Don’t be deceived – chaos to remain
Overnight, U.S. President Trump backflipped on punitive global tariffs, bringing them down to a universal 10 per cent except for China, against which tariffs were raised from 104 per cent to 125 per cent.
Equity markets breathed a sigh of relief but is the coast clear?
Trump’s lackeys claimed the reversal or pausing of tariffs was part of a grand plan – a secret chess game, if you will – to flush out those countries that would play ball and separate those operating against U.S. interests.
But the reality is somewhat more chaotic, and that chaos should ensure continuing volatility.
Remember, this saga began last Wednesday when Trump unveiled hefty tariffs aimed at slashing trade deficits, fulfilling a campaign pledge to “restore America’s wealth.” Markets recoiled instantly, shedding trillions in value as the S&P 500 and Nasdaq plummeted.
While the U.S. Trade Representative’s office had devised a complex tariff formula factoring in foreign rates and trade barriers, Trump opted for a simpler metric tied to trade imbalances, a decision championed by trade hawk Peter Navarro.
Treasury Secretary Scott Bessent and Commerce Secretary Howard Lutnick had pushed for a narrower scope, but Navarro’s vision of a manufacturing renaissance won out and Trump posted on social media: “MY POLICIES WILL NEVER CHANGE.”
That message reinforced the view Trump was hellbent on implementing a permanent tool to boost the U.S. manufacturing industry and reverse the neoliberal financialisation of the U.S. economy that had hollowed out the country’s labour force.
But after days of urging resilience amid plunging stock prices and spiking bond yields, Trump caved to more immediate economic pressures he had hitherto dismissed.
The stunning reversal has resulted in the U.S. isolating China as the primary target while opening negotiations with others. And the spin machine cast the backflip as a deliberate strategy leveraging Trump’s deal-making prowess.
According to various press outlets, however, four insiders confirmed that other factors drove Trump’s about-face. It was not the culmination of a series of premeditated chess moves designed to checkmate rivals.
The first of those factors was the bond market’s alarm
As soaring 10-year Treasury yields signalled deeper financial strain, Trump was still buoyant, posting on Truth Social on Wednesday at 9:37 a.m., “THIS IS A GREAT TIME TO BUY!!!” and urging calm with “BE COOL!” Yet, according to reports, behind closed doors, advisers like Bessent, Vice President JD Vance, and economic chief Kevin Hassett pressed the risks to banks and lending. Before 1:20 p.m., Trump backflipped, announcing the 90-day pause, hiking China’s tariffs to 125 per cent while capping others at 10 per cent. Markets roared back, underscoring the bond market’s sway over the president’s instincts.
The plunging bond market had taken ten-year Treasury yields to 4.50 per cent from less than 3.80 per cent two days earlier – a pace of increase unseen outside crises. And unlike the 2008 crash or 2020’s COVID slump, a 2025 Tariff-inspired crisis would be marked indelibly by Trump’s signature. In response, the U.S. President noted, “The bond market is very tricky, I was watching it, the bond market right now is beautiful. But yeah, I saw last night where people were getting a little queasy.”
The second factor JPMorgan’s CEO Jamie Dimon’s comments in his annual report
Dimon wrote a few days ago that “The economy is facing considerable turbulence (including geopolitics), with the potential positives of tax reform and deregulation and the potential negatives of tariffs and ‘trade wars,’ ongoing sticky inflation, high fiscal deficits and still rather high asset prices and volatility”, while adding, “We are likely to see inflationary outcomes … Whether or not the menu of tariffs causes a recession remains in question, but it will slow down growth.”
Trump wouldn’t have read that annual report, but his posts on social media admitted he watched Dimon’s interview on FoxBusiness yesterday. During that interview, Dimon said a recession is a “likely outcome” of the new tariff program. He also urged the president to give Treasury Secretary Scott Bessent time to make deals, saying, “I’m taking a calm view, but it could get worse,” adding, “I think you’ve already seen business sentiment change a little bit. No one’s wishing for that. Hopefully, if there is [a recession], it’ll be short.”
The backflip resulted in a one-day relief rally of epic proportions as Figure 1., reveals.
Figure 1. Historic one day rally (S&P 500)
But the uncertainty remains
U.S. Tariffs on Chinese imports now amount to 125 per cent. Chinese tariffs on U.S. exports amount to 84 per cent. Both countries say they won’t back down.
Interviews with importers and Chinese exporters reveal an impasse: U.S. importers want discounts from Chinese producers to offset the impact of the tariffs. Chinese exporters say they can discount by four to ten per cent but discounting by the requested 25-35 per cent is impossible. There’s simply no room to do business. Some Chinese factories will be willing to lose orders from U.S. companies and find buyers elsewhere, while others will idle production if they have to.
That leaves several scenarios awaiting determination. One sees Chinese manufacturing activity slump. That scenario may result in U.S. consumer activity slowing as consumers decline to purchase the higher-priced goods being imported from China. Business revenue may drop alongside weakening consumer demand. Another, and least likely, scenario involves spiking U.S. inflation. This requires U.S. consumers to resiliently continue acquiring Chinese-made products at previous volumes and newer elevated prices.
None of these outcomes are good.
Meanwhile, the two largest economies in the world are at each other, much like two male African elephants. Something is bound to be broken in the spat.
China’s holdings of U.S. bonds
China reportedly holds US$768.6 billion in U.S. Treasury bonds. This is less than 10 per cent of the total $8,634.6 billion U.S. national debt. That number however fails to account for the bonds held from agency issuers like Fannie Mae nor does it account for the third parties or custodians the Chinese use in Belgium and elsewhere to hold assets.
Many cast China’s holding of U.S. bonds as a weapon of mass destruction, but in dumping bonds, it also shoots itself in the foot. Perhaps that’s why the nation has favoured gold bullion in recent times.
Instead, China might devalue the yuan to counter tariff effects, a move guided by its central bank’s daily “fix.” The yuan has already dropped this month against the dollar, hitting a 17-year low. Further devaluation could unsettle global markets, prompt competitive currency weakening elsewhere, and irk the Trump administration by strengthening the dollar.
Despite the record one-day advance in equities this week, the Tariff endgame remains elusive. This ensures uncertainty and volatility will remain a feature. The Chaotic nature of the Trump administration also appears to be structural: Are Tariffs a bargaining chip for better deals or are they a permanent tool to boost U.S. industry?
Markets can deal with good news and they can deal with bad news. It’s uncertainty that markets despise. And while an immediate panic might have been avoided, uncertainty today is as acute now as ever. And don’t forget, Trump is a narcissist who relishes chaos, gloating that global leaders are “kissing my ring” on Tuesday night.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
He is also author of best-selling investment guide-book for the stock market, Value.able – how to value the best stocks and buy them for less than they are worth.
Roger appears regularly on television and radio, and in the press, including ABC radio and TV, The Australian and Ausbiz. View upcoming media appearances.
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