Broken

Rather unsurprisingly, Donald Trump broke and ran on the day his fraudulent “reciprocal tariffs” were supposed to come into effect. He may imagine himself a king, but he could not command the waves.

Last month, Trump gave us a foretaste of his propensity to retreat when the going gets tough. On the day his punitive tariffs on Canada and Mexico were supposed to come into effect, he called them off.

Trump’s retreat is a massive defeat for his bizarre program of bullying all the nations of the world with tariff threats. This is a crushing defeat – even as his most loyal lieutenants try to spin this as a great victory for the “stable genius” and even as he announced only a 90-day reprieve. He is still trying to threaten us with a weapon that has lost its powers.

Even as he retreats on tariffs imposed on every other country, Trump continues with the unbelievable tariff rate imposed on Chinese exports. He even increased this to 120 percent.

By continuing to target China, Trump is trying to save face. While China exports a broad range of commodities to the US, the American market constitutes just 12 percent of total Chinese exports. Over the past few years, China has been diversifying its markets to be less dependent on the US market.

In short, a higher US tariff wall will not bring down the Asian export juggernaut that produces a third of the world’s manufactures. It will cause pain, surely. But China’s Xi Jinping has quickly rallied his people and whipped up nationalist frenzy to stand up to Trump’s bullying.

By contrast, 86 percent of Americans now disagree with Trump’s fixation on igniting a trade war. Trump is quickly losing political capital with this insane tariff obsession.

There is no way Trump could recover his political capital by continuing with his hare-brained assault on the global order – and especially since Trump himself could not coherently explain his strategy.

Last Thursday, I wrote in this space that with Trump’s haphazard manner, this program of sharply raising tariff rates is bound to break things. The man is a bull in a china shop.

Now we know the most irreparable thing broke first: trust in US Treasuries.

The most proximate factor leading to Trump sounding the bugle to retreat, from all the available accounts of what happened last Wednesday, was a decision by Japanese hedge funds to sell down their holdings of US Treasury bonds even at an opportunity loss.

In the preceding days, something odd was happening.

Normally, when the equities markets decline, funds seek sanctuary in US Treasury bonds. US treasuries are most trusted. Even if hell freezes over, holders of US treasuries will be paid in full. The market for US treasuries provided an anchor for the global financial system.

Movement of capital from equities to bonds causes the latter to become pricier. That is simply the dictate of the law of supply and demand.

As the stock markets collapsed earlier this week, money was not flowing to US treasuries. Fund managers were looking elsewhere for safe havens. The market for US Treasury bonds was in imminent danger of imploding.

Avoidance by hedge funds indicates US treasuries are no longer trusted. They can no longer be the solid foundation of the global financial system. If US policies can be as erratic as Trump has made them, there is no certainty that the bonds will be paid on time. This changes the financial risk profiles immensely.

After announcing a retreat from his tariff assault, Trump observed the markets partially recover and the bond market to become “beautiful.” Since he merely postponed the tariffs (except those imposed against China), the upturn could be momentary – what is called a “dead cat’s bounce” in market parlance.

Trump even patted himself on the back for the unprecedented single day market rise. But that happened because the markets lost trillions of dollars in the days preceding. The bounce could not even be called a correction. The equities markets remain in bear territory, having fallen 20 percent off their highs.

This should keep Trump awake at nights, if he is doing any real analysis: China holds trillions of dollars in US bonds. Now they know where Trump’s point of greatest vulnerability lies. Should Trump continue to annoy China, Beijing could simply decide to sell their bond holdings.

It turns out that about $9.2 trillion of US debt is due for repayment or refinancing. They will need the rest of the world to help out with that by buying US treasuries – possibly carrying higher rates. Improved rates, however, matter little if the world distrusts US paper.

The US debt has just become costlier to carry in the aftermath of Trump’s insane tariff assault on the global economy. Should more institutional investors decide to dump US debt paper, the American economy will be in serious trouble. The unthinkable could happen: the US could actually default.

Responding to Trump’s bullying, Beijing announced restrictions in the export of rare earth minerals (almost exclusively mined in China). Restrictions have also been imposed on US agricultural exports and other items mainly produced in Trump’s red states. Quietly, Beijing could start turning the screws on Trump, who faces midterm elections next year.

One analyst aptly pointed out: while the world plays strategy, Trump plays drama.