Trade War Is Ramping Up And China Is Putting The Screws To America In Bond Market And With US Dollar - Got Gold?

Trump has blinked on his tariff tantrum with almost every country but has gone all in on China. This weekend he blinked when it came to tariffs on chips, smart phones and computers.

All this blinking is because the bond market has been shocked into a panicky situation. Trump may have been able to ignore the roller coaster in Wall Street stocks, but not the pressure in the bond market.

He has made a tactical error, although nobody on his team will admit it publicly as they all insist he has all the cards and there won’t be a recession. But, the tariff tantrum has highlighted to all foreign investors that the bond market is vulnerable and on shaky ground.

This is all happening before the $9 trillion in debt has to roll over this year from lower interest rates to higher. That ticking time bomb is very troublesome because the supply of bonds won’t change as the GOP lead House and Senate want to keep spending extremely high and to raise the debt ceiling by $4-5 trillion.

DOGE has proven to be a pretty serious failure when it comes to cutting spending. On the campaign trail, Musk pitched that he would save $2 trillion, then revised that down to $1 trillion. Just the other day he was in Washington to announce that actually it is only really around a couple hundred billion. That doesn’t even factor in the legal costs for his actions.

It doesn’t look like Musk’s political career is going to last much more than a month or two longer as he comes to terms with the reality that politicians on the left and right are spending and debt junkies. And trying to change that, even with the GOP controlling everything is a nightmare.

With the spending and debt fiasco in Washington, made clearer by the desire to raise the debt ceiling to an unprecedented level. Then adding on the $9 trillion gorilla in the room, plus the unsustainable cost of servicing the debt. It is clear that the supply of debt has nowhere to go but up in an alarming way.

Trump’s trade war and blinking has sent out the Bat-Signal to the world that there are massive problems in the bond market. Which has caused foreign owners of American debt to sell and drive up yields, precisely when Trump’s mass deportations and tariffs are causing growth and inflation problems that require lower rates.

Now that Trump has blinked on tariffs and is cutting out exceptions, it is likely not to cool the panic that is building in the bond market. It has shown that his tough talk is a bluff and his cards are not nearly as strong as he thought they were. Putting the genie back in the bottle when it comes to the problems he has caused in the bond market won’t be easy.

Foreigners own way too much debt considering the remarkably high supply, so they are divesting. The biggest seller has likely been China, with their selling causing others to follow suit. It has become such a serious problem that some are even talking about freezing accounts of the Chinese to stop them from selling.

Doing that would be a horrible mistake, but it is hard to put it past them with Peter Navarro having the ear of Trump. He has some seriously flawed ideas about tariffs and trade wars, but for the time being is still part of the Trump team.

What is happening in the bond market can’t continue or it will have systemic issues. There already has to be some highly leveraged institutions that are in a panic. It would not surprise me that if the bond market continues to be in panic mode that we could see some major problems for the financial sector.

On Friday, I took a starter position in a leveraged ETF that goes up if there are financial sector problems. My plan is to keep buying more in case the bond market problems boil over into a financial sector problem.

The vast majority of my positions are in gold stocks, but I think it is prudent to also be holding some positions that go up if there are problems in the bond market.

I have also bought the Tesla leveraged bear ETF five times. Three of those buys are under water, another is even and the fourth is in the green. It is not a big position, but I am comfortable with it because in addition to what is happening with Trump’s tariffs, the company has other issues.

Elon Musk and his efforts with DOGE have alienated him and Tesla with a lot of his customer base. Not only in America, but in Europe and other countries. This has slowed down sales and they also have big costs kicking in from recalling Cybertrucks because of all things the glue they use to hold some of the exterior metal together is not working well.

They also have issues with China regarding selling their EVs in that market and needing raw materials and parts to build their vehicles. The stock hit a Death Cross on the stock chart on Friday with the 50-day moving average going through the 200-day at a steep angle so it looks to have plenty of downside.

It doesn’t look like the only thing troubling the bond market is tariffs alone. Although few are talking about it, the mass deportations are worrisome as well. When they started the economy began slowing down and inflation kicked in, the tariffs only made these trends worse.

A big problem that seems to have caught the attention of the bond market, consumers, CEOs and economists, something that I have been reporting on for months, which is growing stagflation. It could easily turn into the alarming kind if the economy drops toward a recession or dips into one, combined with the potential for a second wave of inflation. We could be looking at 4-5% of stagflation, which won’t be easy to get under control.

The Fed hates stagflation because it forces them to either throw the economy, jobs and stock market under the bus, or inflation. They have sent out the message that they are absolutely prepared to help stabilize financial markets if conditions get disorderly. In Fed speak that means that they are worried that financial market conditions could get disorderly.

But, their tools are limited, if they cut rates, then inflation blasts off. The financial markets they are talking about have to be the bond market, and the only way they can help that situation is to get back into the QE business and try to spur bond buyers into action or become the buyer of last resort.

Either of these would be a clear message that the financial sector has problems, which makes me confident it is a good time to own an asset that goes up if the financial sector hits headwinds.

What likely caused the Fed to send out the message that they are ready to act is that foreign sellers (likely China that is causing others to sell as well) is that the US dollar is under pressure along with bonds. When foreigners sell, they receive US dollars, and if they have concerns about the health of the bond market, they don’t want to hold US dollars either and they sell those as well.

While all this is happening, gold is blasting off to hit new record highs, so it is under heavy buying pressure. Which is the final piece of evidence one needs to confirm that it is foreigners selling US bonds and US dollars, and feeling a lot more comfortable owning gold.

One of the key reasons I have been extremely bullish on gold is because America and the world is in a Death Spiral of Debt. Which is getting much worse for the largest debtor, America, with the cost of servicing the debt. Even if Trump completely backs down on tariffs, the debt crisis will get worse, if he doesn’t it could turn into chaos.

The government spending and debt ceiling fiasco suggests that there are no plans to slash spending to address the Death Spiral of Debt. Which means the cost of servicing the debt will grow much higher than its current level which is consuming over 20% of the income from taxes. Especially considering the ticking time bomb from the $9 trillion of government debt that needs to roll over this year to higher rates.

When the bond market went haywire after the tariffs were announced, Trump blinked and announced a 90-day pause. Trade agreements are complex and take time and plenty of lawyering up, so it is highly likely the 90-day period will come and go with few if any trade agreements concluded.

Of course Trump and his key team (Navarro, Lutnick and Bessent) are bragging about a long list of countries frantically calling to make deals, but that is likely a smokescreen. It is unfathomable that they can quickly negotiate and sign agreements as Trump has imposed them on every trading partner.

Making it even more challenging is that Trump has shown every trading partner that he likes being a bully. Plus, he wants one-sided agreements that not only balance trade deficits, he also wants compensation for past imbalances. How is it even possible to balance deficits with most countries?

A perfect example is a country like Vietnam, how are they supposed to buy as much from America to balance the trade deficit, as America buys from them. It is also impossible for them to pay reparations for past deficits. Trump’s bullying actions to fight a trade war with every trading partner is beyond economically insane. But that is what he has done.

Maybe the biggest stumbling block to negotiate trade deals is that Trump has proven himself to be untrustworthy. He negotiated the USMCA with Canada and Mexico during his first term, also boasting about it as the greatest trade deal ever. Yet, now ignores that boastful proclamation and says that Canada and Mexico have been abusing America. And seems to want to renegotiate his greatest trade deal ever.

Countries that want to negotiate with a bully that can’t be trusted, for one-sided trade deals, and need to balance trade deficits, while also paying for past deficits, need their heads examined. They may want to talk, but that doesn’t mean they can come to an agreement. My guess is that as time goes on, Trump and his team will not be able to ink deals and will ultimately have to abandon his trade war.

In the meantime, the clock is ticking in the bond market and I doubt that even if Trump completely abandons his tariff tantrum that they can avoid the problem of letting the genie out of the bottle by highlighting to foreigners that the bond market is vulnerable.

Trump’s mistake to highlight to foreign investors that the bond market has serious problems has caused them to sell bonds and US dollars. Now that it has started, I doubt they will change course and will continue buying gold as they sell bonds and US dollars.

It is the smart thing to do considering the Death Spiral of Debt, unsustainable growth in the cost of servicing the debt, the $9 trillion gorilla in the room, and the potential for problematic stagflation.

While central bankers load up on gold, there is a wonderful opportunity for investors to outperform them by buying gold miners. The high-cost gold miners are making over $1000 per ounce of gold they mine and the low-cost gold miners are selling gold for double of what it costs them to mine gold.

The gold miners are free cash flow machines and that will only get better as the price of gold goes higher. With all that is happening, it would not surprise me that gold exceeds $4000 per ounce this year. Which means gold miners will be adding cash to their balance sheet at a greater rate than companies in any industry.

It will also give them the cash for mergers and acquisitions to increase production and replace their current production with new deposits. The problem is that there aren’t a lot of smaller gold miners for the majors to buy that will move the needle for them. Sure the junior gold miners and mid-tiers have more options, but not a vast amount.

Which means that the gold miners are going to have to look at gold mine developers with high-quality projects or gold explorers with important discoveries. The value of those kinds of assets should soon ramp up because the menu for them is tiny.

The central bankers can look after driving the price of gold much higher. Investors have tremendous opportunities in the gold miners, gold mine developers with high-quality projects and gold explorers with important discoveries.

Ultimately, I have high conviction that the world is heading toward the Gold Standard 2.0. And that the gold stocks haven’t even started to price that in and are still trading at valuations consistent with gold trading much lower. Which puts them in the position for remarkable gains (lifestyle changing gains) for investors.

Gold is already in the sweet spot, next up is the gold stocks joining the party.

All the best,

Allan Barry Laboucan