A 10% drop in two days — the worst since March 2020. Back then, the world was on fire and buying the dip worked (for now). Will it work again? Who knows. But as the old saying goes, “the four most dangerous words in investing are: ‘this time is different.’”
The S&P 500 now stands at 5,074. The 10Y treasury yield has retreated to 4.00%, which is still some 40bps above the September 2024 lows of 3.60%. The 2Y yield has moved down to 3.66%, which is near their September 2024 lows of 3.50%. Remember back then? All the talk was about China’s economy, strikes in the U.S. and the war in the Middle East. Today’s tariff tantrum may prove stickier — and bonds aren't sure whether to price inflation or slowdown
The Ratliff Family Jinx
Speaking of losses - Duke. Hard not to wonder if their tournament run was cursed by White Lotus. A suicidal Timothy Ratliff in Duke gear? That’ll do it.
Recession Odds Climb
As for the fate of the economy, JPM puts recession odds at 60%. The jobs data on Friday didn’t scream trouble - NFP came in at +228K and the unemployment rate to a rounded 4.2%.
And the Powell Rangers?
As of Friday it didn’t seem Powell was ready to come to the rescue - the FOMC “does not need to be in a hurry” to adjust policy according to him.
Will this be a repeat of Powell in October 2018 when he quipped that “we’re a long way from neutral” at the time indicating more hikes were on the come despite Trump 1.0’s trade war with China. Fast forward to December 2018 and the S&P was down 20% feeling the impact of tighter financial conditions and concerns over a global growth slowdown. It took a little bit of time but by mid-2019 Powell had initiated “mid-cycle adjustment” rate cuts.
Will this time be different?
Paging Belgium?
Robert Triffin, a Belgian economist, theorized the “Triffin dilemma”; in a Bretton Woods system, with fixed exchange rates and the ability of central banks to convert dollars to gold on demand, the world wasn’t going to be able to satisfy the demand for reserve assets with gold, so dollars would act as a substitute. As Paul Volcker discusses the Triffin dilemma in his memoir:
“But to maintain growth in those dollar reserves, the United States would be required to print more and keep running balance of payments deficits, inexorably producing inflation and undermining the dollar’s ability to be converted to gold on demand at a fixed $35 price.”
Triffin’s point as echoed by others was that this ‘exorbitant privilege’ ascribed to the U.S. dollar might lead to a dollar that was chronically overvalued and that it would be virtually impossible to maintain a system based on convertibility between gold and a single reserve currency in a world of expanding trade and growth.
“Eventually the sense of trust upon which the currency rests will be eroded if its use is overextended.”
Of course this convertibility of dollars to gold collapsed back in 1971 with the “Nixon Shock” and we moved to a new “dollar standard” or a system some call “Bretton Woods II”.
The Triffin dilemma is still relevant - just transformed. The U.S. still supplies the world with liquidity - now through U.S. treasuries which creates its own set of imbalances, especially the U.S. running a persistent trade deficit. A system some say leads to lower interest rates and an overvalued dollar that encourages an unsustainable build up of debt. Or as some describe a system where export driven economies lend money to the U.S. consumers to keep the system afloat artificially.
Not everyone sees the current system as a problem or even a dilemma.
Tariffs and the Dollar Order
The exact views of the Trump Administration around the Triffin dilemma aren’t entirely clear, but it is clear their policies are aimed at addressing perceived trade imbalances and perceived negative impact of such imbalances.
Whether the future is playing out in a way that former Credit Suisse economist Zoltan Poszar termed “Bretton Woods III” - a multi-polar world with commodities anchoring reserves and a decline in the dollars ‘exorbitant privilege’ may still be premature, but for the time being last week’s tariffs announcements have raised questions around the future of the global monetary order.
The Week Ahead: Data for Show, Tariffs for Dough
Monday: Nothing but NCAA Madness
Tuesday: 3Y Note Auction
Wednesday: Inventories, 10Y Note Auction, FOMC Minutes
Thursday: CPI, jobless claims and Fedspeak
Friday: PPI, UofM
XTODs:
XTOD: Breaking: Big Wall Street trading desks will be manned in time for tonight’s futures open. They are preparing for more selling, intense selling. But you also hear talk about “value” and how some really good stocks are “over sold.” But bearishness is clearly the overwhelming sentiment. This is not totally uncharted territory for markets (not analogous to the economy). In fact it reminds me of 2008 and the whipsawing sales amid the bank failures etc. The question is: Will the Fed intervene and go to war with Trump if this persists. Developing
XTOD: Stanley Druckenmiller thinks tariffs are the lesser of two evils. We have to do something given the current situation the United States finds itself in.
XTOD: How does the media strike fear in investors? Here’s an example from my feed this morning implying that tariffs could lead to a long and deep depression and the rise of another Adolf Hitler: “The Smoot-Hawley tariffs of 1930 helped lengthen and deepen the Great Depression and led to the collapse of global trade, which hit German exports. That in turn contributed to the downturn that helped Adolf Hitler recover from a false start in German politics, as William Shirer documents in The Rise and Fall of the Third Reich.”
XTOD: You can, simultaneously:
- Dollar cost average, remain long-term optimistic.
- Not panic.
- Enjoy the outdoors, kids, good food, etc.
- Realize how unbelievably destructive and unnecessary this is.
https://x.com/CGasparino/status/1908929935294480588
https://x.com/APompliano/status/1908885557419135409
https://x.com/Rick_Ferri/status/1908854259824906479
https://x.com/morganhousel/status/1908173256940822573
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