The Fed, the Future of the Global Dollar, and Why China (probably) still loses
A rant amid uncertainty
It’s been a wildly interesting few days in the markets. I know this because even my non-MBA guys group chat is sharing memes of JD Vance (balloon-faced and all) in front of a wall of down-bad red stock tickers finger wagging, “Did you say thank you?”
Yes it’s true, the meme market rides when the rest of the world burns. But what’s been particularly interesting is that normally when we say “the markets” have been interesting, really what we mean is the equity markets (stocks). In times of stability, the fixed income markets (corporate bonds, government debt, municipal bonds, etc.) are hardly so volatile.
The last week that has sadly not been the case.
Why Bonds Run the World
(sorry Beyonce)
Let me clarify that I am NOT an expert on bond math. However, I do have a fairly basic understanding of the broad dynamics. That being said, here’s what’s going on.
In short:
Bonds give a higher “yield” (rate of return) when they are considered higher risk. Same as have you get a higher credit card rate if your credit score is trash. So when a company or country sees it’s yield go up, that means both that big players are selling it’s bonds on the public market, and that the market in general is losing faith in that institutions ability to pay its debts.
Now that we’ve explained the basics, here’s why it matters:
The 10 year US Treasury bond has been swinging 10% daily for almost a week.
Generally speaking we don’t want the foundational debt instrument of a global economic system to start acting like a speculative penny stock. Although, to each their own.
Last week Trump announced he was (really seriously this time you guys) going to do wide-ranging global tariffs in celebration of every volatility trader’s favorite national holiday… “Liberation Day!”
The result was a wild crash in the market as long traders, speculative investors, and clueless retail nubs like myself all collectively threw a firesale as we struggled to think through how a business like Nike or Apple could maintain profitability (and wildly inflated valuations relative to precedent) in a world where key input costs soar 50% to 100%.
(If you think I’m being hyperbolic, kindly check the big poster board next to the sitting President).
Major US indices crashed 4%+ last Thursday and Friday, with wild whipsaws up and down in the instability since then.
Now back to the debt markets (remember, bonds matter!)
Normally what happens during market instability is what ppl call a “flight to safety” where traders flee to whatever asset they think will hold its value the best. This time, as in every other time for as long as anyone can remember, that “truly safest asset of last resort” is/was/hopefully-will-continue-to-be the US dollar denominated Treasury reserve bond.
Last week ppl got scared of equity markets, so they bought the Treasury. As such, yields went down. (check the graph above).
So why are we talking about this?
Well, because this morning the Treasury yield just jumped massively (bigly? Gd this timeline is cooked). And remember, in bonds, up is bad!
Yields going up means that someone is dumping treasuries onto the market, and that the buying appetite in the market is…not particularly ravenous.
This is where we have to talk about the elephant in the room: China.
How to build a global hegemony (or destroy one)
The world’s largest economy is either the US or China depending on which metric you choose to lean on (and whether you’re currently running for office, where saying we’re anything other than number one is literally tantamount to treason). And with his Liberation Day tariffs, Trump threatened to wildly disrupt that most-important of economic relationships.
Then when Xi called his bluff and doubled down on MORE TARIFFS in retaliation? Trump did even more tariffs…again.
The truth is that China is just as dependent on the US as we are on them. But it’s also true that if Trump is willing to bonfire American relationships and interconnectedness with the world, no one benefits from that more than Xi Jinping. Yes, instability in the interim while an American-led order implodes would be VERY rough on China due to its dependence on trade. But no one said becoming a global hegemon would easy, right?
The consensus online seems to be that as part of its retaliation against the US, China is dumping billions of US treasuries onto the market, spiking yields (as described above) and showing Trump that if he wants to kick of a generational financial apolcalypse, the Chinese are feeling pretty ready to see how things shake out.
So what happens next?
The interesting (and terrifying) thing about all this is NOT the fact the Treasury yield just spiked a few dozen basis points. What’s wild is that there is still so much uncertainty.
The US enjoys enormous benefits from being the world’s reserve currency. Because countries and banks on every continent hold USD as the modern equivalent to gold, America receives a FAR better interest rate on our debt than we otherwise would. In short: we can borrow (and fund our decadent military, government, everything) in large part because the world believes an investment in the US is about as safe as it gets.
But is that still the case?
Fundamentally, the Treasury is a bet on the American government and the American people. As long as the US remains the richest country in the world, and the US tax base remains the most stable and lucrative cash flow in the history of mankind, treasuries should be relatively safe.
Although it has to be said that nothing in life is certain. Theoretically bad leadership or terrible decision making *cough cough* could spook international markets enough to make them doubt whether the safest-of-all-assets is really all it’s chocked up to be.
So is this the end of the dollar?
What it takes to change the world (a lot!)
I don’t know what’s going to happen next. If I did, I’d be rich, and probably more than 300 ppl would be reading this newsletter. But I do think it’s unlikely that global investors will flee the dollar without a better option in sight.
I doubt if Jamie Dimon or European bankers see the Chinese Yuan as a safe harbor, not while massive government debt in China is a looming catastrophe waiting to happen, capital flows in and out of the country remain tightly controlled, and business leaders like Jack Ma risk being locked up for looking too independent. If the US seems too schizophrenic to be safe, does putting your eggs in the basket of Chinese paranoid megalomania seem like a better bet?
What about the Euro?
Yes, there is something to be said about the depth and breadth of the European market. But, unlike the US, I’d argue that Europe has a genuine threat to its physical security and territorial integrity for the first time in nearly a century.
*Putin gestures ominously just off screen*
How can Europe be a safe harbor for global wealth, when its leaders are actively freaking out about whether the continent is strong enough to be safe from Russian imperial ambitions?
Yes, America looks less certain than ever. For anyone caught up in the authoritarian moment of the last few years, sick of democracy and the slow-moving world of modern bureaucracy, the last week should serve as a perfect lesson on the danger of concentrating power in the hands of one man.
If the Senate steps up or the Fed holds strong to its independence, it should do a lot to show the world that America is still a partner worth trusting (or least, a partner no less stable than a grabby-China or a plunderable-Europe).
Basically, what I’m saying is: it’s a very uncertain moment, but inertia is a powerful thing. So until we know what the next world might look like, I wouldn’t bet against this one. It won’t go down without a fight.
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Clearly there’s a lot to discuss, so if anything I just said made sense to you, or helped you understand all the uncertainty just a bit more, give this article a share. Send it to a friend, post it online, forward the email. I’m just one guy, and your support means a lot.
And if by chance you or a friend has a podcast that’s looking for a guest to talk about business, economics, tech, or anything at all in our changing world…drop me a line. You can reach me at weeklyonepager@gmail.com
Until next time, this has been,
The Weekly One Pager