The China-America Showdown
Why are US debt yields and the price of gold rising while stocks have stabilized?
I have talked about the golden bridge away from America as a global response to Trump's vision for how to make great again an America he thinks he thinks is no longer great. He thinks "tariffs are beautiful", and while tariffs can be a useful tool for fixing unfair imbalances, his blunderbuss approach has even attracted the reproach of Bill Ackman, a major Trump supporter known for picking winners like Nikola and Valeant. This week we started to see the consequences, and while media such as the New York Times and Financial Times have taken note, most people have no idea that Trump has finally managed to push Humpty Dumpty off the wall. There is now a valiant effort underway to catch America with a net and haul it back to the top of the world so that the king's clowns are not stuck with the hopeless task of putting the pieces together again.
Gold resumed making record highs after last week's retreat. Long term US treasury bond prices declined despite the March CPI inflation rate coming in at 2.4%, down from 2.8%. And the US dollar retreated against most currencies including that of Canada. US equity markets have stabilized, but the future has become cloudier for all except Trump true believers. These are signs that the Rest of the World is giving up on America's role as the leader of the world since World War II. Humpty Dumpty is in free fall, and the question is no longer, where will gold eventually settle at when its uptrend stalls, but rather how high can it go before it stalls, and where above the current price of $3,230 will it stabilize.
Under pressure from Wall Street kneebenders Trump paused for 90 days the custom tariffs he had proposed on April 2 for nearly every nation that exports to the United States while maintaining a 10% tariff against everybody, and the earlier 25% tariffs on steel and aluminum as well as cars. Trump has been gloating that his phone is ringing off the hook from nations seeking to make a deal. But the most that can be hoped for is equalization of tariffs, what is meant by "reciprocity" but which is not what Trump has in mind. What he has in mind is that every nation bend its knee and kiss his ring with offers of concessions to appease his wrath about imagined.
There is nothing in any such conceivable offers to change the fact that the United States has mutated into a services economy which represents the majority of its GDP and which has benefited uniquely from the US dollar becoming the world's sole reserve currency. In the process the standard of living has risen for Americans, but there has emerged a dangerous dependency on the physical productivity of other nations which produce goods at a much lower cost than is possible in the United States, in part due to the "willingness" of the citizens of those exporting nations to accept a much lower standard of living than is acceptable to Americans, including those who benefit from the $5 trillion the federal government spends to keep the sick, poor, and elderly alive while giving able folks a job that justifies paying them something rather than nothing. And then there are those Global West nations who have proven more competent in producing stuff than the United States, even though the United States has remained in the forefront of innovating stuff its free market principles dictate get produced where it is cheapest to do so, with Apple as Exhibit A.
Trump, who some think is an iconoclastic performance artist secretly working on behalf of a communist goal of dismantling democracy buttressed free market capitalism and who will one day be celebrated as the heroic deliverer of socialism at great personal sacrifice, has put America's privileged status at risk. The reason western investors have been reluctant to treat gold's astonishing rise over the past year seriously, and have only somewhat loaded up on gold producers and have largely shunned the junior resource sector focused on exploring for gold or advancing ounces in the ground, is that absolutely none of them want this to happen.
The Global West likes that America is the hegemon, the guarantor of rule of law, of democracy as the mechanism by which citizens make decisions, and as an upholder of core ethical principles, whose internal inconsistencies and conflicts get dealt with through a pragmatism that decides who are winners and losers while denying anybody the right to gloat with self-righteousness about the outcome, but rather with humility encourages them to think about how a better outcome might become possible. The world likes the vision created by the American founders where America occupies the upper half of the Belief Horseshoe while true believers howl away at the bottom left and right prongs where the guiding principles are "hate makes great" and "might makes right", exploited by power hungry nihilists who treat all absolute truths as instruments for coercion at the disposal of themselves as philosopher-kings.
The action in the gold and bond market, as well as in the currency market where the US dollar has begun to slide, even against the Canadian dollar, is a sign that Trump is pushing America off the wall, and the question is, will Humpty-Dumpty bounce back or end up as a smashed egg impossible to put back together again. What we saw this week was China's leader Xi Jinping calling America's bluff, setting up a winner take all showdown. This showdown China will win, because Trump's agenda is to shut down trade with other nations so that all goods need to be produced in the United States, in effect a self-sufficient nation known as an autarky. This dream is impossible except when the autarky involves world domination, and Trump has tipped such an outcome to fall to China, not because China succeeds, but because America voluntarily fails.
Equity markets have stabilized because investors think the trade policies will be substantially watered down in 90 days. There is almost no chance of this happening because Trump has created a winner takes all showdown with China. Thinking he is acting from a position of absolute strength he has ratcheted the tariffs on China to 145%, to which China has retaliated with a 125% tariff on imports from the United States. Backing down is not an option for China's leader for life Xi Jinping whose policy decisions have favored development of manufacturing capacity geared largely for the export market instead of developing Chinese consumption by creating a stronger social safety net and relaxing his restrictions on free speech understood as criticism of government policy. He helped perpetuate this trap, and he has no choice but to assert Chinese supremacy.
His problem is that the Chinese have retaliated by going on a spending strike, encouraged by the collapse of the residential real estate bubble which was China's other growth engine. They are saving for hard times. They are worried about social security, and the cost of healthcare as this demographically challenged society ages. The Chinese people have adopted a form of Silent Resistance against their Communist Party overlords. And the Rest of the World is pissed that China's leadership is trying to deal with this problem by flooding the world with the output from its investment in manufacturing capacity it has been unwilling to enable its own people to consume. China has no real friends at the moment, which is why it has to defy the nation that has declared itself as nobody's friend.
As Trump marches America toward autocracy through all his other Project 2025 mediated policies the Democratic Party, stuck with the label as collaborators with the capitalists who shifted manufacturing into cheaper jurisdictions for the benefit of American shareholders while the official pumpers of this idea have bent their knees to Trump, is floundering. This may give cause to the MAGA crowd to chortle with glee, but they may soon want to Dump Trump.
The American people who occupy the upper half of the Belief Horseshoe have at their disposal a grassroots Resistance strategy borrowed from the Chinese people. American consumers are recognizing they face a future of pain, which Trump has acknowledged and insisted everybody embrace as a necessity for future gain, like those endlessly repeated 5 year plans of the Soviet Union and China. But those people not hopelessly enmeshed in the Trump adoration cult are already thinking in practical adaptation terms, and those who reject Trump and his Project 2025 autocratic ambitions are turning that adaptation into a Silent Resistance very similar to what the Chinese people are doing.
Hardly any American consumer alive today remembers the hardships of the Depression era of the 1930s, but many do not have fond memories of how America dealt with the 2008 financial crisis, which was to torch homeowners while creating a bid for the debt owners courtesy of quantitative easing. This period was accompanied by low inflation, but that changed with the post-covid period which coincided with the Biden administration. Trump promised lower prices and emerged victorious, which prevented another possibly more dangerous insurrection. Much to the surprise of the rubes in Silicon Valley and on Wall Street he has started to do what he promised, such as offer Ukraine to Russia and embark on a trade war against the Rest of the World.
The consequences of Trump's tariff policy have yet to manifest themselves, but enough people are sufficiently literate to understand that there is no coherent plan behind this gambit, and even the DogeMaster suggested the tariff policy had to be the handiwork of a "Mr Retarrdo". Those who do understand where the tariff policies will lead can embrace a Silence Resistance that ignores the Democratic Party but hits home where it matters.
The Magnificent Kneebenders rely mightily on consumers buying stuff, but thanks to Trump's Liberation Day tariffs everything is going to cost more. Trump and his Maga base believe climate change is a hoax and that everything done to mitigate greenhouse gas emissions needs to be undone. Energy transition policies are history and, rather cynically, for the true believers it does not matter that this will usher in the End Times, culminating in the Apocalypse which has been spun as a necessary condition for the second coming of Christ. For those who think this is nonsense, it is hard to avoid a sense of futility and descend into despair. If you have grandchildren, children or hope to have or adopt children, the option of just getting your kicks until the shithouse burns down as Jim Morrison of the Doors sang is not available.
There is no need to accept that outcome. If you are seriously concerned about higher inflation and future layoffs that might affect you or those close to you for whom you may have to provide, the common sense thing is to hunker down and embrace the green movement's Rs as a form of protest. Two decades ago there was much talk about footprint reduction, reducing one's indirect CO2 footprint through reducing (making do with less), repairing rather than replacing with something new, recycling whenever possible, repurposing things no longer needed, and rethinking what matters. Nothing hurts the Kneebenders more than people no longer buying stuff they don't need. As Nancy Reagan used to implore with regard to sex and drugs, "just say no".
A possible anecdote that this may already be happening was my observation this week of the twice yearly reuse-cleanup days operated by our waste disposal company. The principle is that you put curbside stuff you want to get rid of, which excludes a long list of waste you wish you could easily get rid of by putting it curbside. On the first day the Not So RecycleSmart people come by and pick up stuff they deem can be reused by whatever distribution network they operate. When this program started over a decade ago people would put out all sorts of stuff such as children's toys for which they hoped somebody else would find a use. But we were appalled how much of this "reuse" stuff remained curbside to be picked up the next day by the garbage truck for dumping into a landfill site. The county provides explicit warnings that everything curbside was its property, that scavenging was forbidden, and residents should call the police to report people picking up stuff. So people like myself would violate this law by hauling back into our garages our own stuff we felt was worth re-using.
Last week the street looked strangely barren, with what looked like truly worthless junk placed curbside. Was this because people no longer wanted to bother putting stuff curbside only to have to haul it back inside that evening? Or were they already thinking, maybe I should keep this stuff I no longer need because hard times are coming and I want to be in a position to help myself or anybody I need to or choose to care about? When I came home the evening of reuse day it struck me that very little had been picked up by the RecycleSmart people. While some may have started the Quiet Resistance by putting out only garbage, some did not, which was very evident the next day as I drove to the office and passed the garbage truck. It was festooned with stuffed animals which the workers had extracted from the landfill destined garbage piles. Obviously there was no room in the truck for these stuffed animals, so they wired them to every nook and cranny of the truck's exterior. They knew where these Made in China stuffed animals needed to go and they broke their employer's cruel anti-scavenging law to help fulfill the purpose of reuse day. The Quiet Resistance has begun.
Don't just view the shrinking pennies in your wallet while the cost of everything rises as necessary pain for future gain; withdraw from engagement to any online system that constantly feeds you "fresh ideas". Everything you do online leaves behind information about you that is collected and collated so that not only can your future desires be anticipated and "catered" to, but even worse they can be shaped into existence. You can't avoid that but you can resist the algorithmic assault on your psyche. I have always operated with the principle that when somebody is spending money to market something to me, the value is less than when I find something on my own. I have a fundamental resistance to advertising, which is why in my field of resource juniors my motto is, "don't call me, I'll call you".
Online systems are wonderful when you can search them for what you want. Just ignore anything they highlight as something you might want. With AI it will get even worse. Part of the Silent Resistance is to insist that the choices about which you have to make a decision are ones you generated through your search criteria, not which some agent served up because it happened to have a dossier of all your past Internet activity. Of course that is hard to do, because when the choice you made from options you generated turns out to be bad, there is nobody to blame but yourself. Part of the Silent Resistance is to accept absolute responsibility for your choices.
This unpleasant experience is the lot of people who inhabit the upper half of the Belief Horseshoe. If you understand what that means I do not have to explain the graphic below. This metaphor is not new, but surprisingly nobody has really run with it. I've always been distressed by the linear presentation of the "political" spectrum as a left to right line with a precise dividing line in the middle, which seems a black and white way of pigeon-holing everybody and forcing them into an us and them relationship. The current partisan divide is created by the false dichotomy of "left" and "right" when the real dichotomy is between what Isaiah Berlin described as "foxes" and "hedgehogs". Hedgehogs are those who latch onto and cling to a true belief, which, when it includes a moral prescription, comes with a duty to enforce that true belief using principles such as "hate makes great" and "might makes right". Hedgehogs occupy the bottom prongs of the belief horseshoe where the only difference between the left and right prongs is that the right prong grounds its beliefs in metaphysics (ie God or Allah) while the left prong simply asserts them as indisputable absolutes.
Foxes in contrast understand the wisdom of thinkers such as Karl Popper, Friedrich Nietzsche, Charles Sanders Peirce and Isaiah Berlin who accept as indisputable truths only those of a logical and methodical nature, which leaves out moral principles which are aspirations rather than descriptions of the way things are. Foxes understand that core moral principles most people accept as self-evident generate contractions when applied to a reality defined by scarcity and relationships. Foxes understand that pragmatism requires policy decisions which create winners and losers and accept that this outcome is intrinsically unfair. Foxes count on democracy to determine how such decisions are made and eventually changed. Their faith is in the method of democracy, not the "truth" of the policy decisions. Foxes do not get to experience righteousness and have an acute understanding of the "tragic" whereas hedgehogs "know" they made the "right" choice and bathe in self-righteousness. Foxes have humility which hedgehogs lack.
When you size up somebody, don't try to figure out which side of the peak of the Belief Horseshoe that individual sits on. Try to figure out whether that person is a fox inhabiting the upper half of the Belief Horseshoe or a hedgehog in the lower half. Foxes can have productive conversations with each other regardless what left or right portion of the upper half of the Belief Horseshoe they occupy because they know none of each other will have be truly right, but they share a common goal to negotiate the best solution to a problem and rethink it later if it does not work out. This is the vision of democracy that the founders embedded in the 1776 constitution and this is what the Quiet Resistance will seek to defend.
The Chinese, who are already forced to inhabit the bottom half of the Belief Horseshoe, are already engaged in the economic form of Silent Resistance and for Xi Jinping to save the Communist Party's control of China he needs to overcome this resistance to consumption. Because China's $17 trillion economy is so export dependent compared to the services dependent $27 trillion US economy it will suffer far more than the US economy through a total disruption of trade between the world's two biggest economies. Trump thinks that is the basis of his strength, but that is to ignore that the Chinese have suffered for most of the past century whereas this has not been the case for Americans. Those who suffered through the 1930s Depression have largely passed away. The American consumer in general has no collective memory of "hard times", and thus will have a much lower tolerance for "hard times" than the Chinese when they do arrive, which Trump has conceded will be necessary if his Liberation Day plan is to succeed. But how is Trump supposed to win this showdown with China when the Chinese have far more experience with suffering and impoverishment than Americans?
It may be that Americans are far more resilient than I think, but Xi Jinping has the ability to buy patience from the Chinese by playing the nationalist card of finally forcing Taiwan to become a full part of China just as he did with Hong Kong. Trump blusters about seizing Canada or Greenland, but neither place was ever part of America, and most Americans would likely be revolted by America behaving like Russia or Nazi Germany. The same cannot be said about the Chinese and Taiwan. Annexing Taiwan would rally the Chinese around Beijing especially if done during a "state of siege" such as Trump's trade war promise. Americans will not rally around Washington if its seizes Canada or Greenland. In fact millions may march on Washington as the Resistance becomes Loud.
If Xi's showdown with Trump results in a collapse of trade between China and the United States, what does Xi Jinping have to lose by annexing Taiwan and taking control of the world's semi-conductor manufacturing center? It will bring America's AI dream to a crashing halt, possibly cheered by stressed white-collar Americans who can see how AI will threaten their livelihoods. It takes 4 years to build a foundry; what TSMC has promised to build in the United States is just a fraction of its Taiwanese capacity. If Xi Jinping is suddenly in charge of Taiwan's chip foundries, what can America and the Rest of the World do?
Is the United States going to declare war on China? Does Trump think other Asian nations will rally in support, nations that he has already declared war against with punitive tariffs? Asia may circle the wagons to create its own tariff free economic trading zone, with South Korea and Japan giving up on the United States as an export market. The Rest of the World, including the Europeans, many of which already are members of the Trans Pacific Partnership which was created to push back against China, is already considering that pushing back against America works better through a trade alliance with China. Is Trump going to "punish" with nuclear weapons as Putin has threatened? No, he is going to do nothing, which is why the China-America Showdown will not work out well for the United States.
Trump's vision of the United States as an autarky possibly served by a handful of vassal states is giving foreign owners of US treasury debt reason to rethink the wisdom of USD denominated government debt. Japan holds about $1 trillion in T-bills. China used to hold a similar amount but has trimmed it back to $760 billion. On April 9 the US CPI dropped from 2.8% to 2.4% which should give the Federal Reserve reason to start lowering interest rates. But those CPI numbers do not reflect inflation yet to be caused by tariffs. Customs officials are still trying to figure out when and how to apply them. March employment came in with a much better jobs increase than expected. This only reflected government agency job cuts; layoffs in the corporate world are only beginning because few took Trump seriously when he promised a tariff war, and most are still holding out with the hope that this bad dream will go away. The showdown with China has no off-ramp other than capitulation by Trump.
While equity markets have stabilized after dropping nearly 20%, bond prices have dropped, meaning that yields for the 10 year Treasury have gone up. The Federal Reserve can only control short term rates; the market controls long term rates. The change increments are too small for retail investors to notice and be alarmed about, but given the $36 trillion size of the treasury market, the yield increases this week have handed out big losses to bond owners, made worse for foreign owners because the US dollar has begun to decline against most currencies, even the Canadian dollar. Somebody is easing out of US debt holdings. It is not clear who is doing so; neither China nor Japan are currently suspected. In May the debt ceiling will have to be raised by Congress. There is worried talk about capital flow controls. The equity markets may have closed up on Friday along with cryptocurrencies, but those have a different audience than the bond market.
This week gold recovered from its downturn late last week and has made new highs, with the gold producers also making new highs in some cases such as Agnico-Eagle Gold Mines which is now outperforming the KRO 2020 Gold Producer Index. Even the GLD ETF traded more volume than usual and accumulated a lot of ounces. What do you do with the US dollars you get from selling your T-Bills? Some nations may wish to buy their own currency to prop it up, which may explain why the US dollar is declining. If you are an American resident you would put the money into very short term T-Bills whose rates are similar to long term T-Bills but without the risk of losses coming from much higher yields down the road when the tariff drama becomes reality. If inflation does rise as importers pass on the cost of tariffs, the Federal Reserve will be forced to raise short term rates, so you can keep rolling over your short term T-Bill portfolio for ever better yields. Of course, if Trump forces Powell to embrace the Turkish autocrat's strategy of lowering interest rates to fight inflation, the rush to exit US debt will go through the roof and longer duration T-Bills will tank.
Would you leave your T-Bill liquidation proceeds as cash in the bank? This time around the banks are not leveraged like they were in 2008, so the risk of a systemic crisis leading to bank failure seems to be much lower today. Gold can go down in price, but in the current context where the United States seems hell-bent on isolating itself as Magaland and making itself irrelevant to the Rest of the World, the long term trend would seem to be higher rather than back down. It really is time to start loading up on KRO Favorite Vista Gold Corp.
Over the weekend as I finish this I hear that tariffs are being suspended for all sorts of things like semi-conductors which cannot be reshored in less than 4 years. What a surprise. The current perception with regard to gold has been one of concern about when and how low will it eventually fall as Trump achieves his MAGA goal. For 30 years I have listened to nonsense from my peers that cover this sector about how gold will go to the moon because of fiat currency debasement caused by "liberal" America. What they fretted about was the printing of money to keep the poor, sick and elderly alive, which they resented. The gold narrative needs to be reframed to reflect the new reality defined by Trump's Republican Party. It is about the debasement of America, which will not happen overnight, but instead involve a slow motion fall of Humpty Dumpty while Trumpelstiltskin explodes with apoplexy because the world guessed his name and he can't win his game.
I do believe America can reestablish its place in the upper half of the Belief Horseshoe, but that will be a decade long struggle during which gold will reprice into the $5,000-$10,000 per oz range in real terms. And why do I think that? Because while gold is a bridge away from America, no nation currently has what it takes to become the next America, with America the best candidate to become itself again. This means gold will be a safe haven bridge during an interregnum that may last a decade. It will be the foundation for a secular gold bull market with implications for the resource junior sector like we have never seen before. Gold closed last week at $3,230 per oz, which is just below the $3,352 level which represents the inflation adjusted $850 peak gold achieved in 1980 when the world thought America as failing on all fronts. Back then America got its act together and it was the Soviet Union which failed a decade later. Watch this week's gold price action to see if it will break out into uncharted territory in terms of real price. Don't think this will happen, but think it might appear to trend in this direction? Hedge your outlook with a bet on Vista Gold Corp.
