A Brief Mid-Week Update on the Market Chaos

This is what the U.S. government is attempting to do with its current practice of self-immolation.

This is the global economy if the U.S. completes its suicide mission

This will be a brief mid-week update on the market chaos.  Hopefully, this will help you make some sense out of the terrible mess our government has created.  Currently, the U.S. is stuck in a hideous game of chicken with the Chinese government, and neither party is willing to blink. Combined, they account for nearly half of the global economy, so the collateral damage of their infantile power struggle could be catastrophic for the rest of the world.  I am sure there must be a far better way to resolve disputes, because there is only one worse way – actual military conflict.

Billions of innocent people around the world will suffer the consequences of the foolish policy choices of Trump and his team, and I am sorely disappointed that this is the best strategy our government could concoct in order to address some long-term, but not catastrophic, trade imbalances. There will be no real winners in this sort of battle, but for sure there will be lots of losers.  

Already, corporations around the world have been forced to slash their economic projections for the year, delay and/or cancel planned investments, and prepare for employee downsizing. Chaotic market conditions have already led to losses well in excess of ten trillion dollars, and unless things change very quickly, millions of people are going to lose their jobs.  The fact that our government can brag about generating several billions of dollars of extra tax revenues a day when stock losses in the U.S. have already surpassed $10 trillion is frankly, revolting.  The only thing that all the noise and bluster from Washington is achieving is jaw-dropping volatility in the markets. 

Intraday swings in the equity markets are astonishing, and there are no signs of things calming down any time soon.   I have traded profitably in many markets for forty-one years, but I have never before seen such persistent levels of chaotic market conditions.  The idiocy of this volatility is that all of the pain and suffering inflicted on retirees, small equity investors, and pension programs is the result of foolish bluster and posturing, without regard for every-day Americans.

As you can see in the charts below, the 10-year U.S. treasury bond yield has ripped higher as stocks have been crushed.  Volatility has soared, oil has collapsed, the dollar has been aggressively sold against the yen (and to a lesser extent, the Swiss franc), and credit spreads have blown out, making corporate financing much more expensive.  The ”Liberation Day” self-immolation has created long-lasting damage that won’t be healed for many years.  Trust between close allies has been severely damaged, and in some cases, shattered.  In the best case, it will take decades to heal the damage and start regaining some of this trust.  Remember, I am not even addressing the whacky strategies and severe pain already inflicted by the scorched-earth practices of DOGE.

The dollar’s hegemonic status is being damaged, and these foolish policies will accelerate the demise of the dollar’s key role in global finance.  The long-term repercussions of this development would be devastating, as the dollar’s principal reserve currency status has been one of the strongest sources of guaranteed funding for the U.S. national debt.  A country with over $36 trillion of debt should never take any steps that might weaken its future ability to borrow money.  If I were to write a screenplay about the collapse of the United States economy, nobody would believe it if the leading characters created sophomoric policies like the ones the Trump administration has just implemented.

The chart below illustrates quite well the history of tariffs in America.  Before the U.S. implemented income tax on Americans and American companies, tariffs were essentially the only source of revenue for our government.  Any student of history knows how well things worked out after the Smoot-Hawley Tariff Act, but if you need a refresher, it led to the Great Depression, a global trade war, the rise of Hitler, and WWII. Other than that, the tariff strategy was a winner!

Trump and his team told us that they wanted lower oil prices and lower interest rates before liberating us from trillions of dollars of savings.  Oil prices have complied quite well.  Interest rates have not complied at all.  In fact, their strategy has backfired.  Look at the chart below to see how the U.S. Treasury 30-year yield has reacted to the recent chaos.

The dollar has also been slammed as investors are running for cover.  The yen has surged higher, but it likely has much farther to go.

Over the past few years, the Fed’s balance sheet has been somewhat reduced since it ballooned in response to Covid, but the Fed never was able to shrink it back to appropriate levels, because frankly, the economy wasn’t strong enough to handle it. It is one thing to use emergency funding strategies when we have an economic crisis, but not reducing the balance sheet to its pre-crisis levels was a real blunder.  In fact, it demonstrates very clearly that the U.S. economy may have looked strong over the prior four years, but its strength was dramatically overstated due to the combination of massive government borrowing and excess central bank liquidity.  Essentially, the U.S. has followed the same path for decades, using monetary and fiscal policies that intentionally overstate the strength of the economy.  Politicians like it this way as it helps them stay in office.

The bottom line is that an incredible amount of damage has been done, and more pain and suffering is yet to come.  The stock market will likely have another leg lower – perhaps to the 4340 level in the S&P500 – before having another sharp bear market rally.  It just needs to crack the 4800 support level before this next down leg.

Dollar yen should continue on its overall path down to 139.70, and Aussie/yen should continue its decline.  The path in all cases will be bumpy, but the trends are quite clear.  The New Zealand dollar should also continue to decline against the yen, but you need to be prepared for some serious volatility along the way.

Gold, which I recommended buying around the $3,000 level a few days ago, is already $90 higher.  Investors are scared and they are clearly not parking their money in U.S. Treasuries. Gold is an obvious safe haven, as is the yen and, to a lesser extent, the Swiss franc.  

We will have tremendous trading opportunities for years to come, so it is alright if you miss a trade or two.  The key is to have disciplined rules with rigorous risk management policies in force.  

In the meanwhile, I wish you all the best of luck.