Conspiracy Theories

There’s a conspiracy theory doing the rounds that US President Donald Trump is deliberately crashing the US economy as part of a 5D chess game to bring down interest rates so he can refinance national debt at lower yields. Foreign Affairs Forum puts the debt to be refinanced in 2025 at around $7 trillion.

Sumit does a good job of breaking this down. This all started with the tariff wars launched by Trump several weeks ago which have crashed the stock market.

Initially, the bond market behaved as expected: the 10-year Treasury yield fell to 3.87%—its lowest level since October—as investors fled to the safety of government bonds. Per the plan, yields should have continued falling and Trump would have revelled in another great victory. Instead, rates flipped. The 10 year T-bond spiked to 4.5%.

10 Year Treasury Bill Rate

Source: Bloomberg

It was a similar story with the 30 year Treasury yields, which leapt to 5%, which is almost where it was in 2007 just before the last major financial crash.

Trump is not known for heeding advice, but this time he did. He seems to have listened to his Treasury Secretary Scott Bessent who cautioned Trump to slow-pedal his tariff increases. He hit pause on most of the tariffs increases that had been announced just days earlier – with the exception of China, which seems to be the real target of this trade war. Tariffs on China are now an astonishing 124%.

That delay prompted the stock market to rally and another conspiracy theory was born – that Trump tipped off his billionaire friends about the course reversal, allowing them to take massive bets on the rally.

Vulnerabilities in US Debt

Here’s the vulnerability: foreigners are huge owners of US debt, and there is speculation that they are selling. The US is seen as capricious and unstable as a trade partner. Selling of US Treasuries undermines the USD, which explains why we have seen the euro move from parity with the USD to $1.135.

Source: FRED

The downside of the US’s massive trade deficit with the rest of the world is it reinforces USD strength. Foreigners sell into the US market and then invest dollars in 10 year Treasuries for the most part. Last year, the net inflow from trade into US assets was about $2 trillion, which helped support the US government budget and support bond prices.

For decades, cheap goods from China and elsewhere kept US inflation low. That era may be coming to an end, says Sumit. US inflation expectations have hit their highest level since 1991. That’s likely to delay further interest rate cuts by the Federal Reserve.

All this could reverse quickly if Trump and China strike a deal to lower tariff levels (China has responded with reciprocal tariffs on US goods). We can expect the rest of the world to look at Trump’s recent tariff wars as a sign of things to come. De-risking assets may mean moving out of US assets. That will certainly drive the USD weaker and make US exports more competitive. But re-shoring factories is not done overnight. That may take a decade or more.

Gold and Bitcoin

At the same time, gold has hit an all-time high above $3,250 an ounce. Central banks in India, China and Russia have been accumulating gold for years, in anticipation of just such a crisis as this.

Source: Bloomberg

Bitcoin remains under pressure at $84,000 but there is potential for it to de-couple from tech (such as Nasdaq) and plot a path of its own. That’s a different story we will cover in a separate article.

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