The Joker Economy

When Trade Wars Turn Financial Markets to Chaos

Investing can seem complicated and overwhelming to a lot of people. Trust me, I get it. I’m fortunate that I enjoy finance and investing, especially when it interacts with economics and international relations. However, a basic concept of investing is that investors are willing to exchange their cash for assets (e.g., stocks, bonds, gold, etc.) in the hopes they can grow their money – especially at a growth rate higher than the inflation rate.

Now, everyone should know that investing is not without risk. While some investments are lower-risk like bonds (when compared to higher-risk assets like stocks), these lower-risk assets will provide a lower rate of return. Like insurance premiums rates, the rate needs to reflect the risk.

So, for investors to give up their money, one thing they want to understand is that the rules of the game are transparent and reliable. Throw in a high degree of uncertainty, and chaos can take hold. In short, that markets don’t like chaos.

As the Joker described chaos in the movie “The Dark Knight” (which was played perfectly by Heath Ledger):

“I just did what I do best. I took your little plan, and I turned it on itself. Look what I did to this city with a few drums of gas and a couple of bullets. Hmmm? You know... You know what I've noticed? Nobody panics when things go "according to plan." Even if the plan is horrifying! If, tomorrow, I tell the press that, like, a gang banger will get shot, or a truckload of soldiers will be blown up, nobody panics, because it's all "part of the plan". But when I say that one little old mayor will die, well then everyone loses their minds. Introduce a little anarchy. Upset the established order, and everything becomes chaos. I'm an agent of chaos. Oh, and you know the thing about chaos? It's fair!”

Unfortunately, what the Joker says here about chaos is playing out now in the financial markets. The established order and the rules of the game are being challenged. Investors are panicking. In short, the Trump Administration trade policy has become an agent of chaos.

Uncertainty has a Cost

So, in the chance that you’ve been living in a cave for the past three months under Wayne Manor, since President Trump's return to office in January 2025, his administration has reinvigorated its hard-line stance on international trade, introducing a new wave of tariffs and trade restrictions. The financial markets have responded with notable volatility as investors grapple with the economic implications of these policies. Unlike previous periods of market uncertainty when U.S. Treasury securities typically served as a safe haven, recent market behaviors show a concerning deviation from this pattern. Consequently, current trade tensions are reshaping global financial dynamics, challenging the traditional role of the U.S. dollar, and creating new difficulties for U.S. debt management.

The New Trade War and Initial Market Reactions

In February 2025, the Trump Administration announced expanded tariffs targeting major trading partners, particularly China and the European Union. These measures, which the administration describes as necessary to protect American industries and address trade imbalances, include:

• Additional 25% tariffs on Chinese manufactured goods

• New 15% tariffs on European automotive imports

• Restrictions on technology transfers and investment in critical sectors (this is illustrated by the recent ban on Nvidia chips to China as reported by Yahoo Finance)

• Threats of further tariffs on countries that don't negotiate "fair" trade agreements

The immediate market reaction was predictable as equities experienced significant volatility. The S&P 500 dropped 7% in the two weeks following the announcement, while the technology-heavy NASDAQ fell nearly 9%, reflecting concerns about supply chain disruptions (remember the pandemic…good times!) and increased input costs for American companies (since the exporting countries DON’T pay the tariffs, the importers PAY the tariff).

The Unusual Flight from Equities

What has surprised analysts is not the initial market decline but rather the destination of the capital fleeing from equities. Traditionally, periods of market stress trigger a "flight to safety" where investors move capital from riskier assets like stocks to the perceived safety of U.S. Treasury bonds. This pattern has been a reliable market dynamic for decades, typically causing Treasury yields to fall (and prices to rise) during market turbulence.

However, the current situation has broken this pattern. As investors sold stocks in February and March 2025, Treasury securities did not see the expected influx of capital. Instead, Treasury yields have risen significantly:

• The 10-year Treasury yield increased from 4.2% in January to 5.7% by mid-April

• The 2-year yield jumped from 4.1% to 5.3% in the same period

• The spread between U.S. Treasuries and comparable bonds from other developed nations has widened

This unusual market behavior suggests investors are harboring concerns not just about U.S. corporate profits but about the stability of U.S. government debt itself. Remember, the rate must reflect the risk. Once again, the bond vigilantes have spoken, and they are demanding a higher rate of return to compensate them for the risk. (See my previous newsletter called “

Rising Interest Rates and U.S. Debt Challenges

Unfortunately, the rise in Treasury yields translates directly into higher borrowing costs for the U.S. government at a time when its debt obligations are already substantial. The U.S. national debt currently stands at approximately $35 trillion, and higher interest rates significantly increase the cost of servicing this debt.

1. Higher debt servicing costs reduce fiscal flexibility for other government priorities (e.g., another pandemic, responding to an invasion of Taiwan by China, etc.)

2. The need to issue more debt to cover interest payments creates a potential debt spiral (just look at the history of Argentina's economy on how this could play out)

3. Rising yields make it more expensive for businesses and consumers to borrow, potentially slowing economic growth (e.g., higher interest rates for home and auto loans, credit cards, etc.)

4. The combination of trade disruptions and higher interest rates increases recession risks (as evidenced by this recent article in Forbes)

The Dollar's Historical Privilege as Global Reserve Currency

To understand the full implications of the current situation, it's important to recognize the exceptional advantages the United States has enjoyed through the dollar's status as the world's primary reserve currency. Since the Bretton Woods Agreement of 1944, the U.S. dollar has been the cornerstone of the global financial system, providing the United States with what former French Finance Minister Valéry Giscard d'Estaing famously called an "exorbitant privilege." Put in another way, Scott Galloway often refers to the power and influence of the U.S. dollar as another American aircraft carrier influencing the global order.

1. Reduced borrowing costs: Global demand for dollar-denominated assets has historically kept U.S. interest rates lower than they might otherwise be.

2. Transaction convenience: The U.S. can pay for imports in its own currency, eliminating exchange rate risks that other nations face.

3. Global financial influence: The dollar's centrality gives the U.S. significant leverage in international finance and the ability to implement effective sanctions. (e.g., placing sanctions on Russia after its invasion of Ukraine)

4. Seigniorage benefits: As the provider of the world's reserve currency, the U.S. benefits from the difference between the cost of producing currency and its value.

5. Insulation from balance of payments crises: The persistent demand for dollars has allowed the U.S. to maintain trade deficits without experiencing the currency crises that might affect other nations.

The Trade War's Challenge to Dollar Dominance

However, the current trade tensions are accelerating a process that was already underway - the gradual diversification away from dollar dependence by many countries. Several factors are contributing to this shift:

Market Implications and Economic Outlook

The combination of trade tensions and the gradual erosion of dollar dominance creates a complex economic outlook:

How Does this End?

The current trade war initiated by the Trump Administration has set in motion dynamics that challenge long-standing patterns in global finance. The unusual behavior of investors—selling equities without moving to Treasuries—signals a deeper concern about U.S. fiscal stability and dollar dominance. As interest rates rise and the U.S. government faces higher borrowing costs, the economic advantages America has enjoyed through the dollar's reserve status appear increasingly at risk.

Et, al...

Review: A24

So, if you’ve been a regular subscriber to this newsletter, then you know I’m a big movie fan. Pretty much every weekend, you can find me at my local Alamo Drafthouse checking out the latest release. This past weekend, I went to the movies with a good friend (an eight-year veteran of the Marine Corps) to check out the latest film from A24 called Warfare.

Warfare, co-directed by Alex Garland and former Navy SEAL Ray Mendoza, is based on Mendoza's firsthand experience during a 2006 mission in Ramadi, Iraq. Departing from conventional war narratives, the film eschews character backstories and political commentary, instead plunging viewers into the chaos and claustrophobia of a SEAL platoon trapped under siege. The film's commitment to authenticity—drawn from the testimonies of Mendoza's platoon—offers a raw and unvarnished look at the psychological toll of warfare. Rather than glorifying combat, it presents a somber reflection on the dehumanizing effects of war and the lingering trauma experienced by veterans.

And the verdict is?

I found this to be a phenomenal film.

Like Black Hawk Down (which is still probably my favorite war movie to date), Warfare delivers a harrowing and immersive portrayal of modern combat. The use of IMAX visuals and realistic sound design amplifies the tension, creating an atmosphere more akin to horror than traditional war cinema. This approach effectively conveys the disorientation and terror of battle, challenging audiences to confront the brutal realities faced by soldiers on the ground.

This is a film that should be seen on a large screen with a quality sound system. As a viewer, you need to be truly immersed in the film to feel its impact—and not be distracted by your phone or someone knocking at your door at home. Trust me on this.