The current front-page headlines in America surround the stock market and the immense paper wealth destruction experienced by the supposed masters of the universe who are finally pricing in the reality they have long denied. Blackrock CEO Larry Fink said he could see another 20 percent fall left in the stock market, echoing the litany of experts asserting that the current chaos is primarily a growth scare, not a recessionary one (Fink also said most CEOs think we are currently in a recession). A simple way to understand the stock market right now is that it is pricing out the fantasy it talked itself into after the election, and it has only just begun to price in reality, while still proving that it prefers fake news to real news.
American media’s obsession with the stock market is both good and bad. The market is not the economy, but plotting GDP on the S&P 500 chart proves pretty conclusively that it is one of the better forward-looking indicators the economy has. We should pay outsized attention to it in these moments it tells us to listen, but whether Citi will exceed expected market returns in 2030 is not the end-all, be-all of market signals, despite what America’s financial press may tell you. I have long made it my mission to make people care about the largest, most liquid market in the world, United States Treasuries, and it is time to tap the sign again, while also expanding my attempts to radicalize more finance nerds with the realm of currency wars.
Let’s start with the trade war scoreboard. Stocks and bonds are bank shots to try to predict the future, but this war will actually be fought in dollars and yuan and euros. The entire point of any 19th century economic regime like Trump wants to impose is to weaken your currency relative to your buyers so they can buy more of your domestically manufactured goods. A stronger dollar means they can buy less of our goods (it also means we can buy more of other countries’ goods, but that’s a subject for people who live in the 21st century).
In short, Trump wants this chart to go down. That would mean the dollar is weakening relative to China’s yuan. But ever since he announced these tariffs on Thursday, the opposite has unfolded (the red arrow marks Wednesday).
Chart via TradingView
It has only been a few days since Trump’s announcement, so all the small sample caveats apply, but right now the scoreboard shows Chinna winning on Trump’s own terms the same day that Trump announced another 50 percent tariff on China. This would bring the total tariffs on them to 104 percent, starting Wednesday. It’s a small movement right now, but it does look like the Chinese Communist Party is sending a message to Trump that can be located just under the 7.27 exchange rate.
That message? We can fuck with you too buddy. How? By doing the exact thing you and many others in finance have been complaining about since long before 2016 and which we said we would abstain from doing the first time around in 2018. Trump can throw all the tariffs he wants at China to try to warp exports and imports to his desires but he can’t hit the yuan in remotely the same way. If China’s central bank is willing to load the monetary policy cannon and fire at will to establish a weakened yuan floor, Trump’s tariffs won’t achieve their desired outcome to weaken the dollar relative to the yuan without a lot of mutually assured economic destruction first.
The Negative Feedback Loop Trump Is Creating for Himself
Treasury yields spiked hard today. On the five-year Treasury and longer, yields were up five percent or more. That is the opposite of what is supposed to happen when stocks sell-off. The theoretical basis of the 60-40 portfolio underwriting the entire global economy is that the 40 percent of your portfolio in bonds will protect you when stocks plunge. Not today. No one is safe (well, not no one, all that smart money that bet on stagflation last year is basically in a generational bull market now). You never want to extrapolate any grand conclusions from one day of any kind of market activity, let alone the largest market in the world, but the extreme bond sell-off today next to stocks is highly suggestive that people are just selling assets for cash. Not for cash-like instruments like Treasuries, just straight cash homie.
Why would people be selling long-term bonds en masse today? Lots of reasons, but a very obvious and very classic reason for a big, long-bond selloff is over inflation fears. Short-term interest rates are more responsive to changes in inflation expectations, but long ones are very exposed to what is called duration risk. While it may sound opaque, it’s very simple math you could explain to a first grader (which means it definitely goes over Trump’s head): if you buy a 30-year Treasury Bond paying you 5 percent interest when inflation is at 2 percent, your inflation-adjusted return is 3 percent. If inflation rises to 4 percent, your inflation-adjusted return is now 1 percent. The past week has been a lesson in why you probably shouldn’t even hold long bonds when Trump is president (the rout in bank stocks whose whole business is centered around the ten-year Treasury Note seems to confirm this assumption).
The danger for Trump here is that higher bond yields could make US “risk free” Treasuries a more attractive investment for investors in a world he is making more uncertain, which would strengthen the dollar. That chart above that Trump wants to go down? Increased demand for Treasuries makes it go up. You are literally buying dollars when you buy a Treasury.
So here’s the feedback loop: Trump thinks he can strong-arm China like he did to Paul Weiss and other cowardly and feckless American elites, but what he is actually doing is incentivizing them to weaken their currency to fight fire with fire, and Trump’s own actions should strengthen the dollar at least in the near-term as inflation rises again. There are a lot of factors that would determine whether demand for Treasuries would follow, but logically in a normal world, higher rates of risk-free return are more attractive to investors. The future is beyond murky, but the market has been very clear in the nascent days since liberation day: Trump and China are currently aligned towards China’s interest of weakening the yuan relative to the dollar.
Now this could not endure forever. Weakening the yuan will hurt China in many other ways that they cannot afford in their own slowing economy. They are very much playing a game of chicken with Trump that you can watch unfold in real time on the USD/CNY chart. High yield junk bonds are currently spiking to levels not seen since March 2020, reflecting the current risk the market is pricing into this whole stupid shitshow. This feedback loop of a weakening yuan and rising US inflation cannot run forever, and eventually something would break.
Something breaking seems more like a ‘when’ than an ‘if’ it happens these days given the crystal-clear signals being sent from all corners of the market. When Trump’s reaper eventually comes for the global economy, all this export, import and currency complexity will likely be simplified by a recession which ensures that regardless of what currency it’s denominated in or where it’s manufactured, no one will have enough money to buy or sell anything anyway.
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