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1.  China’s $1 Trillion Trade Surplus is a Red Flag for the Global Economy 

• China’s trade surplus is on track to reach $1 trillion this year - a sharp rise due to weak domestic demand and an aggressive export strategy.
  
• This massive surplus not only underscores China’s soft consumer demand but also places a burden on global markets by reducing demand for imports from nearly 170 countries.

What you need to know: If current trends hold, China's trade gap could hit nearly $1 trillion this year, Bloomberg reports¹. The trade surplus surged to $785 billion in the first 10 months - a record high and up nearly 16% from 2023.

Why it matters: A hefty trade surplus like this often signals weak consumer demand. China has leaned hard on exports to make up for sluggish domestic spending - a problem Beijing only started to tackle with stimulus in late September. This record surplus shows us that demand within China remains very soft, leaving growth propped up by exports - and posing a risk to the global economy.

Now the Dunham Deep Dive: This shouldn’t come as a surprise. China’s economy is still trying to find a pulse.

Remember, a surplus often points to weak domestic consumers. When a country exports more than it imports, it can mean people at home aren’t spending much - especially on goods from other places. So, as people buy less, the country ends up with a bigger surplus.

And this is a problem for the world in two big ways:

First, China is flooding global markets with exports. Other countries are forced to absorb these goods, which can crowd out local businesses as cheap foreign products take over. I covered this more in my article from March – ‘Trade Wars Redux? China’s Manufacturing Glut and Its Global Implications’.

Second, a $1 trillion surplus means China is buying $1 trillion less from other countries. That’s a huge blow for economies that depend on selling to China (which is the second-largest economy in the world). In fact, China exports more than it imports from nearly 170 countries. This situation hurts their growth.

And all of this is happening as President Donald Trump steps back into office - promising to crack down on Chinese imports.

So, keep an eye on this trend - it’s a major issue with global ripples. 

Figure 1: Bloomberg, November 2024

2.  Double Defaults Surge as “Extend and Pretend” Raises Red Flags 
 

• Commercial real estate “double defaults” have hit their highest level in a decade, and regulators fear this could lead to a wave of bank losses.
  
• The “extend and pretend” strategy may be hiding a systemic risk, where loans that should have been written off could suddenly crash all at once.
  

What you need to know: U.S. borrowers at risk of defaulting on commercial property loans for a second time are at their highest levels in a decade. This trend – known as “double defaulting”² - has sparked concern that the banking tactic known as “extend and pretend” is masking a growing systemic risk. 

Why it matters: Regulators are concerned that some lenders might be letting property owners delay payments just to avoid reporting losses. This approach, known as “extend and pretend,” may be affecting the entire loan market, risking a flood of losses if too many borrowers fail at once. 

Now the Dunham Deep Dive: Office buildings in commercial real estate are facing tough times. Last month, 9.4% of office mortgages in commercial mortgage-backed securities (CMBS) were late on payments. This is the highest rate since the financial crisis of 2008.

But there’s an even bigger problem underneath. .. 

I'm talking about “double defaults”.

Here’s how it works: A lender gives a loan, but the borrower stops paying. To avoid a loss, the lender changes the loan terms—like giving more time to pay—hoping the borrower can catch up. This helps banks show fewer new delinquencies in commercial real estate. But even with this, delinquencies are up 40% this year.

Now, what if the borrower defaults again after these changes? That’s called a double default. 

And here's the kicker, already one-third of loans modified last year ended up in double defaults.

This has the Federal Reserve worried. They’re asking how many of these loans should've been written off already, what might happen now if too many fail all at once, and how this could lead to "credit misallocation and a build-up of financial fragility."

These are the right questions, and I’m glad someone is asking them. Earlier this year, we talked about this issue in “The Commercial Real Estate Crunch: Are Small Banks Sitting on a Ticking Time Bomb?” The problem doesn't seem to be going away - and it may get even worse (even if the Fed cuts interest rates).

But I wanted to keep you updated on what’s happening while everyone keeps “extending and pretending” their way forward.

Figure 2:  Financial Times, November 2024 

3.  The U.S. Dollar is Surging Higher – Here’s What That Means 

• The U.S. dollar has climbed to its highest level since November 2022, fueled by Donald Trump's re-entering the White House.
  
•  As other currencies weaken under Trump’s trade policies, a stronger dollar may actually work against his goal to boost U.S. exports.  
  

What you need to know: On Tuesday, the Bloomberg Dollar Spot Index showed the U.S. dollar at its highest level since November 2022³. The dollar is rising, partly due to Donald Trump’s threat of new import taxes, optimism that he’ll push to cut business regulations⁴, and strong economic growth that may delay steeper interest rate cuts by the Federal Reserve. 

Why this matters: A sharply stronger dollar will have widespread ripple effects on the global economy. For example, it makes imported goods cheaper in the U.S. but raises the cost of American exports abroad, potentially hurting U.S. exporters and related jobs. It also increases the burden of dollar-denominated debt in other countries, putting pressure on their economies and driving down commodity prices - a challenge for many emerging markets. Additionally, U.S. companies with overseas profits may see lower returns when converting foreign earnings back to dollars, which could impact stock prices. 

Now the Dunham Deep Dive: Donald Trump’s win sent shockwaves through global currency markets, as traders worried he might add new taxes on imports (aka tariffs).

“But why would tariffs make the dollar stronger? Isn’t that bad?”

Yes, it’s true - higher tariffs could lead to higher inflation in the U.S., which might hurt the dollar’s buying power. But remember, in the world of money, currencies are a “relative game” – meaning when you buy one, you must sell another.

• Think of it this way - imagine you have a choice between two cars. Even if one isn’t ideal, you might still pick it if the other car is worse. Well, right now, many think the dollar is the “better car” compared to other currencies that might be hurt by U.S. tariffs, like the Chinese yuan, Japanese yen, or the euro.

Thus, people are choosing dollars - not because it’s perfect, but because it’s better positioned compared to the rest.

Ironically, this might go against what Donald Trump wants. A stronger dollar makes U.S. goods more expensive for other countries to buy.

Meanwhile – as we mentioned this summer in the article – ‘The Big Drought: A Global Dollar Shortage Is An Overhang On The Global Economy’ - a stronger dollar also makes it harder for foreign countries and companies to pay off their U.S.-dollar loans, which could be a big problem since there’s quite a bit of it (around $65 trillion).
So, while many focus on the immediate news - like the strong dollar - I think watching for the ripple effects that a strong dollar might cause over time is more important.

Keep your eyes open on this one. 

Figure 3:  Bloomberg, November 2024 

Anyway, who knows what will happen?

This is Just some food for thought as we watch how these trends develop.

As always, we’ll be keeping a close eye on things. Enjoy the rest of your weekend.

Sources:

1. China Nears Record $1 Trillion Trade Surplus as Trump Returns - Bloomberg
2. Banks face growing risk as double defaults on commercial loans mount - FT
3. USD: Dollar’s Trump-Fueled Rally Unites Wall Street on Bullish Bets - Bloomberg
4. Trump and Musk's 'Epic' Deregulation Must Preserve Financial Stability - Bloomberg

Disclosures:

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Information contained in the materials included is believed to be from reliable sources, but no representations or guarantees are made as to the accuracy or completeness of information. This document is provided for information purposes only and should not be considered as investment advice.

Index Definition

Bloomberg US Dollar Spot Index - Tracks the performance of a basket of developed and emerging market currencies against the U.S. dollar.

You cannot invest directly in an index.

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