Trump Blinks First Driving Wall Street Stocks Higher But Bonds Are Still Worried And Gold Is A Rockstar

Trump blinked when he realized fighting a trade war with every country in the world might not be such a fantastic idea. Instead he decided to drop the gloves with China, while he didn’t change his stance on Canada and Mexico. He gave all other countries (including the penguins on Heard Island and McDonald Islands) a 90-day reprieve.

Last night, in a speech he gave, he had no signs of relenting on his trade war to punish American consumers with tariffs that are really taxes. The stock market correction since he announced the tariffs didn’t change his mind, but it looks like the dramatic selloff in the debt market this week certainly caught his attention as the yields jumped up.

Wall Street stocks rejoiced on the news of Trump blinking. After the DJIA had dropped 5000 points since announcing the tariffs, it came screaming back by over 3000 points with a 8.28% rally. The S&P 500 was even stronger as it was up 9.87% and NASDAQ was even more bouncy with a 12.18% gain.

Since announcing the tariffs, Wall Street stocks have been swinging like penny stocks, certainly not what one expects from Wall Street stocks. Investors and stock traders reacted like the trade war is over, but it is important to point out that the trade war is still on with America’s three largest trading partners, Canada, Mexico and China.

US debt is what had to have spooked Trump and his key advisors (at least the economically sane ones) with bonds getting hammered over the past few days. Although Wall Street stocks rebounded with abandon, the debt market continued to be under pressure.

Usually when Wall Street stocks are getting hammered, investors pile into bonds, not this time, they are heading for the exit. The intense selling pressure was getting plenty of seasoned investors worried, as it looked like the debt market was in panic mode. That could lead to extremely serious problems such as highly leveraged institutions going under.

Speculation amongst many, including me, was that China was blowing out their bonds to retaliate against Trump’s aggressive tariffs on them. The fact that Wall Street stocks rallied in a remarkable way, and the bonds continued to be punished today is pretty strong evidence that China has been selling, causing others to do the same and drive yields higher.

The 30 year came back significantly today, while the 10 year, 5 year and 2 year hung on to most of their losses. Since the tariffs were announced, bonds have been either trading like a big holder (such as China) wants out, or that inflation is about to go much higher. It could be some of both as the winds of inflation and slower growth are picking up momentum with business owners, CEOs and consumers.

They are signalling that a powerful bout of stagflation is in the cards, I think it is boiling into a serious problem. The stagflationary winds have been gaining strength long before the tariffs and Trump blinking won’t change that with mass deportations and tariffs on America’s three biggest trading partners slowing the economy and increasing inflation.

The US debt of nearly $37 trillion is 70-75% held inside America by the Fed, individuals, institutions and other U.S. government funds. The remaining 25% is owned by foreigners led by Japan and China.

The list of suspects that could be selling aggressively is pretty limited although the bond market is very large. It can’t be the Fed and government funds, and may to a degree be American investors but not the amount that has caused the selling pressure over the past few days. I doubt Japan is an aggressive seller, leaving China which their selling could have caused others to head for the exit.

Obviously, China has a motivation as they can’t be happy with the extreme tariffs Trump has slapped on them. They have been increased to 125% as of today, which is unsustainable for the Chinese exporters or American businesses and consumers.

Wall Street stocks bounced back like the trade war is over, so far most countries have a 90-day cooling off period to negotiate. These will not be easy deals to conclude because the tariffs are not reciprocal, they are punitive and calculated based on trading deficits.

Plus, making it even harder is that not only does Trump want trading partners to buy as much from America as America buys from them, he also wants trading partners to compensate America for past imbalances. These kinds of demands make deals impossible if they are deal breakers.

For example, how can a small economy like Vietnam possibly buy as much from America as America buys from Vietnam? How on earth can countries like Canada, Mexico and other big trading partners pay America for past trade deficits? If those kinds of terms are set in stone, then the 90-day pause will come and go.

In the meantime, the tariffs are still on with Canada and Mexico, and the gloves are off between Trump and Xi Jinping of China. The battle between China and America could be pretty tough to resolve because China has to feel that Trump is trying to bully them into submission.

Of course, Trump and his team feel he has all the cards and China doesn’t have the cards. China has plenty of cards, such as they could blow out their US debt and US dollars. That would drive yields up and the US dollar down. Trump wants interest rates much lower (so he can spend, spend, spend to drive the Death Spiral of Debt much higher) so he won’t be happy if yields are going up.

Trump talks about a strong dollar policy, but the reality is that he wants the dollar to drop to make American products more affordable for foreigners to buy more and get the trade deficit down. Stronger exports will help the trade imbalance but it will also cause imported stuff to go up in price.

There certainly are plenty of moving parts that are causing chaos for companies, consumers and investors, in and outside of America. Wall Street stocks say don’t worry, be happy, everything is fixed.

While the bond market is trading like inflation is going to blast off and that the economy is moving toward recession that will result in troublesome stagflation.

Since the tariffs were announced, gold had come off its record high of $3200 on the futures market and traded down to around $3000. Then today it came roaring back, up over $100 per ounce to nearly reach $3120.

Gold is a superstar with a powerful list of reasons to be bullish on it. Including the Death Spiral of Debt, unsustainable cost of servicing the debt, a weaponized dollar, central bankers loading up, weaponized trade, a global broken fiat currency and debt system, and looming troublesome stagflation.

Gold miners have just as compelling reasons to be bullish on them. High-cost gold miners are making $1000 or more per ounce of gold they produce. While the low-cost gold miners are producing gold at half or less of what it costs them to mine gold. The gold miners are free cash flow machines with the machines getting stronger as gold goes higher.

Gold miners are building up cash on their balance sheets at a relentless pace. They are not having as much success increasing their production or replacing their old deposits with new ones. So, mergers and acquisitions are going to pick up.

The problem is that the list of high-quality development projects and explorers with important discoveries is small. Gold miners loaded up with cash and needing developers and explorers is a wonderful situation for the gold stocks from the majors to the explorers.

It certainly doesn’t mean that investors should jump into any old company with gold in their name. But, sticking to well run gold miners, developers with high-quality projects and explorers with important discoveries is a recipe to outperform even tremendously bullish gold.

All the best,

Allan Barry Laboucan