David Rosenberg: U.S. dollar bear market looms as the world loses confidence in the White House

I don’t recall a time when we have had such inept and confusing economic and foreign policy in the United States.

The White House needs to revive the affordability program into the midterms, but has instead restarted a trade war with its largest trading partner. We have Iran and Oman working on a deal for a safe corridor in Hormuz, and yet the White House continues to enforce its naval blockade.

Kevin Warsh comes into the U.S. Federal Reserve at a time of nearly unprecedented dissension. There are more than just three voting dissenters who want to hike rates; it’s more like nine of the 18. Tightening into a 1.5 per cent demand growth environment — real gross domestic product (GDP) — when the supply-side potential is closer to two per cent is a prescription for a policy misstep.

Treasury Secretary Scott Bessent is going against his private market instincts with his bond buyback announcement. More to the point, it is going to create a conflict with Warsh. One thing is clear, however: Donald Trump and Bessent are determined to either cap or lower long-term rates.

Even if Bessent is successful in reversing the rise in Treasury yields, the question would be the extent to which this leads to a loss of investor confidence, especially foreign investor confidence, because with a depleted three per cent personal savings rate, another year of fiscal-deficit-to-GDP ratios of six per cent or more and a corporate sector that is now funding AI in the capital markets and causing a shift towards a negative corporate financing gap, the U.S.’s ability to sustain global confidence is elevated and rising.

The net national saving is near zero (about one-third the historical norm) while domestic investment is running at a record — the AI capex program alone is roughly half of U.S. GDP growth over the past year — which means the gap has to be filled by foreign capital. Ahhh, but at what price (or yield)? That is the issue since the balance of payments naturally always balances out. But, again, at what price?

There seems to be a fundamental lack of understanding and appreciation at the White House about what the driver of these higher bond yields has been over the past several months. While inflation expectations have remained tame, the impact of trade policy and the Iran conflict have caused measures of inflation uncertainty to hook higher, and that feeds into the risk premium in Treasuries.

Want market interest rates to go down? Declare a complete end of the war, even the economic war, with Iran. Want market rates to go down? Announce a fiscal austerity program. Want market rates to go down? Start to regulate the AI trade because it has been the demands on capital from the spending splurge that no longer is being funded by revenue streams that have bumped against the government’s relentless appetite for deficit finance.