In the wake of a pretty horrible US jobs report that freaked Trump out, the World Bank just slashed its growth forecast for the United States to half of last year’s figure. Due to Trump’s tariffs, they expect the globe’s largest economy to grow by just 1.4 percent this year, down from 2.8 percent recorded last year. In January, it forecast a 2.3 percent gain for the US economy in 2025, putting a number to how big an impact Trump’s tariffs have on economic growth. “Global growth prospects have deteriorated. Without a swift course correction, the harm to living standards could be deep,” Indermit Gill, the World Bank’s chief economist wrote in the report. “International discord — about trade, in particular — has upended many of the policy certainties that helped shrink extreme poverty and expand prosperity after the end of World War II.”
And these projections are under the current tariffs that were temporarily imposed after TACO Trump’s multiple pauses that are all due to expire in a little less than a month. If the base expectation is for GDP to get cut in half over the course of the year under an effective 30 percent tariff on China, it’s not difficult to wonder how bad it could get if we revert to the unhinged 125 percent that Trump imposed back in April.
Forecasts are one thing though, but when people are putting their money where their mouth is, that really adds legitimacy to these fears, and Hong Kong has presented a very concerning dynamic over the past month, as Asia Editor for the Financial Times, Robin Harding, detailed in an excellent column this week.
The Hong Kong dollar is pegged to the United States dollar, meaning its value moves with it and therefore it has little foreign exchange risk with the dollar because any changes in its value will be captured by both currencies. Because interest rates make the world go ‘round, what has happened with near-zero percent short-term interest rates in Hong Kong the last month or so is alarming. Comparable interest rates in the US are around four percent, which theoretically should present a hugely profitable opportunity for arbitrage.
If everything in the US was hunky dory, you would expect investors to flood into Hong Kong and borrow at near-zero percent interest, sell those Hong Kong dollars for US dollars, and earn interest in US dollars at four percent or more and make free money hand over fist (this is generally what a currency-based arbitrage trade looks like). These kinds of market inefficiencies are routinely exploited out of existence by arbitrage traders, so it is very instructive that Hong Kong’s interest rates have remained around zero for this long. If this split in interest rates were a market inefficiency, it wouldn’t exist by this point. That people are not picking up this supposed free money off the ground means that there is a larger dynamic at play scaring investors away from a guaranteed four percent return.
As Harding notes, this development “suggests markets have a limited capacity to absorb shocks at a time when they are being subjected to many of them,” and that it “also hints at something more profound: the desire to hold Hong Kong dollars and other Asian currencies reflects a growing nervousness about US financial markets.”
This is one of the many examples of how investors are attaching a brand-new risk premium to all US investments this year. Dollars, bonds, stocks, real estate—it doesn’t matter—if it’s American, it now costs more to invest here to reflect the increased level of risk that Trump and a country willing to elect him twice presents. America’s status as the globe’s home to safe haven assets has never been more threatened than it is right now, all entirely due to the policy choices of the Trump administration and the Republican bill that will explode the deficit in order to take healthcare away from millions of people to partially pay for the wealthy elite’s tax cuts. While many MAGA folks ignore the deficit concerns recently brought by one credit agency, it’s a lot harder to dismiss the largest most liquid financial market in the world echoing those fears while putting an alarming number to it, especially when that number is typically when TACO Trump emerges.
We are teetering on the edge of true danger in more ways than one. Trump’s invasion of Los Angeles and subsequent threat to use “heavy force” against protesters of any kind at his Big Boy Birthday Bash this upcoming weekend is a stark example of how full-blown authoritarianism is here (it also should help further scare investors away from US shores because authoritarians inevitably impose capital controls). Trump is threatening to undercut his entire demented plan to overthrow a quarter millennium of American democracy by doing the one thing that has historically brought down authoritarian regimes as well as democratically elected representatives of all ideologies: nuking the economy.
That investors are not picking up free money off the ground because it’s in dollars means it is not free money and in fact, is a stark warning about the conditions Trump is creating that a guaranteed four percent return is not worth whatever risk investors are attaching to that trade. Should the GOP pass their Well, We Are All Going to Die Act this next month while Trump lets these pauses expire to return to higher tariff rates, investors and analysts around the world have made it very clear that would push us into a new, more chaotic and fragile world where the only certainties are that global economic growth will be much weaker and America as an investment is far less attractive than it used to be.
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