In today’s issue:
- An Atlantic trade war looms
- But there is a way out
- The UK stands to benefit most from a deal
An Atlantic trade war is brewing.
The upcoming German election results may make it even more likely.
Having lived and worked in Germany for five years early in my career, I’ve kept an eye on developments in the country ever since.
I also retain a network of German financial industry and economic policy contacts.
Ever since the Ukraine war broke out, there has been a general sense of foreboding that nothing good would come of it.
When the Nord Stream pipelines were blown up and the government failed to figure out who did it, there arose a sense of disbelief and distrust.
Then the economy tanked. Deindustrialisation set in. Hope for a better future began to evaporate. The Wirtschaftswunder Economic Miracle became a Wirtschaftsalptraum Economic Nightmare.
And alongside it all, the populist Alternative für Deutschland (AfD) political party went from strength to strength in the polls and in regional elections.
National elections are now only weeks away, with AfD projected to win the second largest share of seats in the Bundestag.
Musk’s surprise rally appearance – but no salute!
Over the weekend, tech entrepreneur and free speech champion Elon Musk made a surprise virtual appearance at an AfD rally.
He confirmed his support for the party he claims is the only one that can “save Germany”. He also emphasised his admiration for German culture and its historic achievements in art, music, science, literature and philosophy.
He also decried recent German government efforts to restrict political speech, prevent AfD from forming any part of a future governing coalition, and possibly even ban the party from standing in future elections altogether.
Implied by his appearance and comments was that President Donald Trump would find a welcome partner in AfD in multiple policy areas.
But the existing EU leadership in Brussels has no patience whatsoever for AfD or, for that matter, the various other populist parties that have been grabbing an ever-greater share of the vote in most EU countries in recent years.
Populism is “anti-democratic”, the EU elite claim. Conveniently airbrushing away the largest, most consequential and unambiguously pro-democratic populist movement in history: the Suffragettes.
In the Netherlands, Italy, Austria, Hungary and Slovakia, populist parties are already in government. In France, they’ve come awfully close, making it difficult for the other parties to form a governing coalition.
The current EU leadership, already at loggerheads with domestic populism, will thus soon be at loggerheads with the new US administration. Trump regards the EU bloc as both protectionist in trade and weak on defence policy.
Trump has already demonstrated that he will use the threat of tariffs to get his way not only in trade policy but other areas. Just this past week he threatened Colombia with tariffs and sanctions if they didn’t agree to accept repatriated citizens found to be in the US illegally.
It took Colombia only ten hours to comply with his demands.
Has the EU ever agreed to do anything in ten hours? Bureaucracies tend not to work that quickly.
Germany’s better-than-expected stock market
But be in no doubt: the risk of a US-EU trade war is already high. If Trump- and Musk-friendly AfD is not invited to join Germany’s next governing coalition, that risk will only increase.
Given all the above context, you’d think global investors would have shunned the German stock market. But that isn’t the case. The DAX (yellow line) was lagging behind the US S&P 500 (red line) for a while but, since Q4 last year, has rallied quite strongly.
Source: Koyfin
Are markets optimistic that a US-EU trade war will be avoided? Perhaps.
What about the UK? Word from Washington is that any US-UK free trade deal would have to include the healthcare sector.
Is it even conceivable that the current UK government would agree to any deal that opened NHS contract bidding to US competition?
When it comes to political expediency, everything is conceivable.
This government is desperate to do something that will get growth going. A trade war would do the exact opposite.
No growth and there will be no more jobs, no rising incomes, no increased tax revenues and no second term for this already deeply unpopular government.
I’ve said it before and I’ll say it again: this government has a historic opportunity not only to enter into a free-trade deal with the US but to help broker a trade deal between the US and EU by linking it to European defence policy.
If it succeeds, as the smallest, most open economy of the lot, the UK will be the biggest winner economically of them all.
Now, take another look at that chart. Here it is again:
Source: Koyfin
The UK FTSE 100 index of global companies (blue line) has lagged behind both the US and German stock markets over the past few years.
If you’re optimistic that a US-EU-UK free trade deal of some sort is in fact within reach and agree with me that the UK stands to benefit the most, then it is the UK stock market that you want to buy.
Until next time,
John Butler
Investment Director, Fortune & Freedom
Mag Seven Deep Sixed
Bill Bonner, writing from Baltimore, Maryland
‘More investment does not necessarily lead to more innovation.’
– Liang Wenfeng, Founder of company that created DeepSeek
We’ve got a good idea where the Big Loss will come from. This month, a bombshell hit the whole cluster of AI-enhanced capital values.
AI chips – the foundation of Nvidia’s $3 trillion market cap – suddenly face an unexpected competitor. The Daily Beast:
Chinese AI Upstart Sparks $1 Trillion Market Rout After Trump Hyped AI Megadeal
A Chinese artificial intelligence startup’s latest AI model spooked markets Monday, leaving U.S. and European technology stocks on track for a $1 trillion wipeout, a week after President Donald Trump threw his weight behind a $500 billion private sector investment in AI infrastructure.
DeepSeek is the product of $6 million, not billion (in rented GPU hours), of investment by Chinese entrepreneur, Liang Wenfeng. Despite spending $200 billion a year to dominate the AI space, the four leading US tech giants – Microsoft, Amazon, Meta, and Alphabet – have let Wenfeng steal a march on them.
Typically, a bubble attracts its own pin. By trying to contain Chinese innovation, the Trump/Biden administrations seem to have sharpened its point. And now, it heads straight for those tech oligarchs standing in the second row during Trump’s inauguration.
Now valued at $17 trillion, collectively, the Magnificent 7 were already headed for trouble. That’s what normally happens. Bubbles deflate. Peaks lead to valleys. And new technology is always followed by newer technology.
But this time, Palo Alto might soon resemble Gaza City. Seeking Alpha:
Major averages tumbled on Monday as concerns about the AI rally ramped up in the face of buzz about China AI startup DeepSeek, sparking a risk-off move. Early on and the Nasdaq Composite was -2.7%. AI names like Nvidia (NVDA) and Super Micro Computer (SMCI) were down more than 10%.
What could you expect?
Protectionism and containment lead to decay and backwardness, not to growth and progress. Despite US efforts to stop then, China’s chip exports have actually gone up for 14 consecutive months. Forced to experiment, they developed new tactics and new technology. Forbes:
US export controls on advanced semiconductors were intended to slow China’s AI progress, but they may have inadvertently spurred innovation.
Over at The Unz Review, the report is even more alarming:
In a matter of days, the news of China’s AI sensation, DeepSeek Ri, has gone from a gentle breeze to a Force 5 hurricane.
The ‘capital of tech’ has moved from ‘Palo Alto to Hangzhou,’ says Unz:
It’s clear now that no one in Silicon Valley or Washington DC had the slightest idea that their world was about to be turned upside-down by an innovative new product that would shift the geopolitical plates further eastward. In short, the agenda is being set by people with different priorities, values and beliefs who live 10,000 miles away.
Venture Beat:
Unlike o1 (Open AI) which is available only to paying ChatGPT subscribers of the Plus tier ($20 per month) and or expensive tiers (such as Pro at $200 per month), DeepSeek R1 was released as a fully open source model, which also explains why it has quickly rocketed up the charts…everyone in AI is freaking out about DeepSeek.
The sell-off in tech may be ‘overblown,’ says Barrons. The deeper challenge, though, is probably under blown. Republic World:
Chinese Universities Surge Ahead of MIT, Oxford, Stanford, Caltech
Harvard University retains the top position in the Nature Index, but the rest of the top ten spots are dominated by Chinese institutions.
Last week, Trump announced $500 billion to be invested in Stargate AI – to ‘secure American leadership’ and ‘elevate humanity’. It’s already looking like money down the drain.
Regards,
Bill Bonner
Contributing Editor, Fortune & Freedom
For more from Bill Bonner, visit www.bonnerprivateresearch.com