It's Not a Trade War— It's a Yield War. Here's Why That Matters

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3:16So a couple of years ago, I got into a really bad car accident. I was rear-ended, my car was totaled, and the whiplash I experienced then is only second to the whiplash I experienced in the markets this week. I mean, you guys, are we good? Holy freaking moly. We all know what happened yesterday. So today I'm going to tell you why it happened so we can all strategize for what happens next. Plus, I'll share some context around why this market crash might have been potentially on purpose. But first, let's just follow the numbers. 10%, that's how much the S &P 500 fell in just two consecutive trading days, April 2nd and April 3rd.

3:562 ,200, that is how many points the Dow Jones Industrial Average lost on April 4th alone. 8%. That is how much the S &P 500 came back yesterday. And nearly 2 ,500. That is the number of points the Dow jumped yesterday. On Monday, I did an episode about why the markets dropped. And wow, I cannot believe that episode just came out on Monday because it feels like 100 ,000 years ago. But anyway, we already did that. So let's talk about why it rallied yesterday. It actually starts with a false rally that happened a few days earlier. On Monday, a tweet caused the market to add back trillions of dollars in value.

4:35The problem was the tweet had completely wrong information. A regular guy, Walter Bloomberg, the name is just a weird coincidence he has no affiliation to the other Bloomberg, tweeted that Kevin Hassett, President Trump's director of the National Economic Council, said that Trump was considering a 90-day pause on his controversial tariff proposal. So Walter said, that Kevin said, that Trump said, that he was considering a 90-day pause on tariffs. But he wasn't at the time. The origin of the tweet is even more of a he said, he said. When we go deeper into this rabbit hole, the real origin of this mix-up was a tweet that Bill Ackman, famed hedge fund manager, investor, posted on Sunday.

5:21The tweet was very long, but the highlights were, quote, the president has an opportunity to call a 90-day timeout, negotiate and resolve unfair asymmetric tariff deals, and induce trillions of dollars of new investment in our country. And the president has an opportunity on Monday to call a timeout and have the time to execute on fixing an unfair tariff system. Alternatively, we are headed for a self-induced economic nuclear winter, and we should start hunkering down, end quote. Then, on Fox News, Kevin Hassett was asked about whether Trump will do a 90-day pause in response to Bill Ackman's plea.

5:58And Hassett said, quote, you know, I think the president is going to decide what the president is going to decide. But then he went on to talk about how effective the tariffs were, so not a no. But certainly not a statement about any semblance of a plan to pause tariffs. And then, on Monday, CNBC aired on TV in a banner that read, Hassett says Trump is considering a 90-day pause in tariffs for all countries except China, which was totally misconstrued from the Fox interview. And the CNBC reporters on air quickly corrected it. But then it was too late. Reuters picked it up, which was what then caused Walter Bloomberg, not that Bloomberg, to tweet.

6:39So the full story is Walter Bloomberg said that Reuters said that CNBC said that Kevin Hassett said that Trump said he was considering a 90 day pause on tariffs because of what Kevin Hassett said about what Bill Ackman said. Are we following? It was basically a crazy, crazy game of telephone. And the White House channel started sharing Walter Bloomberg's tweet and denied it right away. But at that point, it was too late. The market had rallied 10 % on the tweet. So imagine the market's surprise when just two days later, Trump did announce a 90-day pause on all reciprocal tariffs, except for China, which got slapped with more tariffs.

7:23The grand total, by the way, for China is now 125%. So net-net reciprocal tariffs still apply to Chinese goods, but for all other countries, only a 10 % universal rate applies. not the additional tariffs based on that complicated-looking tariff formula that Trump whipped up on Liberation Day. And I said imagine the market's surprise, but I mean, I am not surprised at all. I said last week when I talked to James Altucher that at some point, Trump, I thought, would say, psych, this has all been a big bargaining chip. That's not exactly what the president said when he made the announcement. What he actually said was that he did this because people were getting, quote, yippee.

8:03In response, the market rallied big time, this time because of real news. So what happens next? This is a relief rally. Investors are relieved that a vast majority of tariffs are being walked back. But when the dust of this announcement settles, China still is a really important manufacturing and trading partner. And so with these tariffs, it's hard to imagine a scenario where we can just jump back into a bull market. It kind of reminds me of this thing I've seen kids do when they have bad news to tell their parents. Say they broke a lamp or something. And so they make up a worse story to tell their parents.

8:38Like, sorry mom and dad, the dog ran away. Just kidding. Good news is the dog is totally fine, but the bad news is I did break a lamp. The knee-jerk reaction is relief that the news isn't that bad, but the parents still get to be mad about the thing that went wrong. I think this latest news on tariffs will be kind of like that. We're enjoying our moment of relief that tariffs are not that far-reaching. But once we take a deep breath and settle into what remains, the market will go back to throwing a tantrum about the tariffs on Chinese goods. So why keep the tariffs at all? Everyone thinks Trump's new tariffs are about punishing China or reviving American manufacturing, and that the stock market is just collateral damage.

9:21But that's not the entire story. The collateral damage might be, in fact, the whole point. Here's the deal. As you know, the United States has a giant debt problem. As I'm recording this, the national debt is$36.2 trillion. And even though I'm publishing this episode tomorrow, really just three hours from now, the debt will still be higher by the time you listen to this. Over the course of the next year, the U.S. has to refinance nearly$9 trillion of debt. Reason being, outstanding treasuries are maturing, so they need to be rolled over to a new rate. When a lot of these treasuries were issued, interest rates were close to zero.

9:56Today, the 10-year treasury yield is over 4%, and every single basis point adds billions in interest. Because remember, for us, treasuries are an investment. But for the government, treasuries are loans and therefore part of the national debt. So if yields on treasuries went down, that would benefit the government and curb the debt. This is critical. Famed investor Ray Dalio says that if yields don't go down, we could have a sovereign debt crisis like Greece in 2008. We all remember this. After years of excessive government spending, chronic budget deficits, and structural economic weaknesses, investors lost confidence in Greece's ability to repay its debts.

10:36By 2010, Greece was effectively shut out of international credit markets and required multiple bailouts from the European Union and the International Monetary Fund. In exchange, Greece had to implement harsh austerity measures like tax cuts and public sector cuts, which deepened the country's recession, led to widespread unemployment, and sparked massive public protests. Greece has made significant progress since the height of its debt crisis, but its recovery is still very much a work in progress. Greece has exited its bailout programs, returned to the international bond markets, and is seeing positive GDP growth again.

11:12In 2023, the country's unemployment rate, once over 27%, has fallen to around 10%. Not amazing, but definitely better than 27%. That said, the scars of the crisis remain. Greece still carries one of the highest debt-to-GDP ratios in the EU, over 160%, though much of that debt is long-term and held by EU institutions under favorable terms. Wages and pensions remain lower than pre-crisis levels, and structural issues like an aging population and a relatively small industrial base continue to challenge long-term growth. So yes, Greece has recovered from the crisis in the sense that the economy is not a disaster, it is stable, the markets are functioning, and investor confidence has returned somewhat.

11:56But there's still a long road ahead to full economic resilience. And we do not want to be on that road. I never ever want to see the United States at a 27 % unemployment rate ever. So our current treasury rates pose a problem. And to help our debt crisis, we need to get yields down. There are two ways generally that yields go down. First, people flock to bonds. And when there's more buying activity, the prices go up and the yields go down. You've heard my seesaw metaphor on bonds before, so you know the drill. It's basically supply and demand. Interestingly, we usually see yields go down when stocks crash.

12:33That happens because after a market dip, we typically see a flight to safety. Investors scramble toward bonds, prices go up, yields go down. So that's the trend normally. And obviously, we just saw stocks crash, and yet yields are up. The best explanation I've heard is that investors during this most recent dip sold a lot of bonds to cover losses in stocks, and that's why yields have gone up and not down. But anyway, method one is for yields to go down, people flock to bonds, and method two is for the Fed to lower rates. That's where tariffs come in. Yes, they spike inflation in the short term, but they also choke growth.

13:11And a slower economy pressures the Federal Reserve to cut rates. That's what happened after the COVID crash. So let's rewind the tape. Remember when President Trump said that he'd demand the Fed lower interest rates? Well, he can't actually tell the Fed what to do, but he can try to force their hand. So some think he's engineering market panic on purpose, using tariffs as a weapon to pressure the Fed. And if he were, would he ever admit that? Of course he wouldn't. That would ruin the plan. This isn't just economic chaos. It's a high-stakes game of chicken between the President and the Fed. Will Powell cut rates first, or will Trump fold on tariffs?

13:53This isn't a trade war. It's really a yield war, and your wallet is in the middle. For today's tip you can take straight to the bank, please watch the bond market. If yields keep climbing, that refinancing problem gets worse. Second thing to keep your eye on, signals from the Fed. And not to toot my own horn, but I'm going to help you with that because in a couple of weeks, I'm going to have Austin Goolsby of the Federal Reserve Bank of Chicago on money rehab right before the next Fed session to help you understand what you can expect when the Fed makes its next announcement. Any hint of rate cuts could send markets into another tailspin or another sugar high.

14:32And lastly, keep an eye on China. If they escalate, President Trump might too. And then we are right back where we started. When you give a mouse a cookie.

14:48Money Rehab is a production of Money News Network. I'm your host, Nicole Laffin. Money Rehab's executive producer is Morgan Lavoie. Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all do. So email us your money questions, moneyrehab at moneynewsnetwork.com to potentially have your questions answered on the show or even have a one-on-one intervention with me. And follow us on Instagram at moneynews and TikTok at moneynewsnetwork for exclusive video content. And lastly, thank you. No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make.