Ray Dalio’s fix
Ray Dalio calls it the “3 percent solution,” and it’s gaining attention with White House officials and senior Republicans as a potential fix to America’s fiscal woes even as the party pushes ahead with a mega spending bill that’s roiling the bond markets.
For the past couple of weeks, advance copies of Dalio’s forthcoming book, “How Countries Go Broke: The Big Cycle” — and Dalio himself — have been making the rounds with policymakers in Washington and investors in New York.
The hedge fund mogul has been warning for some time that America’s soaring deficits risk economic calamity, and Dalio recently met with the chairman of the House Budget Committee, Representative Jodey Arrington of Texas, and its members.
What’s the solution? It aims to bring the annual deficit-to-G.D.P. ratio down to 3 percent, from around 7 percent. According to Dalio, this can be accomplished only by pulling “three levers” — cutting spending, raising tax revenue, and the corresponding lowering of interest rates.
“The 3 percent solution is very practical,” he told me by email. “It has worked many times in many places, most recently in the U.S. from 1991 to 1998.”
Dalio argues the interest rates lever is the most consequential.
The problem: Everyday interest rates are tied to the budget. We’re seeing that connection play out in real-time. The bond market has started charging a higher interest rate to buy U.S. government debt as confidence in the government’s fiscal discipline sours.
If Congress can get serious, Dalio argues, it will send a huge signal to the markets. Treasury Secretary Scott Bessent had made a similar argument. But he has recently gone quieter on that message as the bill, which is expected to add significantly to the deficit over the next decade, advanced through the House.
A fiscally responsible budget would ease volatility in the bond market. Any economic slowdown caused by reduced spending could be offset by lower interest rates, which is what a heavily indebted nation needs most.
The challenge: All three levers need to work in tandem. Both parties have shown little interest in meaningfully cutting spending. Raising taxes, too, is a nonstarter. The upshot is a stalemate in Washington and higher interest rates.
“All the political decision makers on both sides of the aisle that I spoke with agree that we are likely headed for a terrible outcome if the deficit isn’t cut down to about 3 percent of G.D.P.,” Dalio continued. “So I feel it’s like being on a boat headed for the rocks in which everyone agrees that we will crash if we don’t change our course, but they’re too hung up arguing which way to turn.”
The question is, even if he is right — which he probably is — what would actually push lawmakers to act and avoid the rocks?
“The forcing mechanism will likely be a debt crisis and all that goes with it,” he wrote.
HERE’S WHAT’S HAPPENING
Nvidia beats financial expectations despite limits on Chinese exports. Shares in the chipmaker are up 6 percent in premarket trading after it reported a 69 percent jump in quarterly revenue, to $44.1 billion. But Jensen Huang, Nvidia’s C.E.O., warned that restrictions on sales to China would hurt America’s global tech dominance.
JetBlue and United form an alliance. The airlines announced a deal in which customers can earn frequent flier miles on each other’s flights. The partnership will allow United to return to Kennedy International Airport amid continuing troubles at its New York-area hub at Newark Liberty International Airport, and perhaps more important allows the two to collaborate without having to strike a merger or deeper alliance.
The Trump administration seeks to revoke visas for Chinese students. Secretary of State Marco Rubio said officials would “aggressively” crack down on existing visas, especially for those studying unnamed “critical fields,” and step up scrutiny of future applicants from China. The administration has already halted interviews for student visa applicants. Separately, President Trump suggested a cap on international students enrolling at Harvard.
Why tariffs uncertainty is far from over
Global markets are rallying on Thursday as investors cheer a big blow to President Trump’s trade fight — even if economists warn that it hardly removes all of the risks.
The dollar and S&P 500 futures are up after the U.S. Court of International Trade ruled unanimously that many of Trump’s biggest tariffs — primarily those imposed under the International Emergency Economic Powers Act — are illegal and gave the administration up to 10 days to wrap up the paperwork needed to end them. That particular law, the court ruled, “does not authorize the president to impose unbounded tariffs.”
The administration sharply criticized the ruling and vowed to appeal it; the matter could end up being decided by the Supreme Court.
Here’s what was struck down:
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The so-called Liberation Day “reciprocal tariffs,” most of which Trump had paused until July 9
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The 10 percent base line levies
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Most duties of 25 percent on Canadian and Mexican imports, and an additional 20 percent charge on Chinese goods
And some experts say the government may have to reimburse companies that have had to pay tariff duties on the above.
What wasn’t:
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Tariffs on steel, aluminum and car parts
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Pending levies on pharmaceutical imports
The ruling throws trade negotiations with other countries into limbo. Why should anyone offer Washington any concessions until this is resolved?
Investors view this as good news. Companies with big tariffs exposure — including Adidas, Puma and Stellantis — rose sharply on Thursday.
In fact, stocks have rallied in recent weeks on investors’ belief that the worst of the trade war is over. A lower overall tariff rate will be better for corporate profits, kick-start hiring and investment and could persuade the Fed to lower interest rates. Wall Street has lowered the odds of a recession since Trump began pausing and rolling back some of his levies.
Is it too soon to celebrate? “The Trump administration has other authorities it can use to impose tariffs similar to those the court struck down,” Alec Phillips, a political economist at Goldman Sachs, wrote in a research note last night. They include reclassifying the levies under different trade laws, such as by using Section 232 of the Trade Expansion Act of 1962, which underpins the levies on steel, aluminum and auto imports that remain in place.
There’s plenty at stake: The ruling potentially deprives the government of about $200 billion in annual tariffs revenues, he estimates.
The Musk-Trump situationship
Elon Musk is ending his formal work as President Trump’s chief cost-cutter, seemingly driven by frustration with Washington gridlock and pressure from investors to refocus on the companies that made his fortune.
But we don’t knowhow big any Musk-Trump rift is. And Musk will still need to retain some influence in the Trump administration to help out his businesses.
Musk is stepping back from Washington and politics to some degree. He noted on X last night that “my scheduled time as a Special Government Employee” was coming to an end.
That’s after he publicly criticized Republicans’ budget bill, which Trump has championed. And Musk told Ars Technica, “I think I probably did spend a bit too much time on politics.”
But Musk’s influence in Washington appears shakier. Trump has pressed ahead with tariffs despite Musk pushing back publicly, if gingerly.
And while he said that his Department of Government Efficiency team’s approach has become “a way of life throughout the government,” Musk has acknowledged that the initiative has faced “an uphill battle.”
Trump’s recent trip to the Middle East underscores that reality. Musk had sought to derail a big A.I. data center deal struck by one of his archrivals, Sam Altman of OpenAI. The Wall Street Journal reports that Musk had warned executives at the Emirati tech investor G42 that Trump wouldn’t sign off on the plan unless his xAI was included in the transaction.
In the end, Trump officials pressed ahead — and Musk’s company was left out.
(A reminder: Musk’s move appears to be what Altman said at last year’s DealBook Summit that the Tesla chief wouldn’t do: “I believe pretty strongly that Elon will do the right thing and that it would be profoundly un-American to use political power to the degree that Elon would hurt competitors and advantage his own businesses.”)
Musk still needs to stay on Trump’s good side. SpaceX and Starlink have benefited heavily from a seeming lock on space-related contracts. Tesla’s bet on autonomous vehicles, which is reportedly poised to begin a crucial real-world test next month, depends on Trump regulators relaxing rules on the technology.
And Musk, like other A.I. entrepreneurs, is continuing to push for looser oversight.
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In required Musk reading: a deep dive into the entrepreneur’s techno-futuristic philosophy with a billion-year timeline.
“You call that chickening out?”
— President Trump, bristling on Wednesday at a reporter’s “nasty” question about the so-called TACO trade, short for “Trump Always Chickens Out” in trade fights.
The Fannie and Freddie trade
Hedge fund managers who have bet big on Washington relinquishing control of Fannie Mae and Freddie Mac may have reason to smile this week.
Over-the-counter shares of the mortgage finance giants briefly surged on Wednesday after President Trump posted on social media that he was “working on TAKING THESE AMAZING COMPANIES PUBLIC.”
Trump said that the U.S. government would still guarantee loans made by Fannie and Freddie if they’re no longer under Washington control, a backstop that could help limit volatility in the mortgage market. That said, it’s unclear what a guarantee might look like in practice.
Here’s who stands to gain:
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The billionaire Bill Ackman has stakes in both companies through his hedge fund, Pershing Square. He holds roughly 10 percent of Fannie’s public over-the-counter shares and has been calling for an end to the conservatorship for years.
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Capital Research Global Investors, a unit of Capital Group, has stakes in both entities, too.
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Other major investors have included the billionaire investors Rob Citrone of Discovery Capital Management and John Paulson.
Big shareholders could see a “windfall” from privatization, said Lawrence White, an economics professor at the N.Y.U. Stern School of Business. But that’s a big if, he added, since it’s unclear whether Trump will actually follow through. (The president made a similar promise in his first term, and it never happened.)
The context: Fannie and Freddie have been under government control since the federal government bailed them out in 2008.
At the time, canny investors saw an opportunity, buying up shares in both at rock-bottom prices.
It’s been a long wait. Even as the housing market bounced back, consecutive administrations took no action to re-privatize the companies. Trump seems to see it as a priority, but the administration is “going to need congressional cooperation,” White said.
Risks loom. Removing the conservatorship could have ripple effects that affect borrowers with lower incomes or credit scores, “resulting in less access to credit and a harder path to homeownership,” Bharat Ramamurti, a senior adviser at the American Economic Liberties Project, said in a brief released on Thursday.
A rise in mortgage rates would be probable too, but the magnitude would depend on how privatization is carried out, said Laurie Goodman, the founder of the Housing Finance Policy Center at the Urban Institute.
THE SPEED READ
Deals
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Rhode, the makeup brand founded by the model Hailey Bieber, agreed to sell itself to e.l.f. Beauty for $1 billion. (Reuters)
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“Saudi Arabia Seeks New I.P.O.s to Attract Foreign Investors” (Bloomberg)
Tech and artificial intelligence
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Meta is exploring opening more physical stores as it increasingly bets on sales of consumer hardware like V.R. headsets and smart glasses. (Business Insider)
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Reed Hastings, the Netflix co-founder, has joined the board of Anthropic. (Hollywood Reporter)
Best of the rest
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President Trump reportedly wants more than $25 million and an apology from CBS News to settle his legal fight with Paramount, which owns the news division. (WSJ)
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“How America Lost Control of the Seas” (The Atlantic)
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Andrew Ross Sorkin is a columnist and the founder of DealBook, the flagship business and policy newsletter at The Times and an annual conference.
Bernhard Warner is a senior editor for DealBook, a newsletter from The Times, covering business trends, the economy and the markets.
Sarah Kessler is the weekend edition editor of the DealBook newsletter and writes features on business.
Michael J. de la Merced has covered global business and finance news for The Times since 2006.
Danielle Kaye is a Times business reporter and a 2024 David Carr Fellow, a program for journalists early in their careers.
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