The Sell-America-Moment
Engineered Market Chaos or Simply Pure Stupidity?
Trump’s trade war sends shockwaves through the global stock markets, I am way more concerned about the irreversible ripple effects that his action might have though. Many political and economic commentators have interpreted his actions as calculated political move. He would simply create short-term fear and insecurity in the markets, so that capital would move from stocks and comparable asset classes into bonds.
What advantages do they attribute to this strategy for the Trump administration?
Their argument centers on the US's significant refinancing needs this year – approximately $9.6 trillion. They argue that increased demand for bonds, would lower their yields, which would save the US hundreds of billions of dollars over the next decade.
As explanation: Governments borrow money via bonds, which normally have two components:
Nominal Value: Typically $100, which the investor receives back when the bond matures.
Fixed interest rate: Currently likely around 4%. This determines the coupon, the amount a bondholder is normally paid twice a year.
When demand for bonds increases, their Nominal Value goes up – let's say to $110. This means that the effective interest rate for a new holder of the bond decreases to around 3.6% (4% on $110 instead of $100 investment). Consequently, if the government issues new bonds, they can do so at a lower fixed interest rate.
That, at least, was the theory held by many commentators. As I already mentioned in S1E3: Trump's Bank War: Why his Tariffs Create a Historic Dilemma for the FED, it struck me as an odd tactic to evaporate trillions of dollars in wealth within days to potentially save around $500 billion over a 10-year period. Furthermore, what those commentators also failed to consider is that China holds approximately $760 billion in US bonds. This gives them the equivalent of a financial nuclear weapon. Not only could they absorb the increased demand for bonds from capital leaving equities, effectively thwarting the anticipated plan, but they could also create additional supply, sending yields soaring.
This morning, China instructed its state banks to reduce their purchases of US dollars. This action is just one consequence of Trump's tariffs. Critically, first signs of how they also erode trust and, consequently, US soft power globally, become visible. This damage is irreversible; the perception has been created that the US President has declared the end of the US-led post-war order. He appears to believe he can unilaterally coerce other nations into negotiations to determine how the order that will follow on his terms. Yesterday, he publicly boasted about his interactions with other world leaders, further exacerbating these concerns:
They call me… kissing my ass... dying to make a deal. Please, please, Sir! Let me make a deal, I'll do anything, I'll do anything, Sir!
Trump is not only damaging his own image globally, but also that of the United States as a whole. The US established the global, rule-based trade system, where participants adhered to the World Trade Organization's regulations. Trump has replaced this order with a poker game in which he consistently portrays himself as holding the strongest hand. It’s only a matter of time before others call his bluff.
As I argued in S1E3, I don't believe this is mere incompetence, but rather a calculated move within a broader strategy to reshape the US, both domestically and internationally. The escalation with China, coupled with the market's, the Federal Reserve's, and some of his billionaire allies' reactions in the past 48 hours, just underline his appetite for risk. He has already begun to target the FED, laying the groundwork for a populist argument: Monetary policy for China or for American workers? when he shared on his Twitter copy:
Economists understand all of this as a self-inflicted dilemma. He will blame the FED and its Chairman Powell for the ripple effects. Tonight, investors began to divest from US bonds, causing yields to surge to in a way not seen since 1982. All this is just the beginning, yet it can be interpreted as first signs of smoke that investors around the world really begin to believe, that the US President is indeed willing to destabilize the Federal Reserve and potentially even the US dollar to force the hand of his internal and external adversaries. A copy of Andrew Jackson’s Bank War.
We will see what news regarding the United States Digital Asset Stockpile, that is already under development, the coming days and weeks will bring.