Want to sell America? Go ahead. Just don’t forget to buy back higher.
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Sell and see what happens. Hi, my name is Mark, and I am a capitalist. And no, this is not my first meeting. As a young teen, I sat in my room many nights reading, painting, soldering, drawing, and yes, programming computers. I was a certified nerd, but don’t let that fool you. While I kept myself occupied until the early hours of the morning with hobbies, I was sharpening my fangs. I was watching President Ronald Regan and the goings on in Washington DC on a not-so-small black and white, “portable” TV that I would lug from the kitchen to my room. Everyone else in the house was sleeping while I watched repeats of Louis Rukeyser's Wall Street Week on channel 13. Each week, he would cycle through Wall Street's best and brightest minds, and I was captivated.
I was destined to be an engineer (or so I thought), but I was fascinated with Wall Street, always grabbing the business section from my father's New York Times to track stocks I was interested in. I would enter their closing prices in a VisiCalc spreadsheet for fun. 🤓
Later on in college, I switched my major from Engineering to Economics as fascination in my avocation was overtaken by my destined vocation. A couple of really dynamic professors set the hook, and the transition became permanent. I was able to satisfy my voracious appetite for math and evidence-based decision making with econometrics.
As part of my studies, I learned quite a bit about different types of economic-political models. Economics, after all, was still considered a liberal art at the time and much of the curriculum was weighted in social science. My regular followers know that I often refer to my Marxian Economics class which was spent studying the Communist Manifesto. The point here is that I wasn’t just born into capitalism, I chose it, based on what I learned were the alternatives. Side note on that: my scientist-father escaped communism in 1957 during the Hungarian Revolution, so I knew a few things about socialism and purported communism.
Jump forward a bit and I found myself in my first Wall Street job on a Treasury bond trading desk. Back then Treasuries were mostly for institutions and banks, and besides, my firm was dedicated to institutions. Folks, back then there were no online courses, Google, ChaptGPT… no mini-MBAs sold to wealthy wannabes. The closest thing we had was Marcia Stigum’s Money Market (Stigum, M., & Crescenzi, A. (2007). Stigum's money market: Instruments, institutions, and risk management (4th ed.). McGraw-Hill.) It was first published in 1978, and it was standard issue for all incoming fixed income traders and salespeople. I still have my version, complete with trade tickets as bookmarks.
That said, on the trading desk, I learned a lot about how the economy really worked and how the bond markets were deeply in lockstep with it. One of the things that was eye-opening to me was the level of participation in the markets by foreign governments. For those old enough to remember those days, Japan was the China of the day. An emerging tiger that struck fear in the hearts of American economists, businesspeople, and politicians.
After World War II Japan re-emerged as a technical and manufacturing powerhouse. It soon became the world’s second largest economy with its dominance in automobiles (Toyota, Honda) and consumer electronics (Sony, Panasonic). Because of this along with low labor costs, Japan had a very large trade surplus. The US was struggling with high inflation and even stagflation. A series of Fed-inspired recessions kept the US on its back foot. The fear was real, and it peaked when the Japanese bought New York's landmark Rockefeller Center and even Pebble Beach Golf Links–both American icons.
All the while, I was witnessing Japanese companies buying HUGE positions in US Treasuries and even establishing Primary Dealers in the US. There was a treasury futures session in the middle of the night which specifically catered to Japanese traders. Why would Japan, so established, with so much economic momentum, be so interested in US Treasuries? The Brits had their Gilts, and the Germans their Bunds, both stable industrial heavyweights. Why, America? There were many Americans at the time that objected to “the competition” owning so much US debt. People famously said that the US owed so much money to Japan, that they owned the US. Many were ready to throw in the towel and sell America.
We know today that it would have been a losing strategy. But what was it that propelled the US from those scary days to where it is today? I will tell you. RAW CAPITALISM, INNOVATION, CREATIVITY, and OUTRIGHT HUNGER FOR SUCCESS as core American values! Success is not guaranteed in the US, but it remains the best place to attain it. Because? Capitalism. Now, there are other things, like the fact that the US has the strongest military in the world making assets and people in the US safer than anywhere else on the planet.
These days, China has emerged as a new so-called threat, similar to 1980s Japan. President Trump, rightly, is attempting to reset and level the playing field with China, whose emergence was due in large part to the US being a trading partner. China, similar to Japan in the 1980s, is in its feels trying to assert and cement its growth globally, making negotiations between the US and second largest economy China, challenging, to say the least. What’s more, the US is currently applying pressure to all its trading partners to make trade more… free, globally.
A few weeks back, rumors emerged that China was selling US Treasuries and repatriating the proceeds causing yields to jump and the Dollar to decline. Just last week, Japanese Finance Minister Kato suggested that selling US Treasuries for leverage in trade negotiations was a “card on the table,” ruffling some feathers. Japan is the second largest holder of US Treasuries. The so-called “sell America” theme had been circling around igniting some… er, emotions.
Were my feathers ruffled? NO WAY! Why, because where else is Japan and China going to place its money to ensure its safety? Where? [crickets sound] What other domicile in the world has the ability to INNOVATE and CREATE and not only protect capital but grow it consistently over time? I am still waiting for an answer.
Guess what? Over the weekend, WHILE YOU SLEPT, Finance Minister Kato “clarified” his statement and said that Japan had no interest in selling Treasuries. And you know why. Folks, capitalism is imperfect, but if protected, it will always win the race. Are you concerned about recent volatility in the markets and the President’s less-than-perfect delivery of trade policy? Well, you can sell America if you like, but if you do, be prepared to lose. If you don’t believe me, check out the chart that follows this section.
Stay focused, don’t get caught up in the noise. US capitalism has existed since it adopted the capitalist principals from Adam Smith’s Wealth of Nations in 1776. It has spanned the reigns of many US presidents, and it will go on long after this President has made his mark. With that, [cue AC/DC’s Thunderstruck], “racers, start your engines!”
FRIDAY’S MARKETS
Stocks rallied on Friday making it a rare 9-day winning streak for the S&P 500. The boost came from a better-than-expected jobs number which supported the case that the US economy is holding up. The strong jobs number also gave the Fed more slack when it comes to cutting rates sooner–strong jobs and expected inflation means tight monetary policy.
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