Trump Reversing "Humphrey's Executor" Is NOT Priced In
By Michael Every of Rabobank
There are key central bank decisions this week, starting with the RBA today. However, the market has already priced in their expected outcomes. What it’s failing to price in, though it’s more important, is the stream of political and geopolitical developments in which it operates. Not Trump threatening Mexico with an extra 5% tariff over water; nor threats of tariffs on Indian rice and Canadian fertilizer; nor Trump about to unveil a $12bn farm aid package, tasking his top advisers with finding ways to lower soaring beef prices; nor Nigeria helping foil a coup in Benin, Thailand and Cambodia attacking each other, and Israel bombing Hezbollah in Lebanon.
Rather, the US Supreme Court appears ready to overturn decades of precedent to grant Trump the power to fire a swathe of government officials. Reversing ‘Humphrey’s Executor’ will allow him to overcome legal and bureaucratic resistance to the Gramscian changes he’s introducing to the political economy. That isn’t priced in. Indeed, despite Justice Kavanaugh’s opposition, it could put the Fed in the firing line too, with Governor Cook’s court case in January and a Fed Chair nominee, likely Hassett, promised within weeks. That isn’t priced in either.
Neither is Friday’s US National Security Strategy (NSS) even if for some countries and many markets it implies staggering changes ahead.
It’s America First, starting with “protecting the country and its way of life” and ending with “restoring US spiritual and cultural health”.
Its working principles are a focused definition of national interests; peace through strength; a predisposition to non-interventionism; flexible realism; the primacy of nations; a balance of power; pro-American worker; fairness; and competence and merit.
Its priorities begin with “The era of mass migration is over”; protection of core rights and liberties; burden-sharing and burden-shifting; realignment through peace; and economic security, focused on balanced trade, access to critical supply chains and materials, reindustrialisation, rebuilding the defence industrial base, energy dominance, and financial sector dominance.
In the Americas, the US wants to “enlist” new friends to work with it, and it will expand its military presence there via a ‘Trump Corollary” to Monroe Doctrine. The goal is for “partner nations” to build up their domestic economies, while a “stronger and more sophisticated” Western Hemisphere grows for the US. That’s not the traditional US model of US cheap labour and resource extraction. The plan is also to “expand” its list of partners while pushing out influence from “non-hemispheric competitors”, which sounds like regime change, a long-standing tradition.
In Asia, the aim is to “win the economic future” and “prevent military confrontation. Even with Trump agreeing to sell older Nvidia chips to China, the NSS states: “we will rebalance America’s economic relationship with China, prioritising reciprocity and fairness to restore American economic independence. Trade with China should be balanced and focused on non-sensitive factors.” Indeed, the US will “resist predatory, state-directed subsidies and industrial strategies,” etc. Moreover, “We must encourage… prominent nations in adopting trade policies that help rebalance China’s economy toward household consumption.” So, a US bloc with a common external tariff against China. This “must be accompanied by a robust and ongoing focus on deterrence to prevent war in the Indo-Pacific”, and from Taiwan to the South China Sea, this means much more military burden-sharing from US allies and partners.
For Europe, the emphasis is on decline and the starker “prospect of civilisational erasure.” There is a litany of US complaints about the EU’s strategy and the view that “should present trends continue, the continent will be unrecognizable in 20 years or less. As such, it is far from obvious whether certain European countries will have economies and militaries strong enough to remain reliable allies.” This is then sharpened to, “Over the long term, it is more than plausible that within a few decades at the latest, certain NATO members will become majority non-European. As such, it is an open question whether they will view their place in the world, or their alliance with the US, in the same way as those who signed the NATO charter.”
While the FT talks of ‘Trump’s America and a clash of civilizations with Europe’, the NSS argues “Europe remains strategically and culturally vital to the US…Not only can we not afford to write Europe off - doing so would be self-defeating for what this strategy aims to achieve…. Our goal should be to help Europe correct its current trajectory. We will need a strong Europe to help us successfully compete, and to work in concert with us to prevent any adversary from dominating Europe.” So, the US wants to remake Europe state by state, ignoring the EU. The NSS says policy will prioritise “Cultivating resistance to Europe’s current trajectory within European nations.”
The NSS also says “It is a core interest of the US to negotiate an expeditious cessation of hostilities in Ukraine.” Yet after meeting Macron, Merz, and Starmer yesterday, Ukraine’s Zelenskyy says he won’t yield any territory to Russia. The war may grind on… and the US may walk away, leaving Europe to pay and provide materiel for it. In parallel, Reuters reports the US plans to hand over the running of European NATO by end-2027. If so, European plans to raise core defence spending to 3.5% of GDP by 2035 would be completely inadequate, more so if there is war nor peace. This could require spending 8-10% of GDP for the next two years; or Russia might win, which Europe has said is “existential” for it. The Deputy Secretary of State also just posted that the US will no longer accept NATO meeting with it and talking ‘alliance’, then after it leaves, the same countries changing hats to ‘EU’ and pushing policies that undermine US interests. He implies one or the other will have to change. That has huge implications of its own, including the US openly playing divide and rule via security with the EU: east/north vs west/south.
In short, the NSS puts Europe --as currently constituted-- in a terrible geopolitical position with no good options. The response so far has been silence (‘As Trump goes on the attack, von der Leyen goes into hiding’). Limited conversation around the topic focuses on the mistakes that the US is making. OK, **but what will EUROPE DO**? Chatter of ‘working with China’ rather than the US --as Macron was maybe angling for when not threatening to use Europe’s trade-bazooka on Beijing-- would just ensure the US becomes openly antagonistic; and Chinese trade practices are set in place, as its trade surplus hit a new high. We were here on tariffs too, before the EU yielded.
Tellingly, the NSS plan for the Middle East – “Shift burdens, build peace” actually looks like the easier region to deal with, as does Africa’s “Look to partner with select countries to ameliorate conflict.” Cynics might add that reads like a future NSS Europe text.
This might all seem abstract to markets (“What does this mean for the ECB?”) but it was the ECB’s Lagarde who underlined the world which made Europe prosperous is disappearing. The one that opened up on Friday is likely to be even more transformative as: JP Morgan’s Dimon attacks Europe’s economic record; Ford’s CEO warns Europe is risking the future of its auto industry; the EU steel industry is “in disarray”; France is shielding an €18bn Russian asset pot from the EU ‘reparations loan’ push, where Germany faces a €52bn potential bill for guaranteeing it – and Japan won’t join in.
That leaves one hope for the EU to cling to: that the NSS is just aspirational shelfware. Yet if the Supreme Court rules for Trump on Humphrey’s Executor, the NSS may be backed by new US political-economy hardware and software. That’s called a fat tail risk - and it’s NOT priced in!