The Outsider Perspective Issue 438 | The Beltway Outsiders

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Good Friday Morning! Except for those of you with fried chicken breath. I don’t mean you just ate fried chicken, either. I mean, you actually brushed your teeth with KFC’s new flavored toothpaste.

WAIT! Come back! Don’t stop reading now.

KFC introduced a fried chicken-flavored toothpaste, and the flavor is “inspired by all of KFC’s 11 herbs and spices.” I don’t know if nine out of ten dentists approve of this, but I do know a solid ten out of ten colonels approve. “The toothpaste, which is offered exclusively on the Hismile website for $13, was sold out as of Tuesday morning.”

So… which one of you bought some?

This week, I’ll discuss the new economic war we’ve entered with China and why the U.S. bond market is fighting back—links to follow.

Quick Hits:

China admits it’s been hacking American infrastructure. In a secret meeting with outgoing Biden officials, the Chinese admitted they’d been behind years of hacks “into computer networks at U.S. ports, water utilities, airports and other targets.” While reports have suggested as much for a while, it was a bold admission from the country. U.S. officials at the meeting “perceived the comments as confirmation of Beijing’s role and was intended to scare the U.S. from involving itself if a conflict erupts in the Taiwan Strait.”
Intel sources suggest a Taiwan invasion is no more than six months away. Sources speaking to 19FortyFive say the Chinese are prepping a Taiwan invasion that is months away. While I don’t doubt the validity of the sourcing for the site – it’s a great military/defense site – I have my doubts. In order to make a push into Taiwan, China would have to exercise a massive troop/navy buildup that would be impossible to hide – similar to Russia. We’d know about it. Until we start seeing those kinds of reports, I’m doubtful of these kinds of projections.
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Where you can find me this week

Please subscribe, rate, and review The Horse Race on YouTube — the reviews help listeners, and readers like you find me. Make sure to sign up for the Conservative Institute’s daily newsletter and The American Almanac.

Trump’s Tariffs Face Market Reality – Conservative Institute

IRS Commissioner Quitting Proves Rot In Agency – Conservative Institute

Trump’s Tariffs Aren’t Showing Up In Economic Data… Yet – Conservative Institute

United States vs. China. And Donald Trump vs. The Bond Market.

A few weeks ago, I wrote about how Trump was pushing a form of a modern Monroe Doctrine. At the time, I thought he was driving a tripartite world where the U.S., China, and Russia divvy up the world and force Europe to pick sides. I was wrong: it’s Cold War 2.0. It’s the U.S. vs. China, and everyone has to pick a side.

My view of tariffs has been that they’d be a vehicle for trade deals. Whatever the pros or cons in either direction, I think that’s where we end up. Scott Bessent confirmed that this week when he and Trump announced the 90-day pause on tariffs. The White House is encouraging everyone to come to them for a deal – except China.

We’re at economic war with China—and it is not a Cold War. It is an extremely hot one. The White House is manipulating the economy, manipulating currency, and more to advance its view.

This track poses its own risks: China is more incentivized to go to actual war and get Taiwan now, and recent reports have tightened that timeline to six months (I have my doubts). A trade war moving into a shooting war would effectively prove Graham Allison’s Thucydides Trap, something I’ve largely discounted. We’ll know if they do want war, though. A naval buildup to get Taiwan would be impossible to hide. I’m still not convinced they do go to war, but I’m less confident than I was about that in January.

A lot of ink has been spilled on what this means for Americans. The press loves focusing on how this isn’t good for Americans, things will be more expensive, etc. I don’t doubt any of those points. However, less focus is given to what this means for China.

For the first time in the post-war era, the Chinese Communist Party faces an existential threat. China could offer Trump a generational trade deal today, and I don’t think he’d take it. The goal is to drive a stake through the Chinese economy, their central bank, and their economic way of life.

After covering the economic pain for America, the Wall Street Journal wrote this in a piece on China:

For China, finding new buyers could be tough. Other countries are already bristling at a flood of Chinese imports and will be reluctant to take more. Piling more unsold goods into China’s saturated domestic market would add to already-severe deflationary pressures in its economy.

At stake in this trade war is not just China’s short-term economic performance, economists say, but its entire economic model. China’s fortunes have been built on lavish investment in factories, infrastructure and real estate and a towering export sector, a strategy that powered it into second place in the global economy.

Now, economists say, it will need to pivot to boosting consumption, or watch growth stagnate. Rebalancing China’s huge economy toward consumption means funneling more resources to households and away from factories. In the long run, that would require far-reaching and costly reforms to build out China’s threadbare social safety net and bail out cash-strapped local governments, according to analysts.

“China’s growth model, which was spectacularly successful in recent decades, has reached its limit,” said Frederic Neumann, chief Asia economist at HSBC in Hong Kong. The bank expects the trade war to shave 1.5 to 2 percentage points off Chinese growth in the coming year—though it anticipates a much bigger hit if other countries join the U.S. in pushing back at rising Chinese exports. The government is aiming for around 5% growth in 2025.

For the United States, a deep recession is a real threat from this trade war. For China, it’s an existential one. Their communist centrally planned model built up the state to be the world’s factory floor – and now they have no buyers.

On top of that, China faces two disaster scenarios: 1) Its economy is in the tank with deflation running wild. 2) China faces a demographic disaster as the long-term impacts of the one-child come due.

In short, China has a flood of cheap goods it either has to flood its own economy with at a time when prices are imploding, or find new buyers. If they do this, it would trigger an even larger deflation crisis, collapsing the Chinese economy. Or they have to dump cheap goods elsewhere, like Europe (which doesn’t want a flood of goods, either).

Trump is starting his economic war with China with a bang. What China needs is for the U.S. or global economy to fold to prevent Trump from crushing them.

That’s where the bond market comes in. Until Scott Bessent and Donald Trump can control the bond market, their ability to wage a trade war with China will be limited.

A lot of people on the right have talked up rumors about China selling off U.S. Treasuries in a bid to harm the U.S. economy. There’s little evidence that’s happening.

In a typical downturn, in which investors believe we’re heading into a recession, money floods out of risk assets (stocks) and seeks a safe haven. That typically means gold and government bonds (treasuries). In this risk-off scenario, the price of gold will shoot up, while the interest rates on bonds will plummet because so many people are buying them, resulting in lower yields.

What is happening now? Investors believe we’re heading towards a recession (due to tariffs), and Treasury yields are shooting up because people are selling them.

Everyone is trying to answer this week’s trillion-dollar question: Who is selling U.S. Treasuries and why?

Some suggest China. Some say it’s a sign that the world is selling off the United States as a safe haven. Others are pointing to the possibility of another basis trade unwinding, specifically in Japan. I tend to lean towards the basis trade unwinding as the main culprit because there’s some evidence pointing in that direction. But no one outside the government knows for certain.

Some asset managers believe this move by Japan is market manipulation on the part of the United States. We’re directing them to sell treasuries off, triggering a yield spike. That could be true. But it’s impossible to prove.

Why does this matter? If bond interest rates surge, it will trigger credit tightening in the United States. Remember when the Federal Reserve increased interest rates? They were trying to do this through policy to attack inflation. Right now, interest rates are going up without Fed intervention.

It puts the U.S. in a bind. We could be facing a credit crunch unless policymakers intervene, barring bonds from backing off. This is why Donald Trump put in place the 90-day tariff pause worldwide. I went to bed Tuesday night believing we were headed towards a credit crunch because bond yields were surging up like rockets. With the pause, there’s some more room to wiggle.

Trump announced the pause, and markets backed off. However, I’m writing this on a Thursday evening while Asian markets tank and U.S. Treasuries are surging again – signaling more people are selling them off. Apollo Management estimates there’s $800 billion tied up in the basis trade, meaning it could take a while to burn that out.

Where does this put us with China? Trump’s war against China faces an internal threat from the bond market. If bond yields were collapsing against a recession backdrop, there wouldn’t be as much of a problem. Trump could claim he was remaking the global economy as he had been doing and then refinance U.S. debt at lower levels.

The sticking point is inflation: the most recent report showed cooling inflation. But that reflects nothing related to tariffs, yet. And trust me, that “yet” is as ominous as it looks. No one has a model that reflects what these levels of tariffs will do to inflation.

Ignoring tariffs, are the drivers of inflation solved? It’s hard to know. Trump has driven down oil prices, killing off the energy portion of inflation data. But that wasn’t the only thing driving inflation.

In short order, we’ve entered a global economic war against China, triggered a bond market meltdown, and divided the world into two spheres: America or China. Recession is a distinct possibility, though no one is sure about that either.

On Wednesday, Goldman Sachs said the U.S. was entering a recession this year. Within minutes of that dropping, Trump announced a 90-day pause on tariffs. The bank retracted the call an hour later.

When I say no one knows what happens next, I genuinely mean it. The people who have billions at stake on these calls don’t know. And while Trump and his team paint this scenario as if everything is part of the plan, his caving in the face of the bond market suggests otherwise.

Everyone has a plan until they get punched in the face. The mistakes made over the Signal app were the first scandal for Trump’s second term. The bond market implosion is the first pushback against the Trump agenda we’ve seen so far. And it was a haymaker right across his jaw.

The White House is rattled by that, even if they won’t admit it. If bonds continue pushing up, the pressure on the White House to relent further will amplify. That’s what I’ll be watching the next week. And I know Scott Bessent, Trump, and the cabinet will do the same.

Links of the week

Hudson River chopper tragic crash victims identified as tech boss, wife and three kids after doomed tourist flight – The Sun

Ukraine captures Chinese soldiers in Russia – claims 155 more – BBC

China’s Secret Weapon For Taiwan Invasion? Meet The Shuiqiao Bridge Barges – 19fortyfive

Chuck Todd Finally Confesses but There’s a Catch – PJ Media

Trump’s triple-digit tariff essentially cuts off most trade with China – CNBC

Supreme Court rules U.S. must facilitate return of Kilmar Abrego Garcia from El Salvador – CNBC

Democrats snub Kamala Harris in special elections – Daily Mail

Democrats in a Populist Era: They’re still lost. – Ruy Teixeira

WeightWatchers preparing for bankruptcy with rise of Ozempic – The Sun

X/Twitter Thread(s) of the week

That moment when Bill Clinton realized his entire presidency depended on the bond market.