Merlin Weekly Macro: Trump’s wayward ways undermine America First

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The pratfalls of America First

It is exactly five years ago this week that President Biden unilaterally bunked off from Afghanistan. With neither discussion nor notice, the Americans went AWOL. Regardless that the Afghan war was a NATO operation mandated by President Bush invoking Article 5 (the one and only time in NATO’s history the “attack on one is an attack on all” provision has been used) following the 9/11 atrocities in 2001, Joe Biden deliberately deserted his partners and left the benighted Afghans to their fate and the Taliban. For NATO, it was a near-death experience. It was a tangible reinforcement that within the Alliance America literally calls the shots; but it also exposed America’s potential to be both an unreliable leader and a flaky ally. “America First” might be Donald Trump’s two-word branded, brutalist ideology but it is far from uniquely his own; Biden put America’s and his personal political interests before everyone else’s concerning Afghanistan. Far from Making America Great Again, it diminished its and his own international standing.

As we wrote at the time, “The cumulative effect of Biden’s various foreign policy failures may embolden these key players (i.e. Russia, China and Iran) to push the boundaries even further than they already are. Afghanistan might sit squarely in central Asia, but the geopolitical ripples of apprehension are likely to be felt as far afield as the Baltic States, Ukraine and Taiwan.” It proved depressingly prescient and even more dramatic.

Strategic intent mixed with flawed execution

Which brings us to today and President Trump’s own foreign policy. His National Security Strategy of the United States published last November was a forthright statement of intent to advance America’s interests in the Western hemisphere while defending them in the rest of the world. As we analysed in our in-depth critique (“Peace & Perversion”, authored in February by Jupiter Merlin Investment Director Alastair Irvine, also the author of these weekly Merlin Macro columns) it was an offensive strategy in every sense: taking an offensive stance to any and all who stand in the way of America’s interests while perversely giving offence to those countries who should be America’s allies, particularly its NATO partners. Taken together, and with Trump’s propensity towards appeasement of Russia and North Korea, it was and remains impossible to reconcile its summation being in America’s national security interests.

With controversial but largely coherent and varyingly successful interventions in Latin America, including in Venezuela (toppling Maduro) and Argentina (giving financial support to Milei), it has been Trump’s Middle Eastern strategy and his “diversion” against Iran which has proved a folie de grandeur. Strategically inept and directionless, militarily one-dimensional and completely unimaginative, Trump’s grandstanding failed first contact with the enemy. There has been no notion of a Plan B (not least that a Plan B presupposes there was a Plan A; none was evident either). In an interview with the Economist even as far back as March, Sir Richard Dearlove, former head of MI6, was unequivocal that Iran already had the upper hand over the US. Today, the Iranians are calling the shots, Trump is floundering; far from bringing a pariah regime to heel, he is reduced to negotiating with it, giving it agency, oxygen and legitimacy. That itself is a victory for Iran and a moral defeat for America.

Random reprisals…

Trump’s strategic impotency is having consequences. He has lashed out at another ally, this time Oman, threatening to bomb it for negotiating a plan with Tehran to reopen the Hormuz Strait. Even South Korea has come under withering political fire from The Donald; for refusing to help the US in the Gulf (did Trump not declare very publicly the US needed no help? Or was that many iterations ago on Trump’s random path to peace), Trump has withdrawn the US from the annual combined military manoeuvres off the South Korean coast, citing at the same time his friendship with North Korea’s Kim Jong Un and not wanting to irritate the dictator.

… and rational realignment

No longer entirely sure who its friends and protectors are, while negotiating with the US over a significant economic package including nuclear power technology, Saudi Arabia has sensibly hedged its bets: Saudi, Pakistan and Turkey, the three principal Sunni-dominated powers in the region have signed a tripartite mutual protection treaty. In a clear tilting of the balance of power, this is almost sure to be interpreted as provocative by the Shia-led Iranians and their proxies and it adds a new dimension for Israel to digest; Turkey, of course, is a member of NATO (though it will argue correctly that being NATO members did not stop the US and the UK signing a separate pact with Australia).

The consequences of bombs, bluster and bull

As the Iranian stranglehold over the Straits continues largely unimpeded, and Trump is once more blustering to “bomb the [“firewall alert”] out of Iran”, commodity prices continue to roll with the punches. The effect on energy markets is obvious.

The consequences for soft commodities, grains in particular, has the potential to become just as pernicious and potentially more enduring. Thanks to the harsh summer weather, the international agricultural sector is already reeling from a poor harvest and a significant fall in yields and tonnages; with Hormuz being largely shut, access to chemical fertilisers derived from the refining process for next year’s sowing season is curtailed; to which we must now add Putin doing what he did in 2022: he is deliberately attacking the port of Odessa on the Black Sea to which the Ukrainians are retaliating with attacks on Sevastopol in The Crimea. The destruction of merchant shipping and port infrastructure critical to grain exports from both countries is pushing prices higher. Wheat is being weaponised by both sides.

Unforced errors: the market’s interpretation

Trump has put himself under considerable political pressure at home: his Iranian war is deeply unpopular among American voters. He promised he would not get America entangled in foreigners’ wars, so he went and started one instead. Even on such a limited scale, and with no tangible successes but producing a heap of problems, it had already cost a small fortune: $37.5 billion by mid-July and counting; War Secretary Pete Hegseth has demanded Congress approve another $500 billion to be added to the $1 trillion already ear-marked for the defence budget which Congressmen have interpreted as an indicator of a drawn-out conflict.

Inflation is stubbornly above the Fed’s 2% target. Commodity prices might be volatile but the general underlying trend is upwards.

And in the week that a fiscally incontinent US administration saw US government debt surpass $40 trillion (a quarter again as big as the economy, and an increase of $3 trillion—the equivalent of the UK’s GDP—in a year), Trump now finds himself being punished by the markets. Bond investors are driving up the yields on US government bonds to reflect the risk posed by the simultaneous and linked triple-headed monster of inflation, burgeoning debt and geopolitical instability. Even before the latest spike in borrowing costs, as at the end of July the US Treasury reported that the annualised government net interest bill amounted to $1.17 trillion, or 19% of total federal spending; if it were a department it would have the second biggest budget still behind social security but now surpassing medicare; it swallows a fifth of all US government tax receipts.

Two weeks ago, the US and Japan jointly intervened in the currency markets to prop up a sickly weak Yen. It was only partially successful with a third of the instant gratification already surrendered.

Getting a taste for it and attempting to stabilise another market, in a new intervention in response to rising bond yields and falling prices, Trump this week ordered the Treasury to double its bond buybacks from $2 billion per “operation” to $4 billion. Other than sentiment, it’s difficult to fathom the point. The sums are a drop in the ocean; and depending on the cohorts of bonds being repurchased, the likelihood is that they will have been issued at far lower yields than replacement bonds still being issued to fund the government’s yawning 6% budget deficit; the blended nominal interest cost will still be rising. It’s not surprising that one sceptical Wall Street commentator described it as “financial hocus pocus”. Markets were unimpressed and within 24 hours of the order, two thirds of the positive reaction in running yields had been lost. Trump and his Treasury Secretary are wasting their time and taxpayers’ dollars again.

Rational response

History is not going to be kind to President Trump. Memorable? Certainly, but not in the way he’d like to think. Consequential? Undoubtedly with his propensity to create instability and back the wrong horses. But it is his increasingly erratic behaviour and his unforced errors that are defining his second term. Tackling Iran was entirely rational; his colossal error was underestimating his enemy and a complete absence of strategic planning (if Iran had been planning for this moment for 40 years, Trump had given it little more than 40 days’ serious thought as to what to do). After months of lambasting and mocking his allies, few if any are in a mood to indulge him. He is now isolated internationally and is in danger of losing militarily and diplomatically. What he’ll do next is anybody’s guess. In his own peculiar way, he is every bit as hapless as Joe Biden.

America First is one thing; MAGA turning into Making America a Joke is quite another. It has ramifications and risks for all of us. On that score, bond markets are entirely rational pushing up the risk premium.

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