Cooked By State Capitalism

By Benjamin Picton, senior market strategist at Rabobank

The Powell-induced equity rally took a breather yesterday as the S&P500 closed 0.43% lower, the NASDAQ 0.22% lower and the EuroStoxx 50 0.81% lower. Asian equities – perhaps still playing catchup from Powell’s Jackson Hole speech – had traded higher earlier in the day. China’s CSI300 closed up more than 2% and the Hang Seng gained 1.94% with notable lifts in rare-earth stocks after Beijing published new rules to tighten oversight of production and trading of the geopolitically-sensitive minerals. South Korea’s KOSPI gained 1.3% ahead of a Monday (US time) meeting between South Korean President Lee Jae-myung and US President Trump (more on that below).

There are consequential headlines everywhere this morning, but perhaps the most consequential for markets (in the very short term, at least) is Donald Trump’s announcement that he has fired Fed Governor Lisa Cook, effective immediately. Cook was a Biden appointee who had recently come under pressure after being accused of mortgage fraud by FHFA Director Bill Pulte. Trump said in a letter to Cook that there was sufficient reason to believe that she had made false statements on one or more mortgage agreements. He also said that in light of Cook’s “deceitful and potentially criminal conduct” he did not have confidence in her integrity and her actions called into question her “competence and trustworthiness as a financial regulator”, presenting cause for her firing.

As noted in this Daily yesterday, Trump has been busily working over the Fed to bend it to the MAGA program. That program is winning the competition with China by reshoring production, controlling critical supply chains and scoring strategic wins by pulling allies tighter into the US orbit and forcing them to help isolate challengers to US supremacy. China has been playing much the same game for decades now and continues to do so, as illustrated by the recent tightening on controls of rare earth exports, which the United States can’t supply itself with and needs for defence and technology applications.

The MAGA strategy encapsulates a series of carrots and sticks to coax production back inside US borders. Tariff protection to penalise offshore competition and provide an implicit subsidy to local producers was step one, lower taxes and lower regulation through the One Big Beautiful Bill and DOGE is step two, cheap energy through friendly relations with Saudi Arabia and ‘Drill, Baby, Drill!’ is step three, and cheap capital by getting the Fed into a headlock and forcing it to follow the wishes of the executive is step four. Executing a ‘reverse Nixon’ by improving relations with Russia to split them off from their “no limits” partnership with China would have been a nice to have from the perspective of the administration, but looks increasingly unlikely.

Given that Trump is only six months into his second term and has already executed on most of the major planks of the MAGA economic program, it is clear that the economy is being re-made at an astonishing rate, and the commentariat is clearly struggling to keep up. Long term free market evangelists over at the Financial Times are now describing Trump as the ‘Dirigiste-in chief’, which of course he is. The Republican Party of Ronald Reagan is not the Republican Party of Donald Trump. Friedmanite ideas of free markets and low touch government are out and a strong executive hand on the economic tiller is now very much in.

As the FT notes, the examples of this are manifold: the US government’s ‘golden share’ that Trump extracted from Nippon Steel in exchange for approving its purchase of US Steel (Trump has previously said “if you don’t have steel [production], you don’t have a country”), deals to allow Nvidia and AMD to sell chips in China in exchange for the US government receiving 15% of the revenue, the Pentagon becoming the largest shareholder in rare earths producer MP Materials (in an effort to counteract the Chinese export controls noted above) and the US’s 10% stake in chipmaker Intel that was confirmed over the weekend.

The FT quotes the Cato Institute’s Scott Lincicome comparing these “pretty darn bonkers” deals to Barack Obama’s effective nationalization of US automakers during the Great Recession of 2007-8. The comparison is fitting, but its perhaps worth noting that the Obama strategy managed to save those automakers while also allowing the US government to recover some of the cost by selling its stake in later years. A handy counterfactual might be Australia’s government bailout of Qantas during the Covid pandemic, when $2.7bn of taxpayer money was handed over, gratis, and none of it recovered once the company was back on its feet (because state ownership would have been ideologically intolerable). Which was the better deal for main street?

In many respects, the United States as the world’s pre-eminent Western, liberal democracy is responding to competition from China (not Western, not liberal and not a democracy) by mirroring Chinese economic practises back to China and much of the rest of the world. For the first time in a long time the United States is back in the game of economic planning with a coherent (albeit risky) economic, industrial, financial (for more on that, see RaboResearch’s recent piece on the emerging role of stablecoins here) and military strategy now adopted to achieve foreign policy objectives. Gone are the days of assuming that the market knows best in all applications and will deliver wealth and power if simply left alone to do its work.

These are all trends that have been flagged extensively in this Daily and in the work of RaboResearch’s Global Strategist Michael Every for many years now. None of this is should come as a surprise for the intellectually curious who cared to look, but markets still retain the capacity to be surprised by these sorts of statecraft moves. Many markets currently pricing for perfection –or for the assumed continuation of a single globalized system of prices – in the most imperfect of market conditions run the risk of being mugged sooner or later.

Turning back to President Lee’s visit to the White House, these trends are again evident. Trump continues to engage in a kind of aeroplane diplomacy employed in previous trade agreements by securing commitments from Korean Air to purchase 100 (made in the USA) Boeing jets, while also securing commitments from Hanwha to assist with increasing shipbuilding capacity at its facilities in the US by 8-10x and seeking to take “ownership” of land leased from South Korea to host US military bases.

Notably, within the last 24 hours Trump has similarly applied aeroplane diplomacy to China by saying that China was “intelligently” withholding rare earths from the US, but that the US would retaliate by withholding critical aircraft parts. Trump said that “we have tremendous power over them, and they have some power over us”. “We have much bigger and better cards than they do… If I played those cards, that would destroy China. I’m not going to play those cards.” While relations appear relatively cordial at the moment, the potential for bifurcation clearly remains. “If we want to put 100%, 200% tariffs on, we wouldn’t do any business with China. And you know, it would be OK too, if we had to.”

Following his meeting with Trump, President Lee also said that South Korea would “take on a more leading role in maintaining security on the Korean Peninsula”, beginning by increasing defence spending in much the same fashion that European NATO members were recently forced to do by the United States. Tellingly, when asked whether South Korea could continue to rely on the United States for its security while reaping economic benefits from trade with China (South Korea’s largest trading partner) Lee said “[Korea] can no longer maintain the same approach as in the past… It is no longer possible for Korea to act or make judgements in ways that run counter to the U.S. basic policy direction.”

Australia and New Zealand (and Japan?), who plan to spend less on defence that Korea does now and who also have their security underwritten by the United States while profiting from China as their largest trading partner are now very much on notice