The Breakdown - How Trade Negotiations Are Impacting Crypto

Starting point is 00:00:00 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the Big Picture Power Shifts remaking our world. What's going on, guys? It is Monday, April 21st, and today we are catching up on, well, a lot. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly. All right, friends, we are finally back from vacation, Disney, spring break, Easter, all that jazz. And today what we're going to do to kick things off is do a quick high-level recap of everything

Starting point is 00:00:47 that we missed and everything that sets up the week to come. This will bridge across both macro and crypto. And to start off, let's talk about the trade talks that have kicked off in Washington with Japan, South Korea, and the UK, as some of the U.S.'s largest trading partners come to the table. The South Korean delegation is heading into town this week, but Japan was the focus for last week. As the first country to sit down for negotiations with President Trump, Japan served as something of a litmus test for how trade talks might proceed. Initial reports weren't all that promising

Starting point is 00:01:16 for a speedy resolution. Veteran diplomat, Chas Friedman, said, the Japanese have just been in Washington. Their experience apparently was that they went to talk to the American leadership on this matter. The American leadership asked, what are you offering? And the Japanese said, well, what is it that you want? The Americans could not explain what it is they wanted. This is a Kakamimi approach to negotiation. Now, some will say that this is an art of the deal strategy, never wanting to be the one to make a first offer at the negotiation table, but with global trade on hold, there are many people who question the premise of the whole thing. Still, President Trump left the meeting promoting big progress on social media. Treasury Secretary Scott Besson

Starting point is 00:01:52 tweeted that the discussions on trade are progressing in a highly satisfactory direction. Reports over the weekend suggested that the Japanese government would consider increasing imports of rice and soybeans as a bargaining chip. There were no reports of movement on aligning Japanese vehicle regulations with the U.S. to allow the import of American cars, which had been a major sticking point for Trump. Breaking late on Sunday, Charles Gasparino of Fox business reported, quote, a Wall Street exec with ties to Trump White House says the word is that Secretary Besson is close to announcing a significant trade deal likely to be with Japan. Gasparino included an extensive caveat that he hadn't confirmed from White House sources, that a deal could always

Starting point is 00:02:27 unwind and that timing is always suspect. Fintwit latched onto the very fishy timing of this weekly source news bomb. Bucco Capital suggested that Bill Ackman is the Wall Street source, quote, who always has bullish news on trade deal progress two hours before futures open on Sunday night. Meanwhile, big questions remain over the status of negotiations with the EU. Trump met with Italian Prime Minister Georgia Marlone on Thursday, the only European leader to meet with the president during this term. Following the meeting, Trump claimed there will be a trade deal 100%. However, on Tuesday, EU Commission Chief Ursula von der Leyen, told the press, the West as we know it no longer exists. What we perceived as a world order is becoming a world

Starting point is 00:03:04 disorder. This is why we need another new EU that is ready to go out into the big wide world and play a very active role in shaping this new world order that is coming. Ultimately, Italy cannot negotiate their own trade deal independent of the continental trading block. Fonderlion is yet to pick up the phone personally, sending the EU trade representative to Washington last Monday. China continues to be the biggest vacuum in the negotiations. And to a certain extent this is by design. Some believe that the entire strategy is to coerce a global trading alliance against China, leaning on allies to join in pushing back on their manufacturing superpower. Trump remains adamant that a deal is coming. In response to press questions about communications with Beijing on Thursday, he said, oh, we're going to make a deal.

Starting point is 00:03:42 I think we're going to make a very good deal with China. Beijing appears for their part to be making preparations to wait it out. In a statement on Monday, CCP officials warned that any country reaching a deal with the U.S. at China's detriment will face countermeasures, essentially threatening retaliation against countries that sign a U.S. trade deal. President Xi Jinping has also been touring Vietnam, Malaysia, and Cambodia over the past week to drum up support. Fiscal authorities have begun ramping up support for manufacturing in both direct subsidies and technical assistance to redirect goods to the domestic market to keep factories operational. In the background, the export of rare earth metals have been essentially embargoed by a change in licensing requirements. Keep in mind, China

Starting point is 00:04:18 essentially has a monopoly on these key inputs to EV and military production. The TLDR of all of this is that the trade war is still far from resolution. The so-called reciprocal tariffs are on hold for 90 days, but in the meantime, 10% global baseline tariffs are in force. Apollo Global Management noted that on average, the U.S. takes 18 months to sign a trade deal and 45 months to implement. Secretary Besson has said that 15 large economies are a primary focus, but that leaves some 60 to 85 lesser economies standing in line. What's more, the domestic economy might not be able to wait 90 days for trade talks to come through. On Thursday, the Philadelphia Fed reported the sharpest declines in manufacturing activity since 2020. Beyond uncertainty and domestic demand,

Starting point is 00:04:57 increases in input costs are making large sections of U.S. manufacturing completely unviable. There's almost nothing in the U.S. that has produced end-to-end from locally sourced inputs, so even for domestic manufacturers, the tariffs have a huge impact. Atlantic journalist Derek Thompson tweeted, We really did it. We took a growing U.S. manufacturing economy, declared it broken, started a trade war, and broke U.S. manufacturing. In response to criticism that he's just a journalist, Thompson interviewed Mulsson. and Hart, the CEO of Viahart, a toy manufacturing company. He said,

Starting point is 00:05:27 If the tariffs don't go anywhere, toys are the least of our worries. What about transformers and pumps and air conditioners? At a certain point, the stock of replacement pumps we need for clean water are going to run out. There isn't anyone building new factories for those things, and the factories won't be ready in time. A lot of companies are definitely going to go under, that's for sure. Ryan Peterson, the CEO of Logistics Company Flexport is already seeing the beginning of this, tweeting, two of our American customers devastated by the tariffs gave up and sold themselves to their Chinese factories in the last week. Outbound shipping from China is already showing up in the data. So far this month, there have been 80 blank sailings, cargo ship departures that are

Starting point is 00:06:00 canceled by the carrier. The peak in May of 2020 was 51. Craig Fuller, the founder of logistics intelligence company freight waves, believes the downstream effects are underappreciated, commenting, many truckers I've spoken with don't realize how quickly container volumes have collapsed. Starting in May, port freight out of California will be almost eliminated. It's going to be a bloodbath in short-distance transit, followed by intermodal, and then a collapse in I-20 and I-40 trucking. For all the economic carnage so far, the benefits that have accrued at least to date seem pretty slim. The U.S. Customs Office reports that only 500 million in tariff fees have been collected. Felix Javan, the host of the Forward Guidance podcast, remarked on how broad

Starting point is 00:06:37 the deterioration in the data has been, commenting, commenting, economic activity is falling off a cliff and any activity that remains the prices are going up. Absolute worst scenario for policymakers here, especially with no meaningful idea of how permanent tariffs will be. We're at a phase now where even if they get removed today, the economy is already scarred and will have cascading impacts regardless. Steve Howe, a Bloomberg researcher wrote, This trade war on the whole so-called remake of global order like Brexit will just make all of us poorer, won't it? Just like Brexit, the proponents feel fully justified that something had to be done. Ex-post, something was done, but the problem wasn't solved. It got worse.

Starting point is 00:07:12 Rah Malawalia of Lumida Wealth brought it all together, tweeting, Japan is slow walking the negotiation and why shouldn't they? U.S. trading partners like Japan and Europe have more leverage than the United States. Why? Because small businesses will bear the brunt of tariffs, and small business owners vote Republican disproportionately. Small businesses are thinly capitalized and lack the working capital to get through a spike in tariffs. In any negotiation, you don't want to be the party under time pressure. Trump is under time pressure to get a deal done to avoid the liquidation of these businesses. Today's episode is brought to you by a crypto tax calculator. If you're

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Starting point is 00:09:03 If you are in this space, you owe it to yourself to at least check out Ledger and their ecosystem them what they have available to you. So thanks, once again, to Ledger for sponsoring the show. Meanwhile, the administration also seems to be ramping up their antagonism toward the Fed. At an event on Wednesday, Fed Chair Jerome Powell gave his starkest warning yet, commenting, commenting, these are very fundamental policy changes. There isn't a modern experience of how to think about this. He noted that the tariffs were far higher than anticipated, adding, we may find ourselves in the challenging scenario in which our dual mandate goals are intention. Powell forecast that unemployment would likely rise as the economy slows.

Starting point is 00:09:37 He was asked directly if there was a Fed put, a level at which the central bank would step in to address falling stock prices. Powell responded with a blunt no, adding, Markets are struggling with a lot of uncertainty, and that means volatility. But having said that, markets are functioning. They're orderly and they're functioning just about as you would expect them to function. Market analysts took this as an extremely hawkish speech, with Powell essentially saying that the risks of inflation could be too great to allow the Fed to cut.

Starting point is 00:10:01 Quinn Thompson of Lekker Capital commented, Powell was incredibly hawkish, so much so he went out of his way to warn of elevated structural risks for the United States, making it a less attractive jurisdiction for investment. He also downplayed the recent market volatility as orderly functioning as expected. Megahawk. David Russell, Global Head of Market Strategy at Trade Station, wrote, Powell just laid down the law with Trump. It was a clear warning about stagflation and a declaration the Fed won't enable the White House with rate cuts. The following day, Trump again raised the threat of removing Powell, stating, I'm not happy with him. I let him know it. If I want him

Starting point is 00:10:31 out, he'll be out of there real fast. Believe me, if we had a Fed chairman that understood what he was doing, interest rates would be coming down. He should bring them down. National Economic Council Director Kevin Hassett told the press that the administration will continue to study whether they can remove Powell from the position. The letter of the law says that Fed chairs can only be removed for cause, which generally means gross negligence or corruption rather than a policy disagreement with the White House. Still, the risk to central bank independence is now overt and even has some staunch Trump supporters queasy. Anthony Pompliano said, I do not believe that the president of the United States should come in and unilaterally fire the Fed chair. Where you have a disagreement and then the firing,

Starting point is 00:11:07 I think that's not really the area that we want to go into. The idea of firing the Fed chairman is a very bad precedent to set this way. Honestly, at this point, many of the markets think it's just a matter of time. With Paulo Macro tweeting, at this point, I'm largely convinced that Trump is going to fire Powell regardless of what courts say and deal with a fallout later. This all puts Treasury Secretary Besson in a very difficult position. One of his primary goals for the year is to roll over trillions of dollars in national debt without increasing the interest burden, and for that he needs bond yields to drop. Politico reports that Besson has repeatedly cautioned the president that any attempt to fire Powell would risk destabilizing financial markets. By all accounts, Besson is one of the

Starting point is 00:11:42 sole moderating forces in the White House. The Wall Street Journal reported that he and Commerce Secretary Howard Lutnik engineered the tariff pause. They state the, quote, intervention was arranged while trade advisor Peter Navarro was occupied in another meeting. Besson and Lutnik reportedly helped compose the post that put the tariffs on hold and refused to leave. until the president hit send. So what did this all mean for markets? Well, the weak saw risk markets continue to drop, no surprise there, but maybe the more alarming action was in macro assets. Felix Javan, again a forward guidance tweeted, personally, if I saw gold up only, USD down, bond yields up, equities down, and I was in charge of things, that would scare me way more than

Starting point is 00:12:17 standard recession rotation price action. The issue here is that there is no safe haven bid for U.S. bonds in the dollar. Instead, this looks like capital flight normally associated with financial crises in emerging markets. Volatility was down across the week, slowing the decline in stocks, but it's still elevated from March levels. For Bitcoin, as always happens, some were quick to declare the asset a failure. On Wednesday, JPMorgan analysts wrote, Bitcoin has failed to benefit from the safe haven flows that have been supporting gold. The recent price action was even enough for Lynn Alden to lower her expectations. She said, before all this tariff-cuffle, I would have had a higher price target. Her new end-of-year target is no more optimistic than regaining the $100,000 price level.

Starting point is 00:12:55 David Duong, the head of research at Coinbase Institutional, even suggested that the data shows a new crypto winter settling in. Bitcoin's price action throughout last week was aggressively sideways. Despite a ton of volatility, prices never dropped below 83,000 or above 86,000. That is until Sunday night when Bitcoin broke out of range and spiked to 87,500. While that's still only recapturing price levels from late March, many are sitting up and paying attention. Zero hedge wrote, there it is, dollar disintegrating and suddenly Bitcoin soars higher. looks like regime shift finally kicked in. Thomas Ferrer of Apollo Sats tweeted, Bitcoin is pumping while stock futures are trading down. It's almost like the market is treating

Starting point is 00:13:33 it like it's an alternative financial system or something. On the policy side, it looks like there are a few new headwinds for getting crypto legislation done. Veronica Irwin of Unchained reports that crypto investors are lobbying Congress to put market structure bills on hold. According to their sources, the argument is that the SEC should be left to pass their own regulation under the current laws. One source said, now that Gary Gensler is gone, there's this thought that maybe we shouldn't move too fast because in a perfect world, crypto would not be regulated. This is a particularly stupid thought, if you ask me, with no real consideration for how much a lack of regulation actually impacts things,

Starting point is 00:14:06 but there you have it. GOP lawmakers have been firmly fixed on getting market structure done by August, which was a goal set by the administration. The logic was always that getting clear laws written would prevent the next Gensler. The proposal currently on the table essentially puts the CFTC in control of regulating markets, while the SEC deals with token issuance within a clear framework. One congressional staffer said that these new lobbying efforts are severely misguided, stating, what they don't understand is that the regulatory pendulum swings back and forth, and the political pendulum swings back and forth. We are kind of near the apex of crypto's power because of, frankly, all the money that was spent on the election and the fact that

Starting point is 00:14:39 their favorite candidates got elected. This moment in time will not last. Crypto lawyer Gabriel Shapiro was very unimpressed by the short-sightedness commenting, this is just proof that there are basically no crypto policy people. They're just reactive little sheeple who do 30-day tactics, not strategy. For so many years, I argued the SEC is the logical regulator for crypto, it just needs friendlier regulations, that the CFTC could end up being much worse and it was a mistake to just pass a big bill giving CFTC authority, hoping that it will magically fix things. Now the circumstances have changed, they realized the own goal committed by spending years doing nothing but trying to make sure the SEC has little to no authority over crypto,

Starting point is 00:15:13 while basically having no other plan for how crypto actually would be regulated, just by anyone but the SEC. Even the stablecoin bill, which was viewed as an easy lift, is looking more shaky as details get hashed out. Reports suggest a three-way turf war has broken out between lobbyists. Circle and Tether are still fighting it out over how much leeway should be granted to overseas firms during a transitionary period. Meanwhile, the banking lobby is ramping up efforts to lock them out entirely. The Block reports the Bank of America has been pushing hard to ensure that commercial firms like tech companies can't launch their own stable coins. One lobbyist source said, the reason why you do that is because if you don't, a retail company, for example, could look at your bank

Starting point is 00:15:48 account, your statements, your expenses, and make some really, really intrusive and anti-competitive decisions about how they market to you. And so Congress a long time ago decided to make that separation. There is no such separation for current payment stablecoin issuers under both bills. Their solution, severely limiting the stablecoin operations of non-banks, would also hinder incumbents like Circle and Tether if they can't obtain banking licenses. Aside from Bank of America, sources say that Fidelity, Goldman Sachs, and BNY have also shown interest in issuing stable coins. One lobbyist said, quote, there's this kind of territorial battle between the non-bank issuers, the crypto issuers, and potential market entrance like the banks.

Starting point is 00:16:23 Saying the quiet part out loud, they added that the banks would like to, quote, own it all instead of open networks to exist. TLDR, the entire thing is getting very messy. Now, despite uncertainty in how legislation will shake out, the institutional adoption story continues a pace. On an earnings call last Thursday, Charles Schwab's CEO, Rick Worcester said, Our expectation is that with the changing regulatory environment, we are hopeful and likely to be able to launch direct spot crypto trading, and our goal is to do that in the next 12 months. He added that clients are increasingly seeking information about crypto, stating,

Starting point is 00:16:52 we saw a 400% increase in traffic to Schwab's crypto site recently, 70% of whom were prospects. Nate Grassee of the ETF store believes that the slow and steady adoption of crypto is inevitable, tweeting, as I've said numerous times in the past, spot crypto trading will be table stakes for every major brokerage. Still, I got to say, coming back into this week, this is a very tough time. One thing that I don't think has been discussed enough yet is that whether it pays off or not, the Trump administration is basically spending all, and I mean 100% of its political capital on these tariffs. Feels to me like they have very little room to push things like stablecoin legislation, and so I'm increasingly nervous that not just from a market standpoint,

Starting point is 00:17:31 but from a political will standpoint, almost everything that we hope for out of this administration is unlikely to come to pass. Now that is not a foregone conclusion, and there are plenty of scenarios that I could draw where things go a different direction, markets get back online, tariffs seem to start to work, trade deals start to happen, and an immense amount of political will comes flooding back into the administration. However, it's a gamble and we're in the middle part where we don't know if it's going to pay off yet. For now that that is going to do it for today's breakdown. excited to be back with you guys this week covering it all as it happens. Until next time, be safe and take care of each other. Peace.

The Breakdown - How Trade Negotiations Are Impacting Crypto

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