The Breakdown - Trump's Taco Trade and the Dollar's Dangerous Game

Episode Date: June 10, 2025

Markets settle on the "taco trade," betting Trump won't push tariffs too far—but uncertainty reigns as China tensions linger, automakers scramble over rare earth metals, and CEO confidence plummets. Meanwhile, Trump's massive spending bill sparks bipartisan backlash, Elon Musk fumes over budget bloat, and discussions heat up about ditching the debt ceiling entirely. Plus, the weaponization of the dollar gains momentum as geopolitical conflicts put foreign reserves at risk. Is the financial system signaling distress, and does Bitcoin offer a way out? Brought to you by: Grayscale offers more than 20 different crypto investment products. Explore the full suite at grayscale.com. Invest in your share of the future. Investing involves risk and possible loss of principal. To learn more, visit ⁠⁠⁠⁠⁠⁠Grayscale.com⁠⁠⁠⁠⁠⁠ -- ⁠⁠⁠⁠⁠⁠https://www.grayscale.com//?utm_source=blockworks&utm_medium=paid-other&utm_campaign=brand&utm_id=&utm_term=&utm_content=audio-thebreakdown)⁠⁠⁠⁠⁠ Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/@TheBreakdownBW Subscribe to the newsletter: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://blockworks.co/newsletter/thebreakdown⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownBW

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, June 9th, and today we are talking macro. 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 of the show notes or go to bit.ly slash breakdown pod. Well, friends, I am coming to you from the past. I am traveling today, so I am actually recording this macro overview a few days in advance of when it releases. In fact, right now, the biggest thing

going on is that Circle is just absolutely exploding out of the gate post-IPO, trading it like three times what it started at. People are stoked the community is on fire. And so it is entirely possible that everything I am about to say is completely changed by the time you hear this. But let's assume that it's not. And as I said, it's very much. been a while since we talked macro. That is not because of a lack of interesting things going on. Throughout May, we still had tariffs flicking on and off, a huge budget bill, greatly eclipsing the meager savings eked out by Doge, and boy, setting up a hell of a fight there. I'm also recording this right as that epic bromance just absolutely explodes all over

the pages of Twitter slash X, and of course a ratcheting up of the debate about U.S. debt. The issue has been that macro stories were often outdated by the time the show was released. Now, the idea that a daily show isn't able to keep up with macroeconomic stories is absolutely wild, but that's been the state of play during this administration. We now appear to be, again, knock on all the wood, because who knows what happens in the next four days, at a place where day-to-day policy shifts are settling down a little bit and larger trends are emerging. Starting with the immediate term, Wall Street has finally got their bearings and settled on a consensus, the taco trade. The term was coined at the beginning of May by Financial Times columnist,

Robert Armstrong, who wrote, the recent rally has a lot to do with markets realizing that the U.S. administration does not have a very high tolerance for market and economic pressure and will be quick to back off when tariffs cause pain. This is the taco theory. Trump always chickens out. The consensus only grew over the past few weeks, with Trump introducing and then immediately delaying 50% tariffs on Europe, then punting on China's negotiation deadline. John authors wrote in Bloomberg, ultimately this issue boils down to cynicism. After taking Trump very seriously for a week or two after Liberation Day, markets are working on the assumption that he can safely be ignored. Tariffs aren't happening, and the administration

will do whatever delivers short-term growth. It will be good for stocks, even if it means more inflation. One member of the press actually questioned Trump about the investment theme last week, essentially asking him if he's a chicken. Trump gave a long and rambling response coming to the point that, quote, it's called negotiation. You said a ridiculously high number, then you go down a little bit. Still, for people who are looking for signs of whether things are going to be predictable or not, the concern is still there that Trump will be tempted to prove that he's not a chicken by ramping the tariffs back up. And indeed, although momentum in the trade war has seemingly stalled out a little bit, that does not mean that tensions with China have settled. Following a temporary de-escalation that was

agreed to in Geneva in the middle of May, both sides have accused the other of breaking the pact. The U.S. is claiming that China has kept restrictions on the export of rare earth metals in place, while China is pointing to increase controls on AI chip exports and the expulsion of Chinese students as going against the deal. During an appearance last week, Treasury Secretary Scott Besson said that China faces a choice. Quote, they either want to be a reliable partner to the rest of the world or they don't. He argued that the nation needs to rebalance away from overmanufacturing and engage in fiscal stimulus to work their way out of real estate overhangs. Trump, on the other hand, is growing increasingly frustrated, posting, I like President Xi of China, always have and always will, but he is very

tough and extremely hard to make a deal with. Even top China analysts have lost the threat of this conflict. of Gavikal research wrote in a recent report, fresh hostilities between the U.S. and China show that the many questions left hanging after the Geneva ceasefire in mid-May still have no satisfactory answers. It's not clear whether U.S. trade policy is being run by President Donald Trump,

his trade negotiators, or his national security team. He added that, the overall objectives of the trade aggression, other than the display of raw power, are as muddled as ever. Basically, for many, the base assumption is that the administration can't handle another round of volatility in the bond market

and doesn't want to see stocks plummet. meaning that their options are therefore limited. And although Wall Street has determined that tariffs are going nowhere fast, manufacturers are not willing to place the same bet. The Wall Street Journal reports that four major automakers are rushing to set up auto parts manufacturing in China to get around the restriction on rare earth metals needed for battery tech. Princeton China policy researcher Kyle Chan commented, to state the obvious, this is exactly the opposite of what Trump's tariffs were aiming to do. The more alarming point is that supply chains have virtually run dry in a matter of a few weeks, with many auto plants on the brink of shutdown without access to rare earths.

Autos aren't the only area of concern with the conference board finding that CEO confidence is falling like a rock across the board. Their latest survey found that 65% of U.S. CEOs expect conditions for the economy and their own business to worsen over the next six months. 82% said the conditions have deteriorated over the past six months. CEO confidence fell by the most ever last quarter in data going back to 1976. The reading is at its lowest level since the final quarter of 2022, which was itself only replicated during the worst quarter of the global financial crisis. Those are not

the conditions you want to see if you're betting on private sector-led growth. The conference board noting that 26% of CEOs are planning to reduce capital expenditure over the coming year. This was exactly the concern around the Wipsaw tariff policy that the corporate sector would decide they can't do anything until they know what the long-term policy will be. That concern is now starting to show up in the survey data. Today's episode of The Breakdown is brought to you exclusively by Grayscale. Grayscale is almost certainly a name you know. They've been offering exposure to crypto for over a decade now and offer over 20 different crypto investment products, ranging from single asset to diversified to thematic exposure to crypto and the broader

crypto industry. They have long been innovators at the intersection of Tradfai and Crypto, and one of the benefits for a lot of us is that Grayscale products are available right through your existing brokerage or IRA. Now, of course, investing involves risk, including possible loss of principle. For more information and important disclosures, visit grayscale.com. Go to grayscale.com to explore their full suite of crypto investment products and invest in your share of the future. The other big moving piece from the government is Trump's big, beautiful bill, the budget measure that is projected to add $3.8 trillion to the national debt over the next decade. Bill squeaked through the House by a single vote and is currently under discussion in the Senate.

Reports suggest the Senate could add even more spending to the bill by making some of the temporary tax cuts permanent. For the fiscal hawks, this is really just shuffling deck chairs on the Titanic. From here, the changes are only happening at the margins, with the broad strokes being that the budget is escalating along with the debt. The big narrative around this one is that Elon Musk himself is leading the outcry, tweeting, I'm sorry, but I just can't stand it anymore. This massive outrageous pork-filled congressional spending bill is a disgusting abomination. Shame on those who voted for it. You know you did wrong. You know it. A big part of the issue is that this isn't anywhere close to the way the administration drew it up.

Coming into this year, the plan was to use a large tariff increase in a dramatic reduction in existing government spending to fund the tax cuts. Ironically, Elon Musk himself was the man tasked with making that happen with his promised $2 trillion in Doge cuts. That, as we know, did not happen. In something of a revelation, Trump doesn't seem to have followed the Doge story, which played out as a very public failure, at least in the eyes of many, over the past few months. As Musk was heading out the door, administration officials relayed that the president asked them, was it all BS?

That seemed to apply that at the top level, the White House was banking on Doge delivering the cost savings they needed. Later, we learned that Trump wants to go even further. On Thursday, the president proposed the removal of the debt ceiling and reached out to a curious ally. He posted, I'm very pleased to announce that after all of these years, I agree with Senator Elizabeth Warren on something. the debt limit should be scrapped to prevent an economic catastrophe. It's too devastating to be put in the hands of political people that may want to use it despite the horrendous effect it would have on our country and indirectly the world. Orrne partially agreed, responding, Trump and I agree, the debt limit should be scrapped to prevent an economic catastrophe. Let's pass a bipartisan bill and get rid of it forever. But jacking up the debt limit by $4 trillion to fund more tax breaks for billionaires is an outrage. So, hey, if you're looking for bipartisan agreement, there seems to be some alignment on the idea that the government should have no limits in accelerators.

its spending. Realistically, of course, the debt ceiling is barely a real thing. All it really does is provide a pretend crisis every few years for lawmakers to use as leverage. It's not really plausible. The U.S. government will default because of a self-imposed limit. However, the intentions are still important. Macro-analyst Lynn Alden tweeted, the debt ceiling itself doesn't matter much. The debt ceiling is just a decision on whether we'll default on prior obligations or not. But if someone was confident on balancing the budget, they wouldn't even care about scrapping the debt ceiling. This all leaves the government in a precarious position. The bond market has already been sending out warning signals over the past month,

and the best case scenario coming out of the next month is that the status quo over spiraling debt will continue. J.P. Morgan's CEO, Jamie Diamond, recently warned, You were going to see a crack in the bond market. I'm telling you this is going to happen. And you're going to panic. I'm not going to panic. We'll be fine.

Now, Diamond has been a debt doomsayer for years now, but the fear is a little more visceral given how 2025 is playing out. His comments actually elicited a response from Secretary Besson on a Sunday show appearance. He said, I've known Jamie for a long time, and for his entire career he's made predictions like this. Fortunately, none of them have come true. That's why he's a great banker. He tries to look around the corner. That appearance also featured a discussion of the debt ceiling, with Bessence stating that the U.S., quote, is never going to default. This is never going to happen.

We're on a warning track and we will never hit the wall. Canadian politician Maxime Bernier tweeted, of course the U.S. will not explicitly default on its debt, that is failed to pay back bond investors. What it will do like it's been doing for decades is print trillions to base the dollar and payback with money that is worth much less, which is akin to a partial default and an indirect tax on all holders of dollars. The U.S. Empire is bankrupt, and unfortunately, the Trump administration is not serious about cutting spending and stopping the debt spiral. We're at the end of a 50-year experiment with pure fiat money

and the dollar as the world reserve currency. I don't know, man. We say this all the time. And at least till now, nothing has really meaningfully diminished the dollar so far. I think something that's worth watching, and that is even more concerning to some, is the increasing weaponization of the dollar. Back in 2022, when Russia invaded Ukraine, many warned that freezing reserve assets could open Pandora's box. The U.S. had deployed this tactic against smaller states like Iran and Venezuela, but never on this scale. In total, 280 billion

in Russian reserves held in U.S. and EU bonds were frozen. Neither the U.S. or Europe has agreed that they have the legal authority to permanently seize the assets, but workarounds have been explored. In 2024, G7 nations agreed to lend Ukraine 50 billion that would be repaid from interest on the frozen assets. Now it seems like the idea of seizing reserve assets is becoming normalized. The Financial Times reported on a growing discussion in Europe about applying sanctions on Israel. In an article written like a policy recommendation, they suggest, quote, banking and financial sanctions are mostly likely to be ineffective, as the U.S. can easily duplicate any payment and funding channels. There is one exception, immobilizing foreign exchange reserves, as the West has done with Russia, would impose an economic

cost. The article suggested that the freeze could destabilize the local currency and eventually be put towards compensation for Palestinians. Around a quarter of the Bank of Israel's reserves are held in the European system, some $55 billion. Leaving aside the moral discussion and the political discussion, his action would further undermine credibility of holding reserves in foreign bonds that are now apparently subject to freezing during geopolitical strife. For countries like India who are contemplating their own regional conflict, the risk of holding foreign assets as reserves suddenly looks far less safe. In the U.S., Republican Warhawk Lindsey Graham is also pushing the idea of asset confiscation. In an appearance on Fox News, he said,

I want to start canceling some debt that we owe to China because they should be paying us, not us paying them. I think you're going to start to see a bipartisan pushback against China to punish them so severely to deter them in the future. In other words, in some circles in Washington, it seems the dollar will be backed by the full faith and credit of the United States, unless we decide not to pay. With such a tumultuous set of events sitting just over the horizon,

it only seems right to close out with an excerpt from a recent blog post from eccentric macro trader Hugh Hendry. He writes, The 30-year U.S. Treasury Yield is sitting at 5% whispering the death of money. The financial system cannot bear it. Too much debt. Too much leverage. The superstructure creaks under its own weight. Treasury yields scream what the headlines dare not say. Something deeper is breaking. The signal keeps flashing one word. Bitcoin. And with that, my friends, we will close this macro Monday. Sorry, Scott Melker, I just stole your name. In any case, tomorrow, we will be back with a normal show.

Appreciate you listening, as always. And until next time, peace.