The Watchdog – Home and Abroad
Scott B. MacDonald, Ph.D. - Smith’s Research &Gradings – September 22, 2025
Summary: The Fed is cutting interest rates, stocks are at record highs, tariffs are bringing billions of dollars into the US Treasury, and adjustable-rate mortgages are making a comeback as buyers seek lower rates. What could go wrong? Well, plenty. Markets continue to race ahead, but the economy is cooling. Democrats and Republicans could shut the government down in October. There is also plenty of economic data to parse during the week, including initial jobless claims on Thursday, existing home sales, and the PCE Index and consumer sentiment on Friday. Fed head Powell will be speaking this week as will a large number of Fed officials, including newly appointed governor Stephen Miran. Analysts will be sifting through all of this to determine whether the economy is just slowing down accompanied by a dose of sticky inflation or is heading into a period of stagflation. On the geopolitical front, Putin’s Russia is likely to continue to aggressively probe NATO’s borders (most recently Poland and Estonia), while Venezuela remains a hotspot. On the positive side, US-Chinese relations may be improving following a Trump-Xi phone call and a promise to meet face-to-face at a regional summit in Seoul, South Korea at the end of October. Many Wall Street mavens are calling for a strong finish to 2025. Let’s hope that they are right.
Home Headlines
House-passed GOP funding bill fails in Senate, leaving path to avoid shutdown unclear. Another threat of a US government shutdown looms. Last Friday, a Republican measure to keep the government funded through November 21 passed the House but died in the Senate. Funding expires on October 1, which makes it dubious that any agreement will be reached. The House and Senate were both scheduled to be in recess until September 29th, but House leaders extended their break past October 1 deadline to pressure the Senate to adopt their bill. That strategy failed and it is unlikely that Senate members would interrupt their recess to deal with anything so trivial as funding the government. Outcomes? We expect that there will be a temporary shutdown of government as recess ends and haggling resumes. The Democratic alternative bill is a non-starter for Republicans as it calls for one month of financing, permanently extending the enhanced tax credits under the Affordable Care Act that expire at year-end, rolling back Medicaid cuts in Trump’s One, Big, Beautiful Bill and restoring funding for public broadcasters. The Republicans would rather let the government shut down and blame the Democrats for not passing their legislation. President Trump has already set the tone stating: “We’ll continue to talk to the Democrats, but I think you could very well end up with a closed country for a period. And we’ll take care of the military, we’ll take care of the Social Security, we’ll take care of the things we have to take care of.”
Pain on the farm. While President Trump regards tariffs as “the most beautiful word”, he might find some disagreement among US farmers. In response for raising tariffs to painful levels, China has opted to derisk from the US due to concerns over food security, sharply curtailing their purchases of US agricultural goods. From January through July, US farm exports to China fell 53% compared with the same period last year. China has substituted American agricultural goods with those from other countries, including Brazil and Canada, both of which are in their own trade wars with the US. In 2024 Brazil was China’s main supplier of soy, beef, cellulose, corn, sugar and poultry; those exports are growing in 2025, a development given a further push by the Trump administration’s 50% tariff on Brazilian goods. A new survey by the National Corn Growers Association indicates that 46% of US farmers believe that they are on the brink of a farm crisis and 33% answered possibly. The agricultural sector is also being hurt by tariff-related higher costs for fertilizers, machinery and other imported inputs as well as labor shortages related to deportations. It now appears that the Trump administration is drawing up plans to use tariff revenue to fund a program to support US farmers. During the first Trump administration, tariffs also hit the US agricultural sector, resulting in a $23 billion bailout package in 2019. Looking ahead, can US agriculture regain markets lost to Brazil, Canada, Argentina, and Australia?
Companies rush to issue emergency guidance after Trump launches H-1B visa fee. Many US companies, especially those in the technology sector, were shell-shocked last week when President Trump announced major changes to the H-1B foreign worker visa. The proclamation introduced a $100,000 application fee for the visa and is expected to give US employers a $14 billion annual bill for skilled foreign workers. Amazon and Microsoft were among the companies rushing to gain clarification on the rule change. According to the Department of Homeland Security, the two tech companies had more than 15,000 H-1B visas approved in the most recent fiscal year. The move aims to force US companies to hire more American workers. Beyond the tech sector, the other sectors most impacted are accountancy firms and healthcare companies. One of the problems facing US companies is that there are not enough qualified US workers to fill the jobs, which, in turn, points to the need for the US educational system to upgrade and US companies to invest more in training local talent. The Department of Education recently released the 2024 National Assessment of Educational Progress, a significant percentage of U.S. students do not read proficiently; fewer than one-third of 4th and 8th graders read at the proficient level, and around 40% of 4th graders and a third of 8th graders read below the basic level. Therefore, a rough estimate is that less than half of American students can read at grade level, and a substantial portion is reading below the basic standard. Tomorrow’s high-tech workers?
Abroad Headlines
Global debt remains above 235% of world GDP.
Why is China stockpiling so much oil? Throughout much of 2025 China has been stockpiling oil. According to the International Energy Agency (IEA), China has bought more than 150 million barrels above its actual use in 2025, with a price tag of around $10 billion. This means that China has considerable and growing stockpiles of oil. Why? Bloomberg’s Javier Blas provides three reasons: 1. Much like a prudent grocery store shopper, oil prices are low, and this is an opportunity to put some oil away at cheaper prices. 2. A greater amount of storage has become available recently and this coincides with a new energy law that imposes a legal foundation for an increase in total oil inventories; and 3. “China has understood that it needs to boost its oil security in a world where the US is wielding sanctions and tariffs willy-nilly.” The security issue extends into two other factors, if China invades Taiwan, it will be vulnerable to sanctions (not to mention the potential for a disruptive major war). The other factor returns to the challenge facing many other countries – derisking their trade and investment from an unpredictable US. As Blas states, “China may see oil as an alternative to US Treasuries, a way to reduce its exposure to US assets.” In the past, China held around $1 trillion of US Treasuries; as of July 2025, that exposure stood at $731 billion. Considering all the above, there is a strong chance that China will remain a major oil buyer through the rest of 2025 and into 2026. The IEA is predicting a surplus of oil in 2026 and China, for whatever reasons are motivating its energy policy, is likely to continue buying, which could help prevent a steeper price decline.
Global debt remains above 230% of global GDP. Most recent data from the IMF shows that global debt to GDP has stabilized at 235% of world GDP. The main reason for stabilization was that private sector debt declined to under 143% of GDP, the lowest level since 2015. That was offset by the ongoing rise in public sector debt to 93%. This was largely driven by US general government debt in 2024 rising to 121 percent of GDP (from 119 percent). Other naughty advanced economy borrowers were the UK and France. Outside of the advanced economies, China is the big story: its public sector debt rose to 88% in 2024 from 83% the year prior, while its private sector debt rose by 6 points to 206% of GDP. China’s rapidly growing debt accounted for more than half of the increase in the global economy’s debt-to-GDP ratio since 2008. This is decidedly worth watching, considering the implications for a world in which China is one of the major economies.
Cyberattack disrupts European airports. Cyberattacks are becoming painfully routine. One of the most recent was conducted against Collins Aeropsace, a provider of check-in and boarding systems for several airlines at airports globally. The attack hit several major European airports and Heathrow in the UK. It is estimated that annual costs from cyberattacks range from $445 billion to over $10 trillion. Considering that cybercriminals do not register their earnings to any tax authority, estimates vary considerably. What does not vary is the risk posed by cybercrime to large and small businesses as well as central and local governments.
Going after Venezuela’s Maduro. It looks like Presidents Trump and Maduro will not be sharing a glass of Venezuela’s premium Diplomático rum any time soon. While the US naval force offshore the South American country has destroyed three ships allegedly loaded with drugs, President Trump is now demanding that Venezuela take back “prisoners and people from mental institutions”. Along the same track, the Trump administration has asked the US Supreme Court to end protection for Venezuelans in the US, which includes over 300,000 migrants from the South American country who have been granted Temporary Protection Status. While immigration groups regard this as racist and illegal, it represents a threat to the Maduro regime, where a large influx of people would have severe consequences for an already shaky economy and an unpopular government. Where does this go from here? It is likely that while drugs are one motivation, the major policy line is regime change in Caracas. This means ongoing pressure offshore and the use of any means to keep the Maduro regime under pressure until something cracks. Watch this space.
