Chartbook 369 Are we on the edge of a major financial crisis? Trump's Chart of Death and why bonds not equities are the big story.

The stock market sell off triggered by Trump’s grotesque Liberation Day has been dramatic and has added intense urgency to the sense of polycrisis many of us have been feeling in recent months:

disconnected shocks from different directions all compounding each other, the sum worse than the parts.

This remarkable report from Bloomberg summarizes the mood in the market:

“I've learned to cope with stress over the years,” says Richard Steinberg, “but at 4 o’clock in the morning, I'm up awake thinking about these things.” At Focus Partners Wealth in Boca Raton, where Steinberg is a senior wealth adviser, the calls from worried clients keep coming, he says. He tries to calm them down but acknowledges he himself is frustrated — “very frustrated” — by Trump’s approach. “It lacks a level of sophistication.” Over in midtown Manhattan, Jay Hatfield, the CEO of Infrastructure Capital Advisors, was feeling much the same, just with a large dose of anger mixed in. “This is unambiguously stupid.” He calls the big tariff chart that Trump brandished at the ceremony last Wednesday “the chart of death,” and when he saw it, told himself to check his anger and just focus on unloading risky assets. By the end of Friday, he had cut about 40% of them from the mutual funds he manages.

The stock market shock reflects a variety of things: the unwinding of the Mag-7 tech boom, a sobering up about Trump 2.0, pessimism about prospects for many globalized US firms and the likelihood of a recession.

The movements of the market generate a feeling of panic and the world collapsing. For better off Americans, this is felt directly in our retirement account. More generally, Americans, whether they own stock or not, are enrolled in a view of “the economy” that centers the stock market. So if the stock market is doing badly, “the economy” is doing badly.

But, it is important to be clear about lines of causation and above all the timeline.

The recession story will take months to unfold.

The longer-term effects of Trump’s protectionism will take years to make themselves felt (see Brexit).

The break marked by Trump’s grotesque policy-making is epochal. As Trump promised, though not for the reasons he imagines, Liberation Day will go down in the history books.

But, if you are worrying about something more immediate i.e. a financial crisis spinning out of control this week, then the market to focus on is not the stock market, but the market for bonds (aka fixed income) and ultimately this means the giant Treasury market with $28 trillion outstanding.

At one end of the spectrum, high-yield or junk bonds are crucial because they are effectively a market where bankruptcy risk is priced very explicitly. The stock market reflects profit expectations. You get dividends depending on profit. Bonds offer you guaranteed returns, so long as the business remains in business. If you are willing to take a flutter on an exposed US retailer like Sacks, you can earn almost 20 percent yield right now. That is because there is a high chance that Sacks will go under. Unsurprisingly, as recession anxiety has surged, Junk bond yields have surged in recent days.

This is very telling as to the worried state of US investors and businesses, but it does not pose an immediate systemic risk. This is how financial markets should function, repricing risk. So long as investors have strong hands i.e. are not making highly leveraged investments, price adjustments are functional.

But not all markets are equal. The truly systemic bond market is the US Treasury market, all $28 trillion of it. In the current moment it is vital because it simultaneously serves three functions: as a safe haven, a political target and a piggy-bank.

Treasuries are a general-purpose safe haven. Investors who are selling their shares, driving stock market prices down, have to park their cash somewhere. The obvious place are US Treasuries. In the “normal” course of a stock market correction, we would expect to see bond prices going up as stock prices go down, as investors shuffle from one to the other. As bond prices go up, the yield (the effective interest rate) goes down. This tends to lower interest rates and ease pressure on businesses. This is the see-sawing, balancing effect of markets operating across assets. Again, it is painful, but it is good news. People take losses. But it suggests that the financial system is still working. As Katie Martin commented in the FT in the last few hours, this is the one to watch.

As the Wall Street Journal commented 10 minutes ago (I kid you not), the market is hard to read right now because longer term bond yields have to price in inflation, and Trump’s tariffs are clearly terrible for inflation. So right now we have safe-haven demand driving Treasury prices up (causing yields to come down) and inflation fear driving Treasury demand down (causing yields to go up). All of us are trying to read through the fog.

In our current, politically-driven crisis, this offsetting movement in bond markets, also matters because if they move in the right way, they may allow Trump and his cronies to declare victory.

Declaring victory matters, because one thing we know about foolish bullies is that they cannot withdraw without saving face. They need off ramps. He may no longer care, but the polling has not been kind to Trump’s first few months in office.

Trump’s mob continue to struggle to provide a coherent script for the chaos their boss is unleashing. They have tried claiming that crashing the market is all part of some kind of long-term plan. But no one buys it. On the other hand, Trump has consistently called for lower interest rates. And, guess what, when you induce a panic in the stock market and folks run into Treasuries, that will tend to lower rates. It will also tend to dump the price for oil, another thing Trump has called for (along with more production .. go figure!). We might even see lower petrol prices, lower interest rates and cooler inflationary pressure - assuming the tariffs dont wreak too much havoc! All the work, of course, of the boss’s genius. Thus a recession may be recast as a demonstration of Trump’s visionary genius or even a long-term plan to rebalance America in favor of the working-man. As a wise friend always reminds me, never underestimate the dialectical imagination of the right (Ted here’s looking at you).

In any case, if the 5-dimensional chess narrative of Trump doom takes hold, it will likely start with the Treasury market and the interest rate.

In both these scenarios the feedback loops of the bond market serve as a stabilizing device - one working via financial markets on investor anxiety, the other on the egos of the Trump crew.

But there are also other possibilities. In terms of short-term, high intensity crises these are the ones to look out for. I am NOT saying these are likely. But they are there and here are some of the signs to look out for:

Rather than investors piling into Treasuries driving the price up, instead, we could see investors selling Treasuries en masse. There are two possible scenarios, one is more fin-fi than the other.

One very real scenario, which played out in March 2020 (Shutdown), is that investors around the world are desperate to get hold of liquid dollars. Foreign investors are facing panic about tariffs. Hedge funds are engaged in complicated leveraged trades, have borrowed money and now face margin calls from their creditors. To get their hands on cash, these actors sell the assets in their portfolios that are most readily saleable and command the best price, which are (see above) US Treasuries.

If there are enough panicked refugees from the stock market piling into Treasuries as other people are trying to sell Treasuries to get their hands on cash, this rotation of assets causes no problems. But, as March 2020 demonstrated, the volume of sales in the Treasury market can be huge and the market structure is opaque and fragile and a meltdown is not out of the question. In that case, a true panic ensues. If Treasuries are falling in price, as well as equities, then there is no safe hiding place and the panic becomes comprehensive. It is like a mega bank run on the entire financial system.

At this point we would expect to see the Fed step in, not just to lower interest rates, as is now commonly expected, but do more drastic interventions. These interventions would center on buying Treasuries. In March 2020 Fed purchases of Treasuries on peak days ran in excess of $100 bn per day.

This has the effect of flushing cash into the system and at least as far as the financial markets are concerned that is a tonic. If everyone has liquidity, everyone can stop worrying about liquidity. As we saw in 2020, panic can disappear as quickly as it arose. Amongst permabulls, who in 2025 are still encouraging investors to keep the faith in the financial markets, you can expect to see frequent references to 2020-2021.

But let us indulge the fin-fi impulse for a moment. What if providing liquidity does not cool the panic? What if investors, both American and foreign decide, that they no longer wish to hitch their wagon to the empire of the mad king? What if they decide that the US is indeed exceptional, but that it is exceptional in rather nasty ways? What if the report in the UK Telegraph is more than mere rumor and Germany’s leaders are seriously considering pulling its remaining gold reserves out of the USA, because of Trump-risk? Well in that case, holding billions in dollars newly created by the Fed does not give you the security you want.

So you sell the dollars. You just want out of the mad house.

This, Ladies and Gentleman, would be the truly big disaster. It would be a sell out not just of US stocks. Not just of US fixed income. But of dollar assets tout court. This would be the long heralded crisis of the dollar.

I don’t think it is likely. Both in 2020 and 2008, even as major pillars of the US financial system wobbled, there was no general rush out of dollars. People wanted liquidity IN DOLLARS.

Right now, we are two stages away from anything like this unfolding. But if you want to indulge your gothic fin-fi imagination, this is the sequence to look for:

Panicked selling of equities.

Ripple effects of uncertainty that cause large-scale selling of Treasuries.

A flip in the Treasury market from safe haven buying to piggy-bank selling, overwhelming the market makers → Treasury prices falling, yields rising and the market misfiring.

Treasury market dysfunction forcing the Fed to step in, to massively boost dollar cash liquidity.

Rather than bolstering America’s centrality as the safe haven in a storm, the Fed’s action triggers a fall in the value of the dollar.

Its a grim cold spring in NYC and here we are again. Thanks to David Wallace-Wells and someone I dont know for sending this humorous tweet!

This time, I intend to stick with the book!

---

I love writing Chartbook. I am delighted that it goes out for free to tens of thousands of readers around the world. What supports this activity are the generous donations of active subscribers. Click the button below to see the standard subscription rates.