Monday, June 9
At the bottom of an hourglass, the pile of sand grows with each new grain. The cone shape looks stable, but it’s not. Under the surface, instable paths form that will eventually trigger a collapse once there’s enough weight.
Markets and economies work similarly. The longer you go without a collapse, the larger the paths of instability grow. So, the collapse will be bigger too.
Even worse, you don’t know when it will happen, nor can you predict which grain of sand will trigger it, but it’s coming. It might take months, years, or decades.
Some like Ben Hunt think this is the beginning of a much larger and long-term shift away from U.S. assets, pointing to April Treasury volatility. When the tariffs hit, there was a one-week, 65-basis-point increase in U.S. long-term interest rates.
It was in the face of a dramatic global growth slowdown, which seems impossible if global capital believes the U.S. is good for its debt and that U.S. debt obligations provide the “risk-free rate” of the world. But it happened.
The U.S. Treasury market is the bedrock of every loan, insurance policy, and equity valuation in the world. Last month it broke because the full faith and credit of the U.S. came into question.
Fortunately, the break was temporary. After the initial crash on April 7-8, the Trump administration said, “just kidding about those reciprocal tariffs,” and folded a lot of its cards on April 9. It folded even more after another Treasury crash on April 11.
Why? Because another one-week, 65-basis-point increase in U.S. long term Treasury rates would break the world.
Every insurer would be in forbearance and need to raise capital, as would most banks. The dollar and equities would crash. Lending and credit would cease. The Federal Reserve would be forced to act.
Much now depends on how the tariff situation develops. But if too much happens too quickly, there’s a real risk of a sandpile collapse.