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Rare Earth Showdown:

China processes 85-90% of the world’s rare earth metals, and close to 99% of “heavy” rare earth metals.

These elements are all found on the bottom row of the periodic table, and have been in the news recently because of the collective realization that China has control over the entire market for them. They are used in all consumer, commercial, and defense electronics. Light rare earth elements are more abundant, and are used in mass market tech, strong magnets, aircraft engines, electric vehicle motors, wind turbines, smartphones, TV and computer screens, nuclear reactor control rods, hard drives, and scientific instruments, among many other things. Heavy rare earth metals are used for magnets, lasers, phosphors, and defense technologies like F-35 fighters, Aegis destroyers, and advanced missile guidance systems. They are rarer, harder to separate, and mostly found in southern China’s ionic clay deposits — hence China’s near-monopoly on heavy rare earth metal refining.

The federal U.S. government has begun taking stakes in domestic rare earth element (REE) mining companies out of fear that China will weaponize its dominance in the industry. Certainly, the realization of that dominance is beginning to impact Trump tariff policies toward China, as the U.S. administration comes to realize that, in this important industry, China “holds all the cards.” China imposed export restrictions to the U.S. last week, in retaliation to new U.S. tariffs. The U.S. strategic stockpile of rare earths is estimated to only last from several weeks to a few months. China has over a dozen doctorate programs focusing on rare earth metals, and over 300,000 people professionally focused on them. In the U.S., there are no doctorate programs, and less than 500 people working professionally on producing REE’s.

This is explained through several things. REE’s tend to be found in geological areas where thorium and uranium are found. Processing REE’s becomes less profitable when a miner must then dispose of thorium and uranium, which is considered toxic and is expensive to dispose of. The economics of processing REE’s are thus less compelling in a capitalist environment, as opposed to in an environment like China’s where state run companies are also focused on long range national interests. Furthermore, U.S. regulations concerning thorium and uranium are much stricter than in China, making disposal of these two elements cumbersome in the mining process. In processing and refining of REE’s, the U.S. is estimated to be 15-20 years behind Chinese capabilities, given that country’s established infrastructure and technological advancements.

Federal Reserve Monetary Policy:

On September 17, the Federal Reserve lowered its benchmark interest rate by 25 basis points to a target range of 4%-4.25%. This was to support the labor market amid concerns about slowing economic growth, even as inflation remained a concern. The Fed has signaled that there may be more interest rate cuts forthcoming, as labor market deterioration is leading to negative job growth. Unemployment rose to 4.3% in August, the highest level since 2021.

Signs of Stress in the Credit Market:

The September bankruptcies of First Brands Group, a U.S. auto parts supplier, and Tricolor Holdings, a subprime auto lender, have highlighted cracks in the credit market which has led to some top financiers warning about an erosion in lending standards. JP Morgan CEO Jamie Dimon suggested that these defaults could be due to broader credit risks in the economy. Delinquencies in subprime auto loans have reached historic highs, leading to increased yields on auto loan-backed bonds as investors demand higher returns for perceived risks. The impact on regional banks that financed these firms is taking a toll on their stock prices and evoking questions about loan underwriting standards and credit risk controls. Banks may become more conservative in lending to certain types of borrowers as a result.

Consumer Spending

We are in a “K” shaped economy with respect to the American consumer. The top 20% of income earners are spending 50-60% of all consumer expenditures, while the bottom 80% account for the rest, according to the BLS and the Fed. The most recent (Oct. 15) release of the Fed “Beige Book” portrayed an economy that is barely growing. “Economic activity changed little on balance since the previous report, with three Districts reporting slight to modest growth in activity, five reporting no change, and four noting a slight softening.” The Fed also noted a softening in the overall employment outlook: “In most Districts, more employers reported lowering head counts through layoffs and attrition, with contacts citing weaker demand, elevated economic uncertainty, and, in some cases, increased investment in artificial intelligence technologies.”

GDP for 2025 is forecast to be somewhere between 1.7% and 2%, suggesting a slowdown in the economy relative to 2024. The market’s recent strength is based upon the expectation of further reductions of interest rates by the Fed, just as tariffs and government debt may increase inflation and prevent the Fed from lowering rates further. While stocks are historically expensive, earnings growth at S&P 500 companies are robust. In a healthy economy, S&P 500 earnings grow between 5-10% per year. Analysts are expecting 12% growth this year, and some foresee 13% corporate margins should be above average this year as well at 12-13%. Until unemployment begins to accelerate, stocks will remain underpinned by the expectation of rate cuts in 2025 and 2026, AI-related infrastructure spending, and corporate profits, unless signs of tariff related inflation begin to appear.

Grant Rogers