Trump Volatility: Go to Cash? Or Go Shopping?

April 14, 2025 | Last week The Institutional Risk Analyst  received a lot of mail from readers and fellow scribes. One long-time colleague in the housing market asked: “You don't think anything really bad will happen? I don't have to sell my portfolio and go to cash?”  Yes, you can go to cash, but then what? The dollar is currently 57% of global reserves, 50% of global invoicing and 88% of total foreign exchange transactions, according to the Atlantic Council.

As we discuss in our upcoming book "Inflated: Money, Debt and the American Dream," the paper money economy created by President Abraham Lincoln opened the door to hyperinflation in the 21st Century. President Franklin Delano Roosevelt made fiat currency a monopoly during the New Deal, trapping Americans and the world into using paper dollars as money. Dollars are the poker chips, the Fed is the dealer and the US Treasury is the house.

In metaphysical terms, think of bitcoin and other crypto tokens as a reaction against Franklin Roosevelt's seizure of private gold holdings from your great grandparents. FDR's confiscation of gold was about political survival, but the wave of public fear caused by Roosevelt's actions and the subsequent dollar devaluation made the Great Depression far worse. And the progressive Federal Reserve Board under Eugene Black happily facilitated Roosevelt's repression of gold as money. We write in Inflated:

"The Emergency Banking Act was introduced on March 9, 1933, passed the same day, and signed into law. Congressman Henry B. Steagall reportedly walked into the House chamber with the text of the legislation newly transmitted from the White House and waving it in the air said 'Here’s the bill. Let’s pass it.' After a few minutes of debate and no amendments, it was passed and the Senate soon followed suit. The first section of the law simply endorsed all the executive orders given by the president or secretary of the Treasury since March 4. Congress gave FDR the power to confiscate gold, seize banks, and impose currency controls, a remarkable agenda of socialist expropriation that terrified American citizens."

FDR deliberately worsened the Banking Crisis of 1933 to serve his own political interests. Some 90 years later, President Trump threatens us with another economic crisis driven by similar political avarice. By fomenting a run on dollar assets, Trump simplistically thinks money will flow into Treasury debt, causing LT yields to fall. But instead the threat from Trumpian volatility is a more immediate widening of credit spreads, a dangerous development that may put the US government in danger of default as soon as Midsummer.

The 19th Century economics of the Trump Administration have cost investors at least $15 trillion in paper losses since January. Remember, it's about Main Street over Wall Street, right? But interest rates are a two-dimensional concept, while credit spreads describe living markets in three dimensions. The Trump tariffs are causing a lot of investors who understand national income accounting to flee dollars. Without a change in direction, the Trump tariff war eventually results in a US recession, a long delayed credit crisis, and a massive resumption of QE by the Fed. Look at Treasury 10s minus 2s (green line) below showing spreads widening since June 2024.

“I cannot decide whether to get angry, sad, scared or to laugh hysterically, wrote retired attorney and author Fred Feldkamp last week in an email. “I can avoid hate. It achieves nothing, but am befuddled how best to react. Everyone other than Trumpets seem to now understand that the double entries required to correctly account for trade necessarily force an identity between current accounts and capital accounts.” 

“Trade surpluses, therefore, mandate capital deficits and vice versa,” he continues. “So, as long as one wisely invests capital surpluses, current account deficits are inconsequential and shutting down one necessarily shuts down the other.  That’s just stupid. If the US trade deficit falls, the US capital surplus that has expanded net worth and funds budget deficits will fall in lock step.”

Of course in recent years, capital surpluses flowing into the US have been used to finance consumption or refinance existing debt, a problem faced by all of the major economies around the world. President Trump, seeing the domestic result on consumers of dollar recycling, namely rising inflation and falling real incomes, has decided that change is needed, but only enough change to ensure that the GOP retains control of Washington. A lot of the fuss and bother in Washington over the past month may just be more Potomac Kabuki Theater.

The stock rally on Friday illustrates the fact that global equity markets usually find a reason to get comfortable with the latest developments in Washington before the weekend arrives. The global credit markets not so much. The equity markets are important especially as a political barometer, but the bond markets are crucial. When you see that spreads on government insured mortgage bonds and corporate debt are blowing out, this indicates that the credit markets are becoming dysfunctional and the US economy is rolling over. Presumably Treasury Secretary Scott Bessent appreciates the risk.

High yield spreads rising into double digits suggest that the US economy is in a stall. If you read the popular press, then you may believe that Trump trade actions will eventually cause an economic depression and that this is the reason for falling equity share prices.

The more immediate cause of the financial market disruption is the fact that falling cash flows into the dollar are already forcing an increase in yields on Treasury bonds and private debt. We tend to view the equity market selloff as a buying opportunity, but this assumes that President Trump and his advisors will eventually accept that fiscal and trade deficits must be financed with capital inflows.

Source: Goggle Finance

As our reader's query suggests, the perennial question people ask is whether foreign investors around the world will sell Treasury and agency debt as they flee dollars and go to cash. But go where exactly?  If all of the foreign holders of Treasury bills and Ginnie Mae MBS sold their holdings and went to cash, what would they do then? Buy gold? UK Gilts? Swiss Francs? Yen JGBs?

Gold is one of the few asset classes that could absorb some of the excess liquidity now fleeing the dollar and US markets -- but only just some. Total gold holdings above ground were a bit over 200,000 tons last year and worth only ~ $15 trillion in 2024. Deliverable US gold stocks, however, are scarce as buyers take physical delivery, especially since the January Inauguration of President Trump. The western nations have re-discovered gold as a reserve asset, but the Russians and Chinese are not selling. Is gold the most undervalued asset on earth? Perhaps, especially given the visible deliverable supply today.

As we note in "Inflated," the US Treasury should be buying gold and selling paper as part of a standing policy. While gold is not defined as a “high quality liquid asset” or HQLA for banks, gold market participants believe that gold will soon be added to the list of HQLAs under Basel III and made eligible to serve as collateral for ISDA swaps. Perhaps the Fed itself will start to hold gold as capital instead of say mortgage-backed securities. This will be a great irony since much of the gold sitting in Ft. Knox today was seized in 1933 from individual US citizens and the member banks of the Federal Reserve System.

Readers also ask: Are China and Russia intent upon launching gold-backed currencies in competition with the dollar? Perhaps, but even with the market volatility of Donald Trump in the White House, the dollar remains the biggest game in town but also a game that few investors can really escape. There is not enough physical gold available for delivery in May to soak up even a fraction of the liquidity flowing out of dollar assets. 

Currencies such as the yen or euro will appreciate rapidly if there are significant outflows from dollars. Perhaps this is precisely the outcome President Trump seeks, a modest devaluation of the dollar added to tariffs to reduce external deficits. But does currency devaluation work when the Treasury is generating huge fiscal deficits? No more than it did for FDR in the 1930s deflation.

We suspect that Trump is beginning a grudging admission of the truth of national income accounting that will ultimately result in significant concessions to the trade war and an equal rebound in US equity markets, the ultimate inflation indicator. What that should mean to our readers is do your homework and get ready to go shopping.

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