By Michael Every of Rabobank

Welcome To Phase Two(s)

Welcome to Phase Two(s), and not just the US-China trade deal, where Beijing has suspended a ban on approving exports of “dual-use items” related to gallium, germanium, antimony to the US and allowed Nexperia to ship chips to Europe again - but not for military purposes. Which matters given Europe is rearming, and Russia is clearly getting supplies of materiel from somewhere. The Western need for new supply chains is still clear, as is the rush to develop them, as is the wobbly nature of this whole ‘deal’.

In the US, it seems another deal has been struck to end the government shutdown after a Biblical 40 days, and just before its negative impact went critical on things like air traffic. Back to ‘normal’ then?

Yet Trump’s response to “It’s the economy, stupid” election defeats last Tuesday has been to shift populist LEFT (as with issues on the MAGA right, he’s seen as unable to win the 2026 midterms from that direction). Indeed, we just saw a flurry of major announcements:

• The DOJ will open an antitrust investigation into the meatpacking industry in an attempt to force down prices;
• Trump attacked health insurers and will send subsidies given to them under Obamacare directly to voters;
• the White House is proposing 50-year mortgages;
• and Trump will redirect tariff revenue directly to households via a $2,000 stimulus check, excluding the rich.

Moreover, the Fed’s Miran gave a speech, A Global Stablecoin Glut: Implications for Monetary Policy, which contained key Mar-A-Lago Accord ideas: from an economic statecraft AND domestic political perspective, this could logically be rolled out alongside the policies above:

1. Dollar stablecoins are increasing demand for US T-bills and other USD liquid assets outside the US and demand will grow in both EM and DM with burdensome paperwork (and taxes?).
2. Exporters may receive portions of their payment in stablecoins, “perhaps undeclared if domiciled in jurisdictions that proscribe stablecoin use.” We flagged that risk a few months ago: the US saying it will pay in stablecoins or telling Middle East oil producers to say it too.
3. This demand lowers US borrowing costs and its neutral rate R* (and logically does the opposite elsewhere).
4. It strengthens the dollar and weaken other FX, but other economies may de facto dollarize, in which case they lose the potential advantages from a weaker currency.
5. Unstated, but logically consistent, if offshore dollar stablecoin demand is higher than supply, we could see higher dollar borrowing rates outside the US than in it.
6. Also unstated, but logically consistent, stablecoins are NOT more US financialisation in one respect. Yes, they can encourage the buying of US assets like T-Bills, which IS financialisation. Yet they are NOT additional debt, just collateralised by it. The debt already exists: now the US gets 1:1 spending power WITHOUT it. That’s definancialisation, potentially.

We’ve already seen the US guide FDI from new trade deals into industries it wants rather than US Treasuries or “because markets” choices. Join the dots to see what could be.

Indeed, Phase Two of the NAFTA rewrite now sees another FT op-ed arguing, “The old WTO model is dead - sovereign control and national security matter.” It backs a target of BALANCED TRADE between the three countries rather than “because markets”, and all three freezing out China. We flagged this as a logical US economic statecraft strategy months ago.

In any normal year, one of the policy headlines above would be worthy of pages of market-moving study. In 2025, we get six --if the op-ed is a trial balloon-- at once to only cursory notice: there’s just too much happening and linking it all up is just too confusing – or threatening. More so when everything AI goes up and down like a yo-yo. Yet depending on policy implementation, we may have to rip up our 2026 forecasts; or burn the textbooks entirely.

Even the Fed’s Williams is warning that the gulf between the rich and the poor risks a US downturn: but is his suggested answer just ‘rate cuts’? Historically, these increase inequality, and political populism, due to asset prices surging and wages staying flat. With geopolitical supply chain problems on top, we might get more commodity price inflation too – unless we see some serious reordering of both priorities and things.

This isn’t just a US issue. In Japan, the BOJ has indicated a December rate hike is possible, Phase Two of normalizing policy; yet PM Takaichi’s Abenomics Phase Two expects the BOJ to take a pro-growth stance, and she’ll be reviewing plans to try to achieve a basic fiscal balance surplus.

The European budget spotlight is mostly on France, but many other governments, and even the Commission, are also struggling to balance their books as they face vast military, resilience, energy, and social welfare bills ahead.

Indeed, to think Phase Two overall, as the Financial Times noted this weekend, ‘The unsettling message for investors from the financial cycle’ is that “The next bailout is likely to involve inflationary financing of fiscal deficits by central banks.” That’s an ever-clearer tail risk we haven’t shied away from pointing to ourselves as a logical endgame, alongside neomercantilism.

Meanwhile, as the US boycotts the South African G20, key Phase Twos are also in the headlines in key geopolitical respects:

Shuttle diplomacy continues over what happens next in the Middle East, where hopes remain that the Israel-Hamas ceasefire is maintained, but a full-scale Israel-Hezbollah clash could be triggered by year-end if the latter won’t disarm, while the New York Times accurately reads the local runes to see that in a “dangerous stalemate”, the risks are currently when, not if, we get a further Israel-Iran war – despite a water crisis in Tehran so severe there is talk of abandoning the capital city.

One paper argues ‘Venezuela could blow up the oil market and destroy Putin’, and “An anticipated US military strike against Caracas would drastically re-shape the global economy.” In short, much lower energy prices, perhaps, after a US push/putsch.

PM Takaichi has stated a Chinese move against Taiwan would be “existential” for Japan and would justify its military support for Taipei; and Beijing has protested after Taiwan’s No 2 leader made a speech at the European Parliament.

Lastly, the Wall Street Journal notes ‘Genetically Engineered Babies Are Banned. Tech Titans Are Trying to Make One Anyway’: as a super-smart friend said to me years ago, when do we get to see AGI robots vs genetically-engineered superhumans? Maybe not as long as you think.