Newsletter #80 - April 2025

While we are writing

We begin this edition with an unusual caveat: the world we describe today may already have changed by the time you finish reading. This is not hyperbole—this is simply the reality of the current macroeconomic environment, particularly as it unfolds under the Trump administration’s political leadership.

Nevertheless, despite the noise and the theatre, the bedrock of economic truth remains untouched. Economic laws—like gravity—are immutable. Just as water inevitably trickles down, fundamental market forces reassert themselves. One can try to dam them, redirect them, or disguise them, but only for a time. Eventually, reality prevails.

Trumponomics: Ambitious Rhetoric, Questionable Foundations

Stephen Miran of Hudson Capital recently outlined a proposed 'Trump economic plan' built around aggressive tariffs, trade restructuring, and bilateral leverage. While rhetorically potent, the plan contains multiple internal contradictions and operational assumptions that are highly unrealistic. At its heart, the plan assumes the United States can:

1. Alienate trade allies,
2. Put up tariffs without retaliation
3. Demand those same countries appreciate their currencies to support U.S. exports,
4. And simultaneously expect them to finance soaring fiscal deficits by purchasing ultra-long-dated Treasuries.

This is mutually exclusive outcomes. Economic diplomacy, like capital markets, runs on trust. The idea that you can alienate your partners and then demand they bankroll your deficits is at best wishful thinking—and at worst, destabilizing.

The Problem with Blanket Tariffs: Economics vs. Optics

There appears to be no coherent strategy behind the recent push for broad- based tariffs. It is neither economically efficient nor strategically wise to reshore every low-value manufacturing process. The idea that the United States or the European Union should once again produce t-shirts and sneakers is emblematic of a misunderstanding of comparative advantage.

Instead, what is required is a focused industrial strategy: one that protects and invests in critical industries, those sectors essential to national security, technological autonomy, and supply chain resilience.

A timely piece in The Economist, titled “Pit for Tat,” provides a stark reminder of China’s dominant position in rare earth metals—a chokehold that poses real risks to Western economies. After decades of offshoring refining and processing of critical materials such as copper and rare earths, both the U.S. and EU now face the consequences of hollowed-out capabilities.

Yes, these industries are energy-intensive, messy, and politically unpalatable. But offshoring them to China does not make them greener—it simply outsources pollution and responsibility. It is therefore not just defensible but essential that governments begin rebuilding industrial capacity. The UK government’s decision to nationalize British Steel is a case in point—not for the 3,000 jobs saved, but for the strategic imperative of retaining steel production on British soil.

The Bond Market Speaks—And It Is Not Buying It

Bond markets are not buying into the Trump economic narrative. Investors understand that tariffs are effectively a tax on domestic consumers, not foreign exporters. Goods priced do not become cheaper or more strategic just because they cross a border. The duty is paid by the importer—meaning by American businesses and households.

Markets abhor uncertainty, and bond markets in particular punish inconsistency. Trump’s erratic trade policy has triggered increased volatility in fixed income markets. Sovereign debt investors—central banks, pension funds, and insurers—value predictability. When that foundation is shaken, yields rise, capital retreats, and trust erodes.

The core problem: you cannot bully the bond market. U.S. Treasuries are seen as a global safe haven only insofar as they reflect macroeconomic stability. Undermine that, and you risk raising borrowing costs for the federal government while also weakening the dollar’s reserve status.

Recent rumors that the Bank of England has warned of hedge funds failing margin calls only underscore the systemic risk of overleveraged fixed-income strategies. In an environment of razor-thin spreads, many fixed-income investors use 10–20x leverage to capitalize on small arbitrage opportunities—reliant entirely on stability and liquidity. Any disruption in Treasury confidence can set off a chain reaction of forced deleveraging.

Jamie Dimon and the Televised Wake-Up Call

On April 9, JPMorgan CEO Jamie Dimon appeared on Fox Business, warning that the proposed tariffs could fuel inflation, spark a recession, and, most importantly, damage the reputation of U.S. Treasuries as a safe haven. President Trump reportedly watched the interview—and responded.

Later that same day, the administration announced a 90-day pause on the rollout of most tariffs, leaving only China-targeted measures intact. While this was framed as a tactical move, it was widely seen as a first blink in the face of market backlash.

However, no meaningful trade agreement has ever been negotiated in 90 days. Trade deals typically take years. The pause may ease pressure temporarily, but it resolves little.

Following that, Trump’s second retreat came after vocal lobbying from major U.S. technology firms. Electronics—phones, laptops, and semiconductors—were soon exempted from tariffs. This second concession reflected the growing divide between economic optics and operational feasibility.

Collateral Damage: The Banking Sector and the Yield Curve

The consequences of persistently high interest rates are already evident across the U.S. economy. Mortgage rates are hovering near 7%, which continues to suppress refinancing activity and exacerbate the weakness in the housing market. At the same time, banks are carrying substantial unrealized losses on their bond portfolios, driven by mark-to-market declines in Treasuries and other fixed-income securities.

As of March, the U.S. banking sector has yet to recover from these losses—especially on Treasury and mortgage-backed securities (MBS). A drop in the 10-year Treasury yield below 4% would have provided some relief. Instead, trade policy uncertainty and renewed tariff discussions have pushed the yield back up to approximately 4.5%.

Figure 1 Unrealized Gains (Losses) on Investment Securities

Mounting Pressure on CET1 Capital

Many smaller banks now face significant exposure, with unrealized losses on Held-to-Maturity (HTM) and Available-for-Sale (AFS) securities representing a substantial share of their Common Equity Tier 1 (CET1) capital, see Figure 2.

Among the most concerning names on chart due to their size are:

• Charles Schwab Bank
• Bank of America

Both institutions report unrealized losses that exceed 55% of their CET 1 capital, highlighting the fragility that remains beneath the surface.

Figure 2 Loss on securities investments to CET 1 capital and accumulated assets

These events will have a significant impact on a number of key economic areas such as 

Higher Funding Costs for the U.S. Government:

• Elevated yields mean more expensive borrowing for the Treasury—leaving less fiscal room for tax cuts or new spending initiatives.

 Further Strain on the Banking Sector

• Persistent losses on bond portfolios, especially in HTM books that cannot be sold without recognition of losses, continue to erode balance sheet strength.

Housing Market Stagnation

• With mortgage rates just under 7% and refinancing activity near record lows, the housing sector remains a drag on overall economic momentum.

Conclusion: Volatility Without Victory

In the span of just a few weeks, the Trump administration has managed to:

- Create unprecedented policy volatility,

- Alienate allies and global trading partners,

- Undermine the credibility of U.S. Treasuries,

- Trigger higher interest rates,

- Suppress refinancing and consumer credit access,

- And potentially fuel inflation—without actually generating tariff revenue.

A Case Study in Policy Missteps

This unfolding scenario is a case study in the challenges of navigating macroeconomic policy in a complex environment. The failure to anticipate the compounding effects of high interest rates, trade disruptions, and fiscal rigidity has left the financial sector exposed and the broader economy stuck in a holding pattern.

The message from markets is clear: the laws of economics remain firmly in place. Policy decisions carry consequences — and when risk signals are ignored, the fallout reverberates across sectors. 

Gravity still works. And yes—water still trickles down.