The US economy strives to become more competitive internationally in trade and investment. There are two ways to achieve this goal; apply tariffs, raising the cost of imported goods to encourage more US manufacturing and exports. Or, devalue the US dollar, so US goods cost less in overseas markets.
So far, the US has chosen tariffs , and they are being used as a bully club.
But hold on a moment, all the noise around tariffs caused the dollar to strengthen, which is what the US does not want. The US dollar must go down in value for the US to become more competitive, not up. What gives?
As strange as it seems, there may be a strategy to this tariff madness, the Mara Lago Accord, a new international currency agreement the US is talking about. The Mara Lago Accord’s goal would be to convince China, Japan, Germany, France, and the UK to agree to jointly devalue the US dollar, make it cheaper.
In other words, do a favor for the US and its economy.
A similar accord happened in 1985, the New York Plaza Accord. At that time, on the back of strong relationships, the US persuaded Britain, Japan, Germany, and France to jointly devalue the US dollar.
It seems logical that the only way countries like China, Japan, Germany, France and the UK could be convinced to take the economic pain of an accord to help the US become more competitive is if trust was abundant.
Well, given the US backing away from the Ukraine and NATO, cozying up to Russia, and the sloppy messaging on tariffs, trust is not abundant. It is a stretch to think Europe is going to trust the US right now.
The same goes for China. Given the aggressive tone on tariffs, it is hard to believe China will have enough trust to sign on to an accord that weakens the US dollar and benefits the US.
Perhaps the US should change their tone away from bullying. After all, bullies are hard to trust.
But if you listen to Treasury Secretary Scott Bessant, bullying may be the right strategy. Bullying, so the thinking goes, may bring the allies to the negotiating table.
With the negotiating table in mind, the Treasury secretary seems to be crafting a proposal, a proposal hinting at a tiered list of US alliances.
The idea is for other governments to put themselves into one of three categories friend, foe, or adjacent player. Friends would get military protection and tariff relief, but must embrace the currency accord, a weaker US dollar. Foes and adjacent players may still get bullied but be eligible for transnational deals.
It is kind of like choosing between membership plans at Costco.
So, what might this mean for investing in bonds?
First, it means favoring short-maturity bonds. As uncertainty grows it pays to be in short maturity.
Second, it might mean staying from US dollar bonds and moving towards Europe and higher yielding Latin American bonds, like Mexico and Brazil.
Putting the Mara Lago Accord aside, there are many things that can weaken the US dollar, and wreck investment returns: a government shutdown, economic growth slowing, and lower US interest rates to name a few.
European economic growth is on the upswing with its newfound defense spending, the Euro is going up, and interest rates will probably stay high.
Mexico has been threatened by tariffs, but the currency has held pretty steady
Brazil has long been challenged economically due to high government spending, but at minimum things are not getting worse.
This blog is for educational and informational purposes only, covering general market trends, industry developments, and asset features. Nothing herein is investment advice, a solicitation, or a recommendation to buy or sell any assets. Etherfuse and its guests may hold stakes in some or all of the assets discussed.
