Brief Summary
This video discusses the potential breakdown of the global trade system and the dollar's dominance due to factors like Trump's trade war, increasing US debt, and the potential for Asian exporters to dump US assets. It highlights the vulnerability of exporters, particularly in Asia, and the possible trigger events, such as actions by Japanese investors, that could lead to a significant sell-off of US assets, causing economic instability.
- The global trade system is under pressure due to trade wars and US policies.
- Asian exporters face losses due to a weakening dollar and potential devaluation of their US asset holdings.
- Japan's bond market and the actions of its insurers could trigger a broader sell-off of US assets.
Global Trade Is Broken
The global financial system, which relies on global trade and the US dollar, is shifting away from the old world order led by the US. Trump's tariff war aims to reduce US dependency on imports from China and reshore industries. This trade war is breaking apart the global trading system, forcing exporter countries to rethink their business models beyond just selling to the US. The US has been running a significant trade deficit, importing goods and exporting dollars, with a substantial portion of these dollars being reinvested into US financial markets, contributing to rising asset prices.
Asian Exporters $7.5T Asset Dump
Exporters are trading less with the US due to import tariffs and a weakening dollar, reducing the need for dollars in their daily business. A collapsing US dollar is particularly detrimental to exporters who invoice in the reserve currency. For example, Korean exporters are experiencing reduced earnings in their local currency due to the dollar's decline. This situation is prompting exporters to sell their dollar assets, fearing further devaluation. Asian investors hold $7.5 trillion worth of US assets, and Trump's policies have turned this into a losing proposition, with many institutions facing significant losses due to unhedged currency exposure.
Nasty Domino Effect
Endless deficit spending is driving a collapse in confidence, with markets pricing in Trump's deficit spending plan. Bondholders, especially foreigners, are facing losses due to rising yields and a weaker dollar. If one country decides to sell its US assets, it could trigger a domino effect, leading to a massive exodus from US stocks and bonds. Countries dumping their treasuries could spike yields, affecting the broader economy and hammering US equities.
Japan The Big Trigger Event?
A potential trigger event for a massive exodus from US assets is the Japanese bond market. Japanese bond spreads have been increasing, posing a threat to US markets due to the large amount of US treasury debt held by Japanese investors. Wall Street asset managers are increasingly bullish on the yen, expecting it to rise. Japan could sell its US bonds to support its own bond market, strengthening the yen and making it more attractive for domestic investors to bring their money back home. Japanese insurers, who hold both US and Japanese bonds, may rebalance their portfolios by selling US assets to cover losses in Japanese bonds.
US Asset Sell-Down
Japanese insurers could be the first to show the strain, with significant paper losses in Q1. If they decide to sell US debt to raise cash or rebalance their holdings, it will create problems. As yields in Japan rise and the dollar falls, investors could move to Japanese assets, causing US yields to rise as well. Japan could issue more bonds in the 5 to 10 year duration, directly competing with US treasuries. This could trigger a feedback loop where money leaves US bonds for Japanese bonds, pushing the yen higher and the dollar lower. The situation is volatile, with no easy solution for the US, potentially requiring a revaluation of gold holdings.
