Downward Ho!
China to snap up a deal ... in two years. Japan just walked away. Where's the beef?
The Dow leaped a 1,000 feet, so to speak, into the air today because Treasury Secretary Scott Bessent announced that a deal with China could be very near. Well, that was how stock investors heard what they wanted to hear; but here is what he actually said because you might want to parse it a little more carefully:
The major averages spiked on news that Treasury Secretary Scott Bessent told a group of investors Tuesday that there “will be a de-escalation” in the trade war with China. “No one thinks the current status quo is sustainable,” he said during a meeting with investors hosted by JPMorgan Chase, according to a person in the room.
The last statement is a penetrating glance into the obvious, but the first statement, which provided all the relief-rally rocket fuel didn’t say a “deal,” as in a way to end the tariffs was at hand. It said de-escalation, as in taking them down some, might be at hand.
Recasting his own statement for clarification, Bessent also said …
“We have an embargo now, on both sides, right?” … [noting] that negotiating with China is likely to be “a slog.”
An “embargo” meaning an official ban because, as I pointed out last week (and as did China), tariff rates are now so intense that they clamp the brakes on so tightly there is not likely to be any movement in trade, except by the most desperate of buyers. It would be like trying to accelerate in your car with your right foot while all your weight is bearing down on the brake pedal with your left foot. But stock algos listen for what they want and trade that. So do human stock traders.
So, market up today! Yay! A slog!
Sometimes people are as dumb as a crumb.
Taking off the rose-colored glasses
Here is what Bessent said that clarified the bit that stocks grabbed ahold of. As soon as investors heard the rest, this is what took a good chunk of the initial gain back out of stocks:
Stocks eased from those levels as Bessent also noted that, “If we walk out the door of negotiations and signed something in two or three years that looked like that, I would think that it’s a huge win.”
Yeah, in their typical overzealous, greedy-for-the-first-buck nature, stocks soared the second they heard what they wanted then sucked about half of that back when they found out what he meant by “there will be de-escalation.” Something in two years would be “a huge win.” Yes, in the bye-and-bye, maybe two years from now, we’ll get there, but two years is a big win, so maybe realistically in five. Even if it takes only two, the nation will be broke and the dollar will have fully collapsed under the tariff destruction Trump is raining down upon it. (But maybe THAT is the actual plan.)
“Bessent is obviously trying to send a signal with that comment, and that signal would seem to be that we know this is hurting markets and we’re in a hurry to wrap it up,” [a two-year rush] said Jed Ellerbroek, portfolio manager at Argent Capital Management. “The market will interpret that as good news that will cause it to rally and adjust its expectations for where the final resting place for this trade war is in a couple months.” [Did you miss the two-year part?]
That would only be reasonable on the market’s part (and Ellerbroek’s part) if Bessent meant “We’ll end the tariffs shortly if we get a working framework, but getting all the details ironed out will take two years.” If he meant, “We’ll be ready to end the tariffs with a deal in a couple of years,” then investors are stunning fools. So, is the guy who wrote the above statement. The problem is we’re left guessing how much waits for two years, knowing that two years would be a big win.
So, a "two-year slog” is what they mean when Press Secretary Leavitt says,
We’re doing very well in respect to a potential trade deal with China. Trump is “setting the stage for a deal with China,” she said, “and the ball is moving in the right direction.”
Oh, good. At least, the ball is going in the right direction. That’s a relief because I really couldn’t tell that it was. So, if all goes well, the ball will be in the right goal in a couple of years and it won’t wind up being an “own goal.” (Those always end up looking so dumb.)
Asked if Trump has spoken directly with Chinese President Xi Jinping, Leavitt said she had nothing to share.
In other words, of course not! Remember that, when Trump recently said China was itching to make a deal, China didn’t even bother to call. Instead, it went out and talked with other trading partners around the world to garner support for the long fight and greatly increased its tariffs to match up to Trump’s, announcing that it would move from deploying further tariffs to exacting other kinds of economic damage (which likely means such measures as China’s long feared economic nuclear bomb of ditching US Treasuries).
Selling us at the auction house
And today we saw that happening in the latest bond auction. We cannot say it was China for certain because there is never that kind of granular detail early on, but what we saw in an auction that otherwise went OK in terms of yield and other metrics was a MASSIVE reduction in foreign buyers (which may have been entirely China or may have been all of the world doing what I said they would do in response to tariffs that diminish their need for the “trade currency.”
For much of April, and certainly following the vomit-inducing surge in 10Y yields two weeks ago, the biggest question in the market has been whether China is dumping their roughly $1 trillion in treasuries. And while we won't know until June when the April TIC data hits (and even then the data is at best mixed), moments ago we found something just as important: the Chinese are certainly no longer rushing to buy US paper, something we learned following today's 2Y auction which saw a dramatic plunge in Indirect (i.e. foreign) demand.
I believe that’s the first death knell for Treasury auctions. Most aspects were good, but the one most closely related to China and foreign buyers was abysmal, and that’s the first move after the latest round of tariffs.
Unless the Trump administration’s plan IS to crash the dollar, as I wrote about over the weekend, Team Trump should be hoping so much for “de-escalation,” given the problems they created for the dollar and Treasuries, that they will bend and allow de-escalation now that the bond market continued to unravel today.
The recent selloff in U.S. Treasurys has weakened President Trump’s hand in any potential negotiations with other countries to devalue the dollar, Rabobank forex strategist Jane Foley says. “If the Treasury market is more vulnerable, then he cannot bully everyone to the same degree.” Trump earlier this month announced a 90-day pause in higher reciprocal tariffs against most countries following a sharp fall in Treasurys.
What does “ready to deal” look like when the deal gets real?
In fact, as you weigh Leavitt’s and Trump’s own bold sounding assurances about a deal being imminent because China really wants to deal, consider as a bellwether what just happened with Japan that also “really wants to deal.”
Trump had a ‘test case’ for trade negotiations with Japan. The failure to reach a deal now has analysts wondering if any will be signed.
Despite early White House signals suggesting a trade deal with Japan was imminent, negotiations in Washington, D.C., ended without an agreement, highlighting Japan’s ongoing concerns and reluctance to concede….
During the weeks leading up to a visit from Japan’s chief trade negotiator, the White House dropped hints it was closing in on a deal.
Indeed, speculation was rife that the visitor from Tokyo might even secure the “first mover” advantage touted by Treasury Secretary Scott Bessent: winning advantageous terms as the country quickest to agree to a deal with the Trump administration.
And yet Ryosei Akazawa, Japan‘s economic revitalization minister, has gone home without an agreement in place—telling local media he had urged the Americans to reconsider their “extremely regrettable” action.
Well, that was flat!
Moreover, Japan’s prime minister said only yesterday he still has “grave concerns” about some of the policies announced by the Oval Office.
So, that is what wanting a deal very badly and the phone ringing off the hook with attempts to make a deal actually look like when people stop by to see what kind of deal can be had.
Such resistance from Tokyo is at odds with the message coming out of the White House, with President Trump saying “big progress” has been made in talks with Japan.
Trump always says whatever he wants and sells it. It never matters if it is true. So, you can believe all his big, brazen promises if you want, but I just keep remembering as a frame of reference how winning a trade war with China back in 2018 and 2019 was going to be “easy, so easy, just you wait and see” because “we have all the power” and “hey need us more than we need them.” And here we still are! Trump routinely says whatever he wants until people who want to believe it start to believe it just because they keep hearing it.
Bottom line: even our close ally, Japan, walked away!
Likewise Commerce Secretary Howard Lutnick said Trump was “totally in the driver’s seat” when it came to tariff negotiations, and that meetings with more than 75 countries trying to cut a deal were “back to back.”
Sounds like it. I’m pretty sure I recall hearing that The Art of the Deal says the one in the driver’s seat is the one who can walk away from a bad deal. So, let’s hope those other 74 meetings run a little longer than the one with Japan today before they, also, walk out telling us we’ve made a grave mistake. “Back to back” sounds like they might be pretty short, too.
The conflicting messages are leading analysts to wonder how realistic Trump’s “90 deals in 90 days” pledge will prove to be.
How realistic do any of his pledges turn out to be? Is the wall finished? Did we get the final payment from Mexico yet? Did he drain the swamp during Trump 1.0? Did we synch an easy trade deal with China back then? Did he hire only the best people as truly great leaders do, or did he fire most of them as “morons?” Did Obamacare get repealed? Was it replaced with something so much better? Was that “easy, so easy, just you wait and see?” Did we see an inch of progress on gaining Greenland during Trump 1.0? Is Trump managing to keep us out of any wars, such as the much escalated one with Yemen right now and the new threats of a new war with Iran?
Because Trump is perpetually excused by his own crowd when he fails, Team Trump just keeps making the same vain promises. “90 deals in 90 days” will be lucky if it winds up being half that many deals in twice as many days unless Trump spins some real loser deals into being great wins. Feel free to come back and tell me how wrong I was 90 days after he first said that.
Trump is working very hard to do a lot of what he promised this time around, so maybe this time will be different; but a lot of what he’s doing, like these trade wars, is so ham-fisted that its just bringing chaos. (You don’t take on the whole world at once in a trade war and threaten to take their lands and then ask them to ally with you against China and make your own nations suffer loss of trade with everyone at the same time while all other nations only suffer it with you. If that works, then all those nations are much bigger cowards than I imagined, and I never imagined them to be brave. So, take a close look at what just transpired with our major trading partner and biggest buyer of Treasuries, Japan.)
Investors are losing confidence in the U.S. dollar this week precisely because of this fear, wrote Thierry Wizman and Gareth Berry, rates strategists at Macquarie, in a note seen by Fortune.
As I wrote in this weekend’s Deeper Dive about a White House dollar conspiracy, maybe that is the plan! (Of course, there was quite a bit of fresh meat in that article for everyone, but I had to save the most savory chunks for paying subscribers because I cannot afford to give away all the milk and the cow too. Either way, I think you’ll find it a grave threat. Even if you want to see the dollar go down)
Downward, Ho!
It is now sharply apparent that my worst predictions for the damages that would come from Trump’s Tariff Wars are starting to show up rapidly and broadly in the data now. So, that should be a worthy Deeper Dive if something even worse doesn’t take up the news between now and then.
In two years slog time, there won’t be much left worth saving at the dollar’s present rate of decline:
Having already lost 10% of its premium value, when compared to other major global currencies, the dollar’s collapse from this past January’s highest summit since the dot-com bust is slowly getting steeper. Will it gain momentum that becomes hard to stop? Read about the rascals that might be pushing it downhill in my last Deeper Dive.
This dive looks like a sled run:
“Lots of uncertainty, not lots of answers, kind of a frustrating environment today for investors,” Ellerbroek added. “The one feeling that I feel like I can identify is the longer we remain in this limbo, the worse it gets for the economy.”
I don’t think either bond markets or stock markets are going to weather two years of this endless back-and-forth and promises that don’t pan out. Neither are businesses that are saying in great numbers that they cannot plan their own business because they have no idea how the on-again/off-again, huge-then-small-then-enormous tariffs are going to impact them. They certainly have NO idea whether it would make sense to start a painful 2-5 year effort to move back to the US.
I was going to highlight a few other austere economic facts that came out today, but it’s already 10:45 PM, so they’ll have to wait until the next Deeper Dive. (Writing the last Deeper Dive took me so late into the night last night and then still required some touch-up time after its publication today that I wasn’t left with much time to write my usual editorial.)