The Art of Capitulation

Trump capitulates over tariffs (Source: here)

Tonight Donald Trump caved in on tariffs. Stocks are rallying. China inflicted the humiliating U-turn by refusing to kowtow. As yields rose sharply when bond markets started to price in lower Chinese Treasury purchases, Trump had no choice but to reverse the vast majority of his recent tariff increases and pause further tariff changes for 90 days.

This is a huge political defeat for Trump and great news for everyone else. Nothing will be quite the same from now on, because we now know that he will chicken out as soon as the pressure gets too much.

Well done China for standing up to the bully! Of course, Trump further raised tariffs on China in a bid to save face, but everyone knows China made him blink.

In the immediate aftermath of Trump's U-turn, his supporters desperately engaged in damage control, trying to put a positive spin on the debacle. Laughably, the best they could think of to say that was that it was planned all along as part of a 'deal'.

However, this is clearly not true. What deal? There is no deal. Only surrender. Earlier today, Trump's extremely lightweight Treasury Secretary Scott Bessent was barely able to conceal his panic as long bonds sold off heavily, clearly unaware of Trump's impending U-turn.

Former Treasury Secretary Larry Summers' comment that the United States was on the verge of a major crisis were far more influential and may have been decisive in making GOP members of Congress turn on Trump. The business community is also irate.

Besides, if Trump's U-turn was all part of some plan then clearly Trump and his officials have no idea of the damage the uncertainty and volatility their plan caused inflicted on markets and the economy alike. Trump's economic team is either completely moronic or entirely unqualified. Probably both.

Surely, a book will come out of this Liz Truss moment. Perhaps a sequel to The Art of the Deal? Perhaps The Art of Capitulation?  

There is an amusing sub-plot too. Peter Navarro and Elon Musk, Trump's deranged tariff-guru and his favourite Nazi, respectively, have recently been at loggerheads over tariffs. I am no fan of Musk, but he was clearly right that Trump's tariffs were idiotic, while Navarro was very, very wrong in supporting them. Navarro must now be shitting himself; he has inflicted a huge defeat on his boss. It will be fun to see him squirm to get out of this predicament.

Can I also add a more sobering point? Trump continues to raise tariffs on China, so the risks emanating from the bond market are not over. Today someone asked me if China is dumping US Treasuries. I do not think they are, for now at least, but markets are clearly pricing a higher probability that Chinese demand could weaken at the margin as tariff levels approach prohibitive levels. When China’s US exports stop, China no longer accumulates Dollars. And without Dollars, China buys no US Treasuries.

The risk is not overwhelming, but worth watching regardless. The good news is that unilateral tariffs on China divert via third countries rather than stop Chinese exports to the US, exactly as happened in Trump's first China trade war. Still, I would keep watching the long end of the US yield curve very carefully. After all, if China starts to sell outright the situation “would be considerably worse” as the Peter Sullivan character says in the movie “Margin Call”.

Let me conclude by calling on the European Union (EU) to wake up! The US has just demonstrated it is too immature to manage the world's most important bond market. This is an amazing time for the EU to start issuing bonds. And you need that financing for the defence union, don’t you?

The End