Trump: Don’t let them see you blink

Don’t let them see you blink

Trump is probably enjoying flexing his muscles. First he imposes ridiculous tariffs on the entire world and markets crash losing $10 trillion in value. Then there is a rumor that he is going to backtrack and the markets rally. Then comes news that the backtrack news was fake news and the markets fall again. Then Trump, for real, announces a “pause” in most of the world’s tariffs and the markets roar back, gaining $5 trillion. For someone with such an ego, Trump must truly be in his glory. It is therefore, hard to imagine, as some have written, that Trump blinked.

But why did he backtrack? Some say it was the steep fall in the markets and Elon Musk’s displeasure at being a few billion dollars poorer. When Musk came out for zero tariffs – rather than Trump’s weird reciprocal tariffs – the commerce secretary Lutnick said that Musk was just an assembler. Musk then called Lutnick a moron and dumber than a sack of bricks. Temper. Temper. Some say that the fall in the markets spooked Trump and that his Treasury secretary, Bessent convinced him to a pause. Still others say that Trump really did not care what happened to the stock market – which I find hard to believe – because he really wanted a fall in the market that would lead to a fall in the 10 year Treasury. Weird? Here is the “logic”. When the market falls, investors run to safety and the 10 year Treasury is considered a safe haven. When the demand for treasurys rise, the price goes up and the yield falls. Since $9 trillion in US debt is maturing soon, the fall in the Treasury yield means that the maturing debt can be refinanced at a lower rate. Each basis point drop in the treasury rate translates to a savings of $1 billion a year. A basis point is one one-hundredth of a percent. And yes, initially the T-bond rate fell from 4.2% to 3.9% or a $30 billion savings if the bonds were refinanced at the lower rate.

But after the initial drop, the rate on the 10 year Treasury shot up to 4.5%. So investors did not run to Treasurys, rather they started to dump them indicating that no longer was the US considered to be a trustworthy safe haven. Also if tariffs sparked inflation, investors demand higher yields to protect the real value of their investments. Of course, Trump has been demanding that the Fed help him out by lowering interest rates, tweeting 

“This would be a PERFECT time for Fed Chairman Jerome Powell to cut Interest Rates. He is always “late,” but he could now change his image, and quickly. Energy prices are down, Interest Rates are down, Inflation is down, even Eggs are down 69%, and Jobs are UP, all within two months – A BIG WIN for America. CUT INTEREST RATES, JEROME, AND STOP PLAYING POLITICS!”

Trump sure loves caps and exclamation points. The Fed has resisted Trump’s entreaties. Its next Open Market Committee meeting is May 6-7 and there is no indication that they will lower rates. The expectation is that they will leave rates steady. In fact, the Fed is likely to resist overt political pressure from Trump to lower rates so that he can have the debt refinanced at a lower rate. So some say that Trump “backtracked” not because of the sell off in the stock market but because of the sell off in the bond market causing the 10 year Treasury to rise rather than fall. Regardless, Trump is now back to square one with the 25% tariffs on Canada and Mexico and his 10% tariff on everybody else – but China.

Trump’s tariffs may have cast doubt in investors minds about the wisdom of putting their eggs in the dollar basket. Central banks hold dollars as their reserve currency. Businesses transact in dollars across borders. This means that there is a demand to hold dollars and this generally means holding treasurys. However, if Trump is lessening the US’s participation in world markets by increasing US tariffs then there will be less demand for dollars. Thus, Trump’s tariffs will in effect reduce the dollar’s status as a reserve currency. In addition, less dollars flowing overseas also mean lower demand for treasurys which are used to finance deficit spending. So in the words of the old adage, be careful for what you wish.