The Watchdog – Home and Abroad
Scott B. MacDonald, Ph.D. - Smith’s Research & Gradings – September 29, 2025
Summary: Democrats and Republicans once again are squared off against each other over whether to keep the federal government funded. Sadly, we have been here before; eventually one side caves and life goes on until the next funding crisis. If there is no agreement, which we suspect might be the case for a short duration, a partial government shutdown will be effective at 12:01 Wednesday morning. In other news, President Trump is promising a new tariff blitz aimed at movies and furniture, the tariffs “deals” with Japan and South Korea are in trouble, US gold reserves hit $1 trillion in value, and videogame giant Electronic Arts will be taken private in a record-breaking leveraged buyout by a consortium composed of Silver Lake, Saudi Arabia’s Public Investment Fund, and Jared Kushner’s Affinity Partners. Overseas, Russia continues to pound Ukraine, Trump and Netanyahu are to discuss a Gaza peace plan at the White House, France’s government is at risk of failing (again) and Colombia’s leftwing President Petro urges “criminal trial” against Trump for Venezuelan strikes. As comedian Jerry Seinfeld said: “Life is truly a ride. We’re all strapped in, and no one can stop it.”
At Home-Headlines
The week ahead – by the numbers. It will be a busy week ahead in terms of US economic data. The highlights include consumer confidence on Tuesday; ADP employment, construction spending and ISM manufacturing on Wednesday; initial jobless claims and factory orders on Thursday; and the US unemployment rate and ISM services on Friday. For markets, consumer confidence and employment numbers will dominate as they are closely tied to what the Fed will do next. Our expectation is that weekly data will largely be supportive for more Fed cuts.
First Brands and Tricolor and what’s to come? While the US economy continues to power ahead and markets are soaring, there is an undercurrent worth watching – low-end credit markets, which have just been hit by bankruptcies of auto-loan specialist Tricolor and car-parts supplier First Brands. The first filed for liquidation abruptly amid fraud allegations earlier this month and the second filed for Chapter 11 protection on Sunday. Tricolor focused on subprime, often undocumented borrowers, an extremely risky market. It is thought that the root causes (besides bad business decisions) were financial pressures on lower income families and deportation (hard to repay a loan if you are deported). According to Fed data, serious delinquencies on US car loans have steadily increased over the last two years; the share of this debt more than 90 days hit close to 5% in Q2. Late payments from subprime borrowers are behind this increase. First Brands is a different story – it is a privately owned company which grew through debt-funded acquisitions. Its downfall appears to be it borrowed more secured loans against inventory and payments due to customers and got hit by rising costs for auto parts due to tariffs. Although it is too early to raise the alarm on credit markets, First Brands and Tricolor have our attention. We concur with Bloomberg’s Paul Davies that the bankruptcies “…could turn out to be a canary in the coal mine for aggressively leveraged buyouts and private credit lenders, especially where tariffs have brought punishing cost increases.” For old financial market hands, this has a faint echo of 2007 where subprime markets began to tank, though banks appear to be more protected than back then. Watch this space.
Trump threatens new tariffs – grab popcorn, watch a movie and sit on a sofa? On Monday President Trump posted on social media that would levy 100% tariffs on any movies made outside the US and substantial tariffs on furniture not made in the US. The US is the leading importer of furniture, with an estimated value of near $58 billion in 2023, with most of it coming from Vietnam, followed by China, Canada, Mexico and Italy. As President Trump stated he was acting, “…in order to make North Carolina great again, which was completely lost its furniture business to China, and other Countries, GREAT again.” As for movies, the US leader posted, “Our movie making business has been stolen from the United States of America, by other Countries, just like stealing ‘candy from a baby.’ California, with its weak and incompetent Governor, has been particularly hard hit.” The furniture companies on the receiving end of higher costs are IKEA, Ashley Furniture, Wayfair, Williams-Sonoma, HomeGoods and Bob’s Discount Furniture. As with the furniture sector, new tariffs will require restructuring operations across borders for Disney, Universal Pictures, Netflix, Warner Brothers, Sony Pictures, and Paramount Pictures. While a lot more clarity is needed on the newly threatened tariffs, if imposed, prices are going up. Buy your sofa and watch your South Korean horror movie now.
US states are concerned about rising electricity costs; New Jersey. US states are increasingly concerned about rising energy costs. Demand for energy is shooting straight up due to power-hungry data centers, the push toward electrification and related closure of coal-powered plants. According to the US Energy Information Administration (September 2025), residential electricity prices rose by 25% during the Biden administration. While concerns over climate change remain, higher energy costs now appear more pronounced as consumers are feeling the bite in their wallets. New Jersey’s gubernatorial race reflects this. Under outgoing governor Phil Murphy, the goal was set to make New Jersey electricity production fossil-free by 2035, which included phasing out fossil fuel plants. According to RealClear Energy, it is estimated that Murphy’s green transition plan, founded on wind, solar, battery power and EVs, would, if fully implemented, add up to $1.4 trillion in lost income, or $140,000 per average New Jerseyan over the next 25 years. The Democratic candidate Mikie Sherril favors continuing electrification, while the Republican candidate Jack Ciattarelli wants to ban offshore wind projects, diversify to include nuclear power and coal and withdraw his state from a multistate carbon tax plan, the regional Greenhouse Gas Initiative. The most recent polls put them at a near tie.
Headlines - Abroad
South Korea and Japan tariff deals in peril. South Korea’s National Security Advisor Wi Sung-Iac sprinkled cold water over the July 2025 handshake deal between Presidents Donald Trump and Lee Jae Myung that was supposed to see the East Asian country invest upfront $350 billion in the US in return for the US lowering tariffs to 15% from 25%. However, since the July handshake agreement US-South Korean relations have soured, especially after ICE made its biggest raid ever on the Hyundai plant in Georgia. South Koreans workers were chained and briefly incarcerated before the South Korean government flew them home. The Trump administration’s message was that you cannot have non-Americans workers in the US illegally and taking away American jobs. The Korean response is that they cannot find enough qualified US workers and that the opening of the auto plant, which will be one of the biggest in the US and employ more American workers, will be delayed. Now, there is the issue of the entire South Korean package, which is now questionable, especially over it will be in the form of loans or cash upfront. As Wi noted, “The position we are talking about is not a negotiating tactic, but rather, it is objectively and realistically not at a level we are able to handle. We are not able to pay $350 billion in cash”.
There are also big questions over the Japan-US deal will stick. One of the leading contenders for the leadership of the ruling Liberal Democratic Party (LDP), Sanae Takaichi expressed concern over a pledge from the East Asian country would invest $550 billion in a US investment vehicle and who has control of allocations. As Takaichi stated: “We must stand our ground if anything unfair is not in Japan’s interests comes to light in the process of implementing the deal. That includes a potential renegotiation” There is sentiment within the LDP that outgoing Prime Minister Shigeri Ishiba gave too much away to the Americans, which undermined his leadership position.
US readies $20 billion rescue to help Milei win in Argentina. President Javier Milei is one of the more colorful political leaders to come to the fore in Argentina, which saying a lot. He is far right, but more libertarian than populist. Moreover, he is trying to undo decades of leftist policies and corruption that have left the country rich in natural resources (like oil and lithium) in a near-chronic state of economic crisis. Milei’s reform program, with a tough dose of austerity and government downsizing, has been brutal on the country, though important structural reforms are in motion. The most recent bump in the road came when Milei’s party overwhelmingly lost a critical provincial election, not a good indicator with congressional elections to be held on October 26. It is now feared that an opposition dominated congress may be emboldened to roll back the reforms, which caused investors to pull their money out of Argentina, squeezing foreign exchange reserves. While the US has been at loggerheads with Brazil over that country’s domestic politics, the Trump administration is ready to extend a $20 billion swap line of credit to Argentina, which reinforces the position of the US president’s Argentine friend. The Trump administration’s credit line also serves another purpose; it is bigger than Argentina’s $18 billion line with China’s central bank. The bottom line – Trump rewards his ideological friends and allies and is more than willing to compete with China in the selected countries in the Americas.
