Bob’s Journal for 5/15

Asia Sends a Quiet Warning About Trade Conflicts

Currency markets in Asia indicate that central banks and investors in Asia might respond differently than expected to the tariff wars.

President Trump complains that the trade deficits the United States has with other countries mean America is being taken advantage of, but those countries don’t sit on the dollars they earn from exports to the United States.

Instead, they’ve been recycling the dollars back into the United States, usually by having their central banks buy U.S. bonds and other securities to hold in their reserves. Individuals and companies also recycle their dollars into stocks, real estate and other investments in the United States.

We know that China and some other central banks began reducing their dollar reserves after sanctions were imposed on Russia following its invasion of Ukraine.

Now, it appears the tariff war is causing friendly countries to begin reducing their dollar holdings and letting their currencies appreciate against the dollar.

Consider the recent action in the Taiwan dollar against the U.S. dollar.

On April 2, before President Trump’s Liberation Day tariffs were announced, the currencies traded at 33.21 Taiwan dollars for one U.S. dollar.

The exchange rate changed sharply in the following days. The changes accelerated in the opening days of May. By May 2, the exchange rate was 30.79 Taiwan dollars to one U.S. dollar. Traders quoted in The Wall Street Journal said the sudden, extreme change was “a one-in-a-trillion event.”

It’s no secret the Trump administration hopes to reduce trade deficits through a combination of tariffs and a decline in the value of the U.S. dollar.

But the appreciation in the Taiwan dollar hurt Taiwan investors, especially insurance companies, that were holding U.S. bonds and other dollar-denominated assets without hedging the currency exposure.

The U.S. dollar’s decline against its Taiwan counterpart since the start of the year might have led some Taiwan investors to engage in panic selling of U.S. dollar assets to stem losses.

In addition, there have been rumors that Japan plans to counter the tariffs partly by selling some of its enormous reserves of U.S. Treasury securities and letting the yen appreciate against the dollar.

Sales of U.S. assets and appreciation of Asian currencies raise U.S. interest rates. That would hurt both the economy and U.S. stocks. These are secondary effects of the trade war that don’t seem to have been contemplated at the start and probably contributed to the changes in tariff policies in the last week.

A Shake Up in ETFs and Mutual Funds Might be Coming

The expiration of a patent and expected changes by regulators could lead to major changes in exchange-traded funds (ETFs) and mutual funds.

So far, most ETFs have been index funds. There are a few actively managed ETFs, but those haven’t really caught on with either investors or fund sponsors.

Soon, it might be possible for actively managed mutual funds to become ETFs by simply adding an ETF share class.

The mutual funds haven’t been able to do that, because years ago the Vanguard Group obtained a patent on the process. But the patent protection expired in 2023.

Major mutual fund firms responded by applying to the Securities and Exchange Commission (SEC) for permission to add an ETF share class to some of their mutual funds.

Recently, the SEC indicated that it is likely to begin approving the applications.

When that happens, an actively managed mutual fund becomes what the industry calls a dual share class or hybrid fund. The management of the fund doesn’t change, but investors have the option of buying ETF shares or investing in traditional mutual fund shares.

Investors who opt for an ETF share class would receive tax benefits that are available to ETFs and not to mutual funds. Analysts estimate that Vanguard shareholders saved millions of dollars on taxes over the years because of the ETF shares.

While the change might be good for investors in ETF share classes, it might not be good for investors in brokers and other mutual fund platforms and marketplaces.

Those firms collect revenue by charging fees to mutual funds offered on their platforms. The funds share revenues with the platforms, usually a percentage of the dollars invested. Those revenues might disappear if more mutual funds adopt the hybrid model.

An alternative is that the cost of investing in ETF shares might rise, because the brokers and platforms might pressure the fund sponsors to expand the revenue sharing to ETF shares.

Which Insurance Premiums Can be Paid with HSA Funds?

Distributions from a health savings account (HSA) are tax free when used to pay for or reimburse qualified medical expenses.

But not all insurance premiums are qualified medical expenses.

HSA distributions are tax free when used to pay premiums for Medicare Part B, Part D prescription drug policies and Medicare Advantage plans. HSA distributions also are tax free when used for COBRA premiums.

But qualified medical expenses from HSAs don’t include premiums for Medicare supplement (Medigap) policies or dental or vision policies.

In addition, the HSA owner must be at least age 65.

Beyond that, HSA funds shouldn’t be used to pay for insurance premiums, unless you are receiving unemployment benefits. Check carefully to ensure the type of premium qualifies for tax-free treatment.

The Data

The Small Business Optimism Index from the National Federation of Independent Businesses dropped to 95.8 in April, the lowest level since October 2024, from 97.4 in March. The long-term average for the index is 98.0.

The Consumer Price Index (CPI) increased 0.2% in April after declining 0.1% in March. Over 12 months, the CPI increased 2.3% through April and 2.4% through March.

The core CPI, which excludes food and energy prices, advanced 0.2% in April after rising 0.1% in March. The 12-month increase in the core CPI was 2.8% through both April and March.

Consumer credit outstanding increased 2.4% in March after falling 0.1% in February.

Revolving credit (which is mostly credit cards) rose 1.7% in March following a 0.2% fall in February.

Nonrevolving credit (which is mostly vehicle and student loans) advanced 2.7% in March after dropping 0.1% in February.

Productivity declined 0.8% in the first quarter, according to the first estimate. That’s the first drop in productivity since the second quarter of 2022.

Lower productivity and higher compensation led to a 5.7% increase in unit labor costs in the first quarter, up from the 2.0% rise in the fourth quarter of 2024.

New unemployment claims decreased by 13,000 to 228,000 in the latest week.

Continuing claims, which lag a week behind new claims, decreased to 1.879 million from 1.908 million.

The Markets

The S&P 500 rose 5.02% for the week ended with Tuesday’s close. The Dow Jones Industrial Average gained 3.25%. The Russell 2000 increased 6.03%. The All-Country World Index (excluding U.S. stocks) added 0.81%. Emerging market equities advanced 1.77%.

Long-term treasuries lost 1.87% for the week. Investment-grade bonds fell 0.27%. Treasury Inflation-Protected Securities (TIPS) declined 0.70%. High-yield bonds gained 1.30%.

In the currency arena, the U.S. dollar gained 1.83%.

Energy-based commodities increased 3.27%. Broader-based commodities rose 1.09%. Gold declined 5.10%.

Bob’s News & Updates

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I’m a senior contributor to the Forbes.com blog. You can view my contributor page here.