Macro Minute: Week of June 9, 2025

Last week I talked about the large events that are taking place in the world and the changes that should entail for portfolios. What I don’t want to misconstrue is the fact that just because deals are announced and tariffs are going to settle out to be less severe than feared that it will change the larger macro landscape. That is what I want to cover today, the larger trends I see unfolding over the coming years.  

• The changing of long held international trade relations. 

This is a trend that I see as a natural correction of the imbalances in the world. The last 40 or so years has been exemplified by a mindset of optimization and interconnected world trade. To me, this is best expressed by the increase in profit margins over time.

Businesses have benefited from organized world trade and coordinated global growth. This is clear by the increased profits the last decade compared to history. This has led to capital account imbalances globally. 

• Countries like China, Japan, and Germany are huge producers in this world order. 

• China alone ran a $1 trillion surplus in 2024 

• Japan ran $208 billion surplus in 2024 

• Germany ran a $280 billion surplus in 2024 

• The U.S. had a $1.13 trillion deficit in 2024 

These large imbalances have grown to the point that they must be addressed. We can all debate whether the methods used are best, but none the less, countries will be tackling these problems. Don’t be mistaken, these have become problems. These imbalances combined with other factors have created currency imbalances and wealth dispersions that will be addressed. This will change trade relations. 

• Due to the large indebtedness of developed nations, bond yields will be structurally higher for years to come unless yields are capped.  

This is a trend that is clear by simply looking at the chart of rates. Below is a chart of the 10yr treasury, 30yr mortgage rates, and corporate yields.

The reason this becomes a problem for the U.S. government is because we have such large budget deficits. Even with the current legislation that is moving along in Washington, it does not appear that deficits will come down in any meaningful way. In fact, it appears that the deficit to GDP will rise to 7%-8% up from 6% currently. This means that the debt interest expense will continue to rise, and the total debt will go up while the interest rate on that debt goes up. This will add continued pressure on interest rates. Without government intervention on debt markets, rates will be hard pressed to go down meaningfully in this environment. 

• Inflation will be structurally higher in the U.S. 

There are many factors that lead me to make this statement, but ultimately it comes down to this:  We have debt to GDP ratio of 124% and that is too much debt. There are three ways to tackle this problem. 

1. You can default on the debt. This is not going to happen as long as the government has the ability to print more dollars to pay its obligations. 

2. You inflate the debt away. This is done by letting inflation run faster than the interest rate on the debt. This is accomplished by one of two ways. First is growing inflation faster than the interest rate. The second is by holding rates artificially low. Ultimately, it is a combination of both most likely. This has happened before in the U.S. after World War II. 

3. You cut spending. This requires the government to cut spending in a big way. Given the reluctance of politicians to make meaningful cuts, this seems unlikely. 

Given these options, I think that option two will be chosen. This will look like the Federal Reserve expanding its balance sheet to hold interest rates lower and letting inflation run higher. 

All three of these trends are long-term and structural in nature. These are the type of trends that create new investment dynamics and cause established ones to have diminishing returns. If you add in the technological developments of AI, the future is looking different than the recent past. So much of investing has become momentum investing, the very premise being that the current trends will continue. It should come as no surprise that my advice, is as so often, is to stay diversified, but also be open minded that things may turn out different than assumed. 

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