Here's the latest report from Alan Brazil at SOM Macro Strategies:
Trumponomics 2025 | Tariffs Are A Continuation of The Economic War With China
U.S. Treasury Market Stress
For the benefit of our non-finance readers not currently living through it: the U.S. Treasury market is under pressure.
Ooh la la! US Treasury swap spreads have blown out—not in the traditional risk-off, flight-to-quality fashion. Investors are currently demanding higher yields to hold U.S. government bonds than interest rate derivatives (risk exposure) with similar maturities.
Displayed above is the yield differential (or spread) between 10-year SOFR interest rate swaps (a derivative) and the on-the-run, most liquid 10-year U.S. Treasury Notes (cash).
We’ll try to revisit past updates on the March 2020 U.S. Treasury market meltdown and the cash-futures basis trade to refresh the background context.
For now, you can check out NextFedChair.com.
Impact of Tariffs on U.S. Growth
Never one to pass up an opportunity to bash the economics profession (yet, they keep coming for more), we’ve got an ongoing pet project in which a PhD student in astrophysics is helping guide his economics counterpart toward building models that actually fit empirical data—statistically, that is—rather than relying on the usual toolkit of heuristics and the mindless application of textbook theory.
Daniel Kahneman was a psychologist and Fischer Black was a physicist—so let’s move on. It's not the dismal science, just the people it attracts.
Take the Phillips curve, for example: most of them don’t resemble a “curve” at all. On more than one occasion, we’ve shown that a flat horizontal line often fits the historical data better than the contortions implied by economic theory. But hey, that’s economists for you. They either insist on bending reality to fit their models—or, like certain folks in the current administration, believe the burden of proof is met by pointing to a handful of instances when their predecessors (read: “elites”) got it wrong.
Last year, that same physicist noticed that the U.S. Beveridge curve is driven by fewer parameters than economic theory suggests. (See: Beveridge Curve, open-sourced) Sometimes a fresh pair of eyes—unburdened by years of disciplinary dogma—can be surprisingly fruitful. The big mistakes by subject matter experts often begin much earlier in the process than most would imagine.
Moving on, here’s Andrew Walter’s latest piece, which builds on his earlier work estimating the U.S. effective tariff rate from 1790 to 2024:
The Tariff Laffer Curve
The analysis is relatively simple but meets the needs of policymakers on a current hot topic—congratulations! If you can’t manage Hermès, then do Zara.
I haven’t had the time to read it properly myself or evaluate the implications—he’ll be educating me tomorrow. Still, we thought it was worth sharing for those who expressed keen interest in Andrew’s last update.
Finally, I’m off to check out the supposedly incredible Arsenal free-kick by Declan Rice that the tenth person has now pinged me about. It better be good be as good as the Roberto Carlos free-kick in 1998.
Updates
February 4 was the day JT told us that the U.S. was about to enter a competition with China over “whose red button is bigger.” I had to double-check that we were still talking about tariffs—and not nukes.
A couple days later, Paul Tucker wrote for us:
“I think China has more scope to retaliate if they can handle, contain, or squash any adverse internal political or public reaction to the hardships it might entail. A vast external surplus provides a cushion. Keynes' notion of symmetric adjustment to international payments imbalances ignored the problem that a persistent deficit country, with large external debts, must repeatedly finance itself, whereas a surplus country does not, as it can run down or sell foreign assets if it were to go into deficit.”
Chinese investors selling U.S. Treasuries is an old story that gets recycled every time bond yields rise sharply—usually closer to the end of the move. Most of the time, there is no credible evidence of such market trade flows.
However, a rough back-of-the-envelope calculation suggests that with crude oil prices averaging $50 per barrel, Saudi Arabia’s fiscal deficit would jump from 2.5% of GDP (assuming $73 per barrel) to between 7% and 12%, assuming no spending cuts.
U.S. Treasury Holdings by Foreign Holders (Jan 2024 – Jan 2025)
Holdings at end of time period (Billions of dollars)
