Geopolitical Judo

Russian revolutionary and politician Vladimir Lenin said, "There are decades where nothing happens; and there are weeks where decades happen". And it looks like decades are indeed hapening these days. We have seen 12% daily swings in equity indices, VIX above 50, and it feels like we’re on the brink of a geopolitical crisis. We’re are on the opposite side of the status quo. If we go beyond the headlines into the most basic components of the market circuitry, we will see interesting dislocations: in the chart below you can see the U.S. dollar index and the 10 year treasury yield. Although the chart timeline is not too long, it’s long enough to see the behavior of both lines is unusual. Why? It appears that China (and perhaps Japan too) is punishing the U.S. by selling US treasuries and selling the dollars. It’s difficult to confirm what they’re doing with the dollars, but if we look at the price of gold, it would be surprising if they are transitioning from a USD currency reserve system, into a gold reserve one. The U.S. dollar index has broken below 100, and that is not only a psychological number, it means the dollar is under attack. Once again China is practicing Judo with the U.S., using the weight of the tariffs against the U.S. to put pressure on the financial muscles and tendons that make the U.S. market work.

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