Trump Slump: Making sense of bond market chaos
Not even sure where to start or end, but let’s begin at the beginning. The forces that brought Trump to power could very well be the ones that undo him. High inflation, for instance, could break the support behind him—not all of it, but enough to defeat him. That’s assuming, of course, there are no dirty tricks to cling to power.
Trump’s claim was that a trade war would happen and America would win. But when faced with reality, he blinked. Big talk, but ultimately all talk. The result has been a chaotic, dysfunctional approach to trade. Do you really think companies will want to invest in America when policies change every five minutes? The damage to America’s reputation is significant.
The good news is that investors seem willing to tolerate that risk—for now—outside of hedge funds unwinding their bets. This has led to the stock market falling, bonds falling, and equities with the US dollar narrowly avoiding the fallout—for now. It seems the serious people have done their job. I can’t stress this enough: the start of something far worse could have happened. In simple terms, Trump decided to throw a milkshake over everybody. It could have been so much worse—he could have thrown two or three milkshakes. Who knows, maybe this chaotic approach to trade will lead to something even worse. The risk still exists, and everyone is looking nervous.
The bad news, however, is that this whole escapade has dented confidence, and that’s not good. Some more good news: Trump appears to have folded under pressure—sort of. The bad news is that the markets haven’t realised Trump hasn’t done a full U-turn, only a partial one. It’s like shock therapy for the economy, and people are going to respond.
All of this is turning into a mess, causing shockwaves around the world. Borrowing costs are up everywhere except for a few nations. The risk of a recession remains high, and the risk of something else—something worse—remains high too.
When the going gets tough, Americans often seem to have little stomach for pain. This, in plain terms, weakens their negotiating hand. It reflects an overestimation of power and a naïve approach to negotiation—blinking first when things get hard or when markets get a bit upset. It’s sheer incompetence to play with trillions of dollars this way. Congress and the Senate could put an end to this, but instead, they choose to play politics. Inaction, ignorance, and the excuse of “just following orders” are not valid defences.
If anyone is curious why politics matters, this is an excellent showcase. If you put clowns in charge, you get a circus. These movements in the markets do matter—you may not notice it now, but you will. Let me end with an example.
Pensions rely on the stock market and bond market. That’s how pensioners generate income. They lend money to companies that build, invest, and grow. If companies don’t grow, they don’t hire, people get fired, and, well, you know the rest. In return, pensioners receive a small income for retirement. This is why, when workers do well, older folks do well too. People can retire and buy things like a coffee. When the money disappears, think of all the jobs connected to servicing pensioners’ needs.
Blaming the stock market and bondholders for politicians’ mismanagement is misguided. The real problem lies in how wealth is distributed. Too few have too much, and too many have too little. This is a political choice, and again, it’s why politics matters. Of course, everything has a trade-off—higher taxes, for one
Of course, addressing these issues comes with trade-offs, such as higher taxes, but those are necessary steps toward building a fairer and more stable system.