American High Wire Act Going Global

The week ended on April 11, 2025, interesting news items to look at this week are:

1. American High Wire Act Going Global: Few people would risk to walk on the high wire because it requires years of physical training (building strength, balance, and agility), mental fortitude, and a strong understanding of one’s body and the equipment employed. What do you think the result would be when one national leader having faith in his self professed negotiation skills brings 347.2 million people onto the High Wire just before a Category 3 Typhoon. (Fig. 1).

To people who still thinks the Trump Administration has more cards to play and “Liberation Day” was just an open salvo, allow me to offer some new data pixels and remind readers of this Blog some familiar ones that Trump’s engine do not even have patrol fumes to run on.

(i) Full Saturation: Last week we shared a “happy talk” interview between US Treasury Secretary Scott Bessent and Tucker Carlson in which Bessent explained the stock market crash began with DeepSeek and not with Liberation Day. Bessent was only partially right, because all stock market crashed for the same reason, there were no bids for the stocks which investors wanted to sell. Why? Everyone and his dog already have the stocks if not overflowing through margin purchases. Sadly Bessent did not anticipate the same is true for the much bigger US Credit Market. For a few years I have cautioned there was a consistent demand shortfall for US Treasuries and the books were cooked. How? through synthetic demand using currency and interest rate swaps via the UK, BLICS (Belgium, Luxembourg, Ireland, Cayman Island and Switzerland) and Japan in the Yen Carry Trade as regards foreign purchases. In the domestic US market, synthetic bond demand was generated in what is called “The Basis Trade”. (The basis trade involves betting on the difference between prices of cash Treasuries and Treasury futures. To do this, Hedge Funds effectively go long the cash bond and short the synthetic futures contract and because of the thin spread, Hedge Funds typically leveraged over 20 to 1 as an absolute yield enhancement mechanism.) It is estimated the Basis Trade is $1 trillion in total portfolio size (10% of US Domestic Duration Purchases). Even before Liberation Day, cracks already appeared in the Basis Trade because of the volatility in credit market  arising from the dog fight between the Trump Administration and the Federal Reserve. At a 20 to 1 leverage, a 5% swing in the underlying Bond price would wipe out all the Hedge Fund’s Equity and since Trump’s election, the volatility in USGG30YR bond prices was at one time as high as 10%. (Fig. 2)

Why didn’t the Hedge Funds stopped, well, because the optics was necessary for “National Security” plus the stick and carrots offered by the US Treasury. On Liberation Day and the following day , volatility shot to the stratosphere (+70%) and Banks made the big margin call. (Fig. 3).

The crash contagion was not confined to the Stock and Bond Markets because the US credit market is the foundation of the post Bretton Woods Dollar-centric international monetary order. As I repeatedly said once credibility is lost currencies and bonds die because all these instruments are just promises written on pieces of paper and totally unsecured. So following the stocks and bonds melt down USD also came under pressure. Dxy’s Friday’s close of 99.78 is the worst since 2022 as the Yen Carry Trade and other speculative two way bets in favour of the USD is unwind in a risk off deleveraging flee to safety. (Fig. 4).

 Now, let’s take stock, there is $1 trillion in US Stock margin financing, $1 trillion in Basis Trade, $1 trillion for the Yen Carry Trade plus UK, BLICS swaps , another $1.8 trillion in current US Federal Government deficit and on top $6 trillion for Treasuries to mature in June 2025 and up for refinancing. Enough? Did Trump have a plan, yes of course. Did Trump and his team rehearsed before hand with muscle memory to correctly response without thinking? What do you think? Understanding the environment and Trump’s timing,  Liberation Day was an act of desperation. Trump’s bunch of Yes men cabinet all just repeat the President’s narrative like an echo chamber.     

(ii) What will be the Impact of the Tariff escalation be on US and China respectively: I do not blame anyone who just look at the raw numbers of China’s trade surplus with US would think US should have the upper hand thus says Trump. However the devil is always in the details. Of the US$440 billion exports to US, roughly (a) 20% is Apple. From the 88 billion shipment value, profit to Apple is $26 billion and Chin’s labor input is $1.8 billion .( Fig. 5)

 On top 17% of Apple’s total sales is in China and Tim Cook is not going anywhere fast. (b) Another 20% of US imports from China is sophisticated electronics and semiconductors with few substitutes to the extent even Pentagon cannot waned its dependant upon Chinese chips as to 40% of its weapons system. (c)  a third 20% of US imports are machines and machine parts from high end to Black and Decker power tools. These can be replaced overtime but as Tim Cook said, it was not a matter of cost to have a supply base in China but skills. Panasonic of Japan certainly second that statement in various interviews. Finally, (d) 40% of US imports are low end products like furniture, toys, plastics, shirts and socks. Here the issue is not seamstress at the sewing machine but the whole supply chain of fabrics, printing, dying, buttons, zippers, needles, threads, packaging and whatever it is necessary including all modes of transport to get the products finally to US shores. Besides alternate availability and as important is the question of scale. On the other hand what Trump never mentioned about is US’s annual receipts of $170 billion from Intellectual Property licenses which is pure cash flow into US. China’s share of global US IP receipts would be around 12% and therefore very roughly $20 billion. This $20 billion would come from Hollywood films, NBA and other Sports television rights, license payments for pharmaceutical, semiconductor design and software. If China could earn a net 5% profit on the $295.4 billion goods trade surplus to US, the overall profit component of both goods and services in the US China two way trade, the combined net profit component would actually be in US favour of $5 billion annually. ($20 billion positive on services and $15 billion negative on goods trade). Consider the US Federal Government interests payment is $3 billion per day, all the animosity surrounding the Trade and Tariff Warfare targeting China is but a red herring camouflaging a darker sinister plot and a much bigger .

Trophy. For China to negotiate further with US has totally lost its meaning and keeping an arms length distance seemed a more sensible approach. For the 7 year Trade War attack by US against China, China has not even mentioned retaliatory measures against US Services Surpluses, only as US escalate tariff on China to 145% did China began to restrict the 30+ movies shown annually in China to 10. (Fig. 6)

2. Financial market performance for the Liberation Week  (Fig. 7):

VIX “Volatility Index” (+45.16%), Swiss France (+8.21%), Eur(+4.57%), JPY (+4.51%), Gold (+3.51%), Russian Ruble (+1.21%),  Nvidia (+0.98%),  GBP(+0.74%), Rmb (-0.15%), Bitcoin (-3.02%), USD Index (-3.82%),  Nasdaq (-4.24%), Silver (-4.70%), S&P 500 (-5.13%), Copper (-9.74%), TSLA(-10.20%%) and Oil (-13.99%). Liberation Day liberated fear, fear of a US recession, fear of  US alienating all countries by hostile trade sentiment and fear of a reset and depreciating USD assets value.

The most important indicator for this week from the financial market is the crash of stocks, bonds (Fig. 8 and 9)

and exchange value of USD all at the same time. This is a clear sign that there is a global sell down of USD assets and leading the charge surprisingly is not China but Japan then Europe. Which American will listen to PONTUS to hang tough and stay the course when it was widely reported that Trump’s family fund  has bought $38 billion of Put Options against Nasdaq Index just days ahead of Liberation Day.

Proverbs 6:16  These six things the LORD hates, Yes, seven are an abomination to Him: 17  A proud look, A lying tongue, Hands that shed innocent blood, 18  A heart that devises wicked plans, Feet that are swift in running to evil, 19  A false witness who speaks lies, And one who sows discord among brethren. 

World Domination

The week ended on April 4, 2025, interesting news items to look at this week are:

1. World Domination: James Bond in the 1962  movie Dr. No said “World domination. The same old dream. Our asylums are full of people who think they're Napoleon. Or God.” (Fig. 1).

I quote from this 63 year old movie because one does need to have a very long view to understand and prepare for what is to come. This week’s “Liberation Day” have drawn the first blood of WWIII. The global economy is in a panic because of a sudden unprovoked attack by the Anglo American Empire on every nation. In an interview of US Treasury Scott Bessent, Bessent explained Trump has consistently promoted his tariff policy and people should not be surprised, but wait a minute, common meaning for a “reciprocal tariff” should mean a tit for tat response. When the average tariff on imports from US was taxed at 1.2% in the EU, then a 1.2% duty on EU exports to US is fair game but at 20% is not reciprocating but war. Bessent also hinted that Trump was just following Hamilton’s tariff plan of fund the nation, protecting American industry and as a negotiation tool. (Fig. 2).

 I am sure most readers of this Blog knows how the US Administration came up with the Liberation Day tariff formula but let’s refresh ourselves with the chart on (Fig. 3.)

using Vietnam as an illustration. As I have said last week, Trump’s methodology is a Shock and Awe Marine Beach Landing Tactic, the essence of Liberation Day is not the tariff rate but a coercion for nations to come individually to US for a bi-lateral negotiation. In the minds of the US Administration  US should prevail in these one on one negotiations. To that extent Vietnam immediately hoped on a plane to Washington, then would likely be followed by Taiwan, Japan and South Korea. What the Trump team had not anticipated was the very strong stand taken by China to immediately counter punch with an equivalent 34% tariff on all US imports and a determination to completely decouple from US. Now if you are a poker player, a follow suit would mean China gave the ball back to US and await her reaction and this puts US in a real catch 22. It is meaningless for US to further increase the tariff rates as a threat (from 54% tariff to say 70 or 80% tariff would not necessarily intimate China). On the other hand, US has made no preparations to completely decouple away from China’s supply chain. The Chinese counter punch caused the US financial markets to enter into a panic mode and the Dow fell a further 2,200 points on top of the 1,700 points on Liberation Day. Should US double down, the US stock market would immediately be tipped into the “Bear Market” territory in a single day movement. The world now awaits US next move. Personally I have been preparing for this day for a little while and allow me to share below some data pixels of the forces shaping this Tariff War.

(i) Ebbs and Flow of US Tariff: Fig. 4 is a chart showing average tariff rates of US Imports between 1821 to 2025.

The effect of “Liberation Day” was to substantially increase US average tariff rate to 22%, the highest since 1918. Remember the precursor of WWII was the tariff war of 1930s followed by the Great Depression. In the Post WWII period, US average tariff has generally came down until 2018 when Trump 1.0 started another bout of trade war. I have segregated  the post war period into two time zones. The first was from 1945 to 1971 (Fig. 4 Green Area). This marked a period of substantial US exports to other countries on post war reconstruction and US promoted a global reduction in trade barriers for her own advantage through GATT (The General Agreement on Tariffs and Trade). The second period was from 1971 to 2018 after US defaulted on the Brettons Wood Agreement and as explained last week, in order to protect the Dollar Hegemony, US flooded the world with USD through trade deficits. Trump’s narrative of US being exploited by other nations through cheating, pilferage and copycat technology was too careless with the truth, well but may be a useful placebo for American citizens when they are being heavily taxed.

(ii) The Deindustrilized State: Fig. 5 is a table showing the top 20 largest companies amongst the S&P 500 Corporations.

Their combined revenue is 35% of the S&P 500 Companies. Notice there are only three manufacturers at the 19^th and 20^th position with Apple at the 4^th. But 60% of Apple’s sales is international, 50% for Proctor  Gamble and 40% for Ford. For these 3 companies, re-shoring manufacturing to US after Liberation Day will be suicidal. No CEO will take responsibility for major Capex to re-shore when the domestic US market is going into recession. The other companies on the list are Retail (highlighted yellow), Healthcare (white and pink), Big Tech (green), Financial (orange), Energy (grey). These companies should have the financial clout to move sourcing but  are not the ones that actually manufactures. Walmart and Amazon sourced their products predominantly overseas and majority from China. For the Healthcare segment, they are mainly distributors of pharmaceuticals and health services only. Unfortunately the drug companies that supply these Healthcare giants sourced 53% of their API (“active pharmaceutical ingredients”) via imports. The question then came, where can the drug companies find the resources to backward integrate and build capital intensive and low yield production bases in US. Big Tech and Financial are not directly involved with tariffs and we will leave them out for the time being. The final grouping is Energy, Exxon international sales is 75% and Chevron is 71%, guess what will they do. There were also other companies that listened to Trump like Nike, Black & Decker and Lululemon and diversified their manufacturing away from China, particularly to Vietnam and India. After great relocation expenses and lower achieved productivity, Liberation Day was nothing but jumping from the oil pan into the fire, all suffered a loss of 25% of their stock value in one month (Fig. 6). 

What will your typical CEO do then? Very likely he will just keep his head down and wait it out with a tightened belt.

In Trump 1.0, a $4 trillion tax incentives given to the S&P Companies but they simply spent in stock buy backs and tariff increases simply passed onto consumers. Trump policies  failed. In Trump 2.0, Trump just picked a fresh bunch of YES men and continue with his failed ideas. (Fig. 7).

(iii)  What will be the likely outcome: US is forced into a stalemate by Russia and China. Like the war with the Houthis, Trump will stay his course for a little while for face reasons and afterwards pull back the USS Carrier Strike Groups. I expect in 3 months time Trump will have a narrative that the Liberation Day is a success (Vietnam, India, Taiwan, South Korea and Japan capitulated) but quietly the patient (the economy and the USD) died during the surgery. The Fed will be forced into QE to infinity with hyperinflation beginning in 2025 and a kinetic WWIII probably in 2029.

2. Financial market performance since Trump won 2024 Presidential Election to April 4 2025  (Fig. 8):

Bitcoin (+21.52%), Russian Ruble (+15.8%), Gold (+10.28%), JPY (+3.01%), Eur(+0.30%), USD Index (-0.39%),  GBP(-1.09%),  Rmb (-2.42%), TSLA(-4.92%), Silver (-9.38%), S&P 500 (-10.58%), Nasdaq(-13.99%),  and Nvidia (-32.95%).

Luke 14:31  Or what king, going to make war against another king, does not sit down first and consider whether he is able with ten thousand to meet him who comes against him with twenty thousand? 32  Or else, while the other is still a great way off, he sends a delegation and asks conditions of peace. 33  So likewise, whoever of you does not forsake all that he has cannot be My disciple.