to Canada. Mexico and China.
- 2025: Actions and reactions to tax increases, and particularly the nomination of Stephen Miran as Chairman of the National Economic Council (in charge since March 2025).
We ask ourselves, which of the above mentioned factors might or ought to be used while forecasting the whereabouts in the ongoing year 2025? Well, taking the multiple explanations into serious consideratation we come to the following conclusions:
The example concerning Canada, Mexico and China is really helpful, as an inflation determinant both in the tax-levied countries as well as the leving country itself, the USA.
Consequently, we view the path of the growth oulook or exports f. impoorts of goods and services as a highly deterministic factor. The growth rate e.g. of Swiss exports has exceeded that of imports for almost the entire period, while accompanied by persistent volatility. The growth rate of US imports has increasingly outpaced that of US exports, especially in the last 10 years.
In addition, the different trend developments of the respective currencies should also be analyzed more closely.
At this point, one may ask what these trend differentials mean for interest rates as well as currency management of the respective monetary authorities?
EXPECTATIONS
We believe that the year 2025 will be dominated by recessionary developments. Why, you may ask? We present our best guesses below.
Without a turnaround in the taxation of raw material imports by the USA, it must be assumed that there will not be significant economic growth improvement in the tax imposing country, if the price of “primary raw materials” continues to be politically increased. Higher “import costs” lead both to higher inflation in the country levying the tax and consequently also to a slowdown in consumer and investment spending.
Furthermore, we note that the US administration has highlighted a plan to weaken the USD, for countries with high USD currency reserves, such as Switzerland. This plan is indeed threatening, as it determines both the economic growth path and the function of the USD as a reference currency. Its main function ought to improve financial stability by allowing investors, traders and governments to compare and assess the value of currencies, while promoting international trade and thus economic growth both in the country where the tax is levied and, in the country, levying the tax. The negative impact of Trump’s “America first” stance is expected to make the economic environment even more difficult, making it really hard to determine the right value of goods and services.
CONSEQUENTIAL PERSPECTIVE
Clear signs of disagreement with the White House’s “official” position were given by the FED, which kept interest rates unchanged (March 19, 2025) at 4.25% to 4.5%, and the SNB which – on March 20, 2025 – reduced the interest rate by 0.5% to 0.25%, indicating the approaching end of 0% for Switzerland!
A further indication of incongruent development might be deduced from the relationships of the gold price in USD and/or the Euro respectively the Swiss Franc in USD, as shown in the following chart, clearly stressing the impact of Covid and of the Russian invasion of Ukraine. What about the price of gold as an indicator of coming change?
We wonder what the implications of “America First” will be. Considering that politicians are calling the shots, a first indication of investors’ deterministic interest is that they may continue to seek “safety” regardless of Mr. Trump’s jargon and absurd impositions – as of recently. In other words, they will continue to be driven by safety. This leads to a high level of interest in gold exposure driving the gold price ever higher, as the chart above shows.
Other highly deterministic, emerging factors are the changes in export and import prices depending on the US government’s tax revenues and the corresponding impact on economic activity, i.e. primarily on corporate fixed investment and consumer spending. The respective effects on economic activity, consumer and investment spending and international trade cannot yet be quantified with sufficient accuracy. We fear that the learning effect of politicians may be slow to materialize. So the real question is: How can a potential financial crisis be contained or prevented?
In such an environment, we tend to focus primarily on our own domestic market and our own currency.
Suggestions are welcome.
