Chartbook 374: As Trump triggers "sell America", will the result be "stage 4", the politicization of financial markets?

Everything was selling.

On Monday - to get you set for the week ahead - Chartbook 399 outlined the stages:

1. First shares sell.

2. In a normal “risk off” mood, folks shift from shares into the safe haven of bonds. But when panic takes hold, investors sell both shares and bonds.

3. And when it gets really, really bad, they may want to exit America altogether, in which case they sell all three: shares, bonds and the dollar. Equity markets plunge. Yields surge as bonds sell off, but rather than rising, to reflect the better interest rates, the dollar falls.

Stage 3 is what happens to Emerging Markets when they get into serious trouble. Higher interest rates, rather than attracting new money, serve as a signal of panic.

On Thursday that is what was happening on Wall Street. The message was “sell America”. So how far are we from stage 4?

4. In stage 4 in embattled emerging markets under massive financial pressure, one of the common reactions of populist leaders is to tear away the veil of neutrality that usually shrouds the markets. They call foul, denounce speculators, rumor mongers and the “interest rate lobby”. How far is the United States from that stage?

There are significant signs not just of market action, but of political pressure building in US financial markets right now. But, first lets explore the market action itself. It has been quite something.

Torsten Slock of Apollo saw three sources of selling pressure in US financial markets.

1. With the yen, euro, and Canadian dollar strengthening at the same time, this could be foreigners selling US Treasuries.

2. With the VIX at elevated levels around 50, there is a lot of hedging activity going on, and it could, therefore, be risk reduction among large asset managers managing rates, credit, and equities.

3. With almost $1 trillion in the basis trade, it could be an unwinding of the basis trade among levered hedge funds.

As investors dumped bonds, the surges in Treaury yields were amongst the largest ever seen. Markets that normally move slowly, have been subject to huge volatility.

To find ourselves comparing bond markets in 2025 with the situation in 1982 is alarming, because the early 1980s were the era of the Volcker shock, when dollar hegemony was being reimposed, interest rates were three times as high as today and the US economy was undergoing the most wrenching period of structural change in modern history.

Last week, the anxiety was hugely compounded by the fact that anxiety spread from the bond market to the US currency itself. Normally, when bond prices fall and yields surge, that gives investors a buying opportunity. Expecting “reversion to mean”, international portfolio managers come into the market snapping up the bargain prices on Treasuries, driving the dollar up. Knowing this, fx markets respond by revaluing the dollar, producing a very tight correlation between relative US yields and the exchange rate of the dollar. Higher yields, higher dollar. This week that correlation broke down. As bonds sold off and yields surged, investors exited the dollar too.

That is disorientating in its own right and will likely produce fallout for strategies premised on the assumption of a strong positive correlation. At a deeper level it reflects the fact that any assumption of a “reversion to normality” is beginning to fray. In this new regime, a lower bond prices and higher yield do not signal a buying opportunity. Why assume that in the long-run you are bound to want dollar assets.

The commentary from Europe is telling:

As Zerohedge reported, Deutsche Bank's global head of FX, George Saravelos, argued yesterday that despite President Trump's reversal on tariffs the damage to the USD has been done: the market is re-assessing the structural attractiveness of the dollar as the world's global reserve currency and is undergoing a process of rapid de-dollarization.

Reserve currency alternatives such as the EUR may find that their fiscal space is going up, but they may also be burdened with greater currency appreciation that requires the respective central banks (ie the ECB) to turn more dovish.

Our concluding observation is that given the centrality of the dollar to the global financial system there are likely to be many unpredictable consequences to the epochal shifts in capital flow allocation that have been unleashed.

We think the process of de-dollarization has more to go, but we are keeping a very open mind as to how this process plays out and what the ultimate new equilibrium in the global financial architecture will be.

In light of the Trump regime, would you not rather be in something safer? Gold surged. There was also strong demand for Bunds, German government debt. As dollar yields spiked, Bund yields fell. This despite the new German government’s plans to issue huge volumes of new debt. (With yields half those in the US they have plenty of room to do so!)

After years of talk about “American exceptionalism”, “sell America” was a jarring new theme. Serious questions are being asked about the future of the “dollar system”. No one has an obvious alternative. Safe haven assets like gold or German debt are nowhere near large enough. But if the $29 trillion US Treasury market is going to gyrate the way that it has been doing in recent days, and the correlation with the dollar has broken down, the basic anchors of the dollar system are beginning to tear loose.

What comes next? Does this intensify? Will the storm pass? We don’t know what the Trump administration is capable of. Is the Treasury market the one force that can reign in the President? What about the Fed? And how long can this remain a technical discussion? How long can we blithely talk about the Treasury market acting as a constraint on Trump, before MAGA strikes back as it likes to do against its opponents?

The markets entered a calm patch on Friday. The indices rebounded. But the reason for that calming is telling. Susan Collins of the Boston Fed gave an interview to Claire Jones and Kate Duguid of the Financial Times in which Collins said:

The Federal Reserve “would absolutely be prepared” to deploy its firepower to stabilise financial markets should conditions become disorderly

That was what the markets needed to hear. The words from Collins gave added momentum to the incipient recovery that had begun earlier on Friday morning. So at least on one reading that is where we are at: the markets are hanging on the words of the Fed.

So what might trigger a Fed intervention? What does Collins mean by “disorderly”?

The market action in the last week has been extraordinary. Conventional correlations have broken down. The swings have been wild. But the markets have so far continued to function. Price action has been crazy, but at any given moment sellers have been able to find buyers. Anyone willing to buy is clearly in a good position right now. But the prices offered by buyers, and the prices at which people want to sell have not been too far apart (the so-called bid-ask spread). Markets become “disorderly” when the bid-ask spread shoots up, sellers and buyers cannot reach an agreed price and liquidity dries up. There may even be “gapping” where, for an interval, there is no price. In that case large differences can emerge between the price set at t-1 and the price that emerges at t+1 in the future. Think of an “air pocket” when your airplane suddenly plunges. Or think of selling a property with few if any comparable properties. How do you set the price? What gives you a floor? When that degree of radical uncertainty enters trillion-dollar financial markets, it is terrifying.

This is what Jamie Dimon was referring to with his comment about a “kerfuffle” in the Treasury market. Were it to come to that, Dimon’s bank would be more than a bystander. JP Morgan is a key player in the Treasury market and Dimon confidently expects the Fed to step in to back up the market.

The last time that happened, the last time there was really serious disorder in the US Treasury market was in March 2020, in the first weeks of the Covid shutdown. It has so far not appeared following Trump’s Liberation Day. But if you want to find signs of stress they are certainly there:

JP Morgan’s own trading desks is warning of air pockets.

“JPMorgan's trading desk noted ominously that de-leveraging and deterioration of macro sentiment has morphed into a situation in which liquidity dynamics are now meaningfully impaired in liquid markets.

The lack of liquidity could result in price moves that are outsized relative to the amount of flow that is actually going through.

This is in BOTH directions - significant bounces can take place ‘on air’ while it could similarly lead to unruly market outcomes to the downside.

This is important context as we head into risk events such as UST auctions, the FOMC Minutes, CPI, and, realistically, just every minute of the trading day now as we are subject to Tariff tape bombs.”

Bid-ask spreads (how far buyers and sellers are apart) in equity markets have surged.

The Treasury market has continued to function. The auction of 30 year debt on Thursday gave no signs of crisis. But here too there are signs of tension.

One interesting development is the behavior of the market for TIPS.

Yields on Treasury inflation-protected securities, or TIPS, have risen even more than those on regular Treasury bonds. The 30-year TIPS yield, for example, has gone up 41 basis points to its highest level since 2008, while the regular 30-year yield is up about 32 basis points at the highest level since January. … The market for TIPS is smaller than that for other Treasuries, with about $2 trillion outstanding versus about $20 trillion of regular notes and bonds. As a result, even when there’s a reason for inflation expectations to drop (In this case because of the expectation of a recession that will crowd out the cost-push pressure of tariffs, AT), once they start falling, “liquidity starts to dry up and the TIPS market dislocates from fundamentals,” Pond said. A Bloomberg TIPS index lost 2.3% this month through April 10, while an index of comparable regular Treasuries lost about 1%. “We’ve seen this movie before,” Pond said, pointing to the financial crisis in 2008, the March 2020 Treasury market liquidity crisis and — to a lesser degree — the regional banking crisis in early 2023.

What is happening in the TIPS market is a reflection in microcosm of the pressures building in the oceanic $29 trillion Treasury market. As the FT reported:

Analysts at JPMorgan said market depth, a measure of the market’s ability to absorb large trades without significant shifts in price, had significantly worsened this week, meaning even small trades were moving yields significantly.

Now, these comments come with health warnings. The bond market is not merely a technical arena. It is a politico-economic battlefield. And as tension has built up, the politicization to become more acute. So far, it takes at least three forms:

• Lobbyism

• MAGA backlash

• Liberal fear.

As for lobbyism look no further than the suave commentary on events offered by Jamie Dimon. When the CEO of JP Morgan projects disorder in the Treasury market and a Fed intervention, he is not merely offering a technical analysis. He has an agenda, which becomes clear if we read a larger excerpt:

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said he expects “a kerfuffle” in the US Treasury market that prompts a Federal Reserve intervention. “There will be a kerfuffle in the Treasury markets because of all the rules and regulations,” Dimon said Friday on an earnings call. When that happens, the Fed will step in — but not until “they start to panic a little bit,” he added. … Dimon’s comments Friday build on ones he made this week in his annual shareholder letter. Certain rules treat Treasuries as “far riskier” than they are, he wrote, adding that restrictions on market-making by primary dealers, together with quantitative tightening, will likely lead to much higher volatility in Treasuries. “These rules effectively discourage banks from acting as intermediaries in the financial markets — and this would be particularly painful at precisely the wrong time: when markets get volatile,” Dimon wrote.

Since 2008 Dimon has been pursuing a campaign against burdensome regulation and oversight. And that campaign continues this week.

As for MAGA backlash, all you have to do is to put your ear to the ground on twitter. One of the telling things about the current moment is how centrist liberals like ourselves talk about the financial turmoil with a certain glee. We do so because the Treasury market is functioning as an abstract and overwhelming force to constrain Trump, in the way that democratic and legal pressures are failing to do. But don’t underestimate the MAGA team. They are folk Schmittians. They know that liberalism’s most potent weapons are moralism and markets. They look at the widely cited statistics on collapsing consumer confidence and surging inflation expectations and they break them down to show that it is the Democrats who are panicking.

Within the markets themselves, there are politicized rivalries between operators. In the quote below you see those trading the “front end” of the yield curve, whose narrative of the last week has been less agitated, sneering at “Unhinged Liquidated 10 Year Emotional Basket Case Hedgies with Liquidity Issues”. The point here, I think, is that longer bonds which have born the brunt of the sell off, are the more commonly-used assets used for general purpose financial engineering.

This is PlungeProtectionTeams full banner on Twitter:

As many in the Trump-aligned finance camp see it, the Fed is sitting on its hands deliberately raising pressure on the Trump administration.

Surprisingly, the Fed has so far refused to even consider doing any serious intervention. Quite the contrary, as NY Fed president John Williams said...

• *FED'S WILLIAMS SAYS CURRENT RATE STANCE REMAINS APPROPRIATE

Which is amusing considering the Fed was "jumbo" cutting last September when financial conditions were massively looser and when forward inflation expectations were much higher than they are now. So why is the Fed not cutting now? This is also simple: the Fed, which has become extremely political - recall former NY Fed president Bill Dudley penned an op-ed during the peak of the first Trump trade war with China - in which he urged his former Fed colleagues not to stimulate and to crash the economy, in order to destroy Trump (no we aren't joking) (No they really aren’t, AT). But an unconditional denial of easing to Trump would be too obvious (especially one which is based on something as flimsy as UMichigan inflation expectations, the very same thing that Fed Chair Powell said during his last FOMC meeting to completely ignore), especially if and when the market went haywire and people start asking questions why the Fed is refusing to move as things start to break (like the basis trade for example).

Zero hedge, the website offering this colorful reading of Fed v. Trump politics, is a favorite site for market gossip and “alt-right” commentary. It was recently invited to join the White House press pool.

Market news, however, technical is not unpolitical! And it is not mere lobbying either. Nor is it hyperpolitical i.e. merely sound and fury. It is fully political. What is at stake, after all, is the ability of the giant Treasury market to discipline Presidential privilege. And in MAGA America we are playing for keeps.

That realization has also come home on the centrist side. Which brings us to #3, “Liberal Fear”.

As Bloomberg reported in a piece that got buried amongst the fallout from the markets:

A JPMorgan Chase & Co. strategist whom Jamie Dimon has lauded as “one of our firm’s great thinkers” is taking an unusual approach to highlight fears on Wall Street over speaking out against the Trump administration. On Monday, before Donald Trump pivoted on tariffs, Michael Cembalest ended a 45-minute client presentation about the levies with a caveat. After calling the president’s plan a “sledgehammer, brute force” approach, the JPMorgan analyst said he withheld certain material with his firm and colleagues in mind. His remarks built on a report from last week in which he voluntarily blacked out several passages. He titled it Redacted: Straight talk from the CEO front lines on Liberation Day, invoking Trump’s branding for the day the tariffs were announced (a video of his talk is also on the bank’s website).

“This is the first time I’ve ever had to do a call where I had to think about the things that I was saying, not just in terms of how they reflect our views on markets and economics,” Cembalest said in his presentation, adding that he had never before taken such considerations into account in a career spanning more than 30 years. “People are being held accountable for their views and the things that they say in ways that they probably shouldn’t be,” he said. “So I’ve said most of what I wanted to say on this call — but not all of it.”

Cembalest didn’t specifically reference Trump in the closing remarks of his presentation. But they were made against an unmistakable backdrop. The administration has targeted large law firms, universities and media outlets that it views as adversarial to its ideals and objectives. In doing so, it has upended long-held norms around the US government’s relationship to those institutions.

On Wall Street, Cembalest is a widely followed senior analyst, known for refusing to invest with funds tied to Bernie Madoff because his group couldn’t reverse-engineer how the financier made money. A key associate of JPMorgan’s billionaire whisperer, Mary Erdoes, he doesn’t shy away from controversial takes. Still, Cembalest highlighted in his Monday presentation that he wanted to include criticism from a wide-ranging group of voices about the tariff-calculation formula — but he said he was told not to do so. “I had a bunch of their pithy and critical responses,” he said on the webinar. “Our compliance people didn’t want me to include them because they felt they were one-sidedly negative.”

So this is the agenda for next week. Again there are three points:

1. Do markets begin to malfunction, not in the sense of gyrating up and down, but in the sense of no longer forming prices in an orderly fashion?

2. Does the Fed intervene?

3. Does the pressure of politicization of markets and market commentary continue to intensify, further undoing the naturalized legitimacy of the dollar system?

To see how far we have already come, just trying saying “Washington Consensus” a few times. See how oddly that tastes now? And remember how easily “New Washington Consensus” (Jake Sullivan’s boast) tripped off the tongue only a short while ago.

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