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The Reckoning 💥

@sethjlevy

Apr 10

After yesterday’s move to drop tariff rates on the rest of the world to 10% while raising China to 125%, the world is watching for signs that Trump will cut a deal with Xi.

Can Trump trust any deal he makes with Xi, regardless how good it seems?

Let’s explore the history 🧵:

Back in 2017, one of Trump’s first moves was to invite President Xi to Mar A Lago.

The purpose of holding the meeting at the “winter White House” was to provide an informal setting for their first-ever meeting, allowing them to "break the ice" and build a personal rapport.

The summit in March of 2017 aimed to address significant U.S.-China concerns.

Trump wanted to convey the importance of establishing a "fair, balanced, and reciprocal" economic relationship, expressing concerns about how the trade imbalance affected American workers.

Read 11 tweets

The Reckoning 💥

@sethjlevy

Apr 9

Researching to better understand the yield spread in context of the Bessent short.

What has been Bessent’s clearly stated goal long term?

Lowering the yield on the 10 year treasury bond.

But it’s going up, doesn’t that mean he’s failing?

No

Quick 🧵:

x.com/i/grok/share/V…

Let’s start with that I am not proposing that I’m some sort of long term expert in these issues.

I’m not.

But given the moment we are in, I have been giving this a lot of thought and doing a lot of research.

With that said, let’s explore.

How does forcing the Yuan over its psychological barrier connect with Bessent’s goal of lowering yields?

Well, in order to truly drive down the yield on the 10 year treasury you need a large and persistent demand for US treasuries.

The type of demand that would result from a flight of capital out of China and into the US.

Read 13 tweets

The Reckoning 💥

@sethjlevy

Apr 8

The Bessent short has gained popularity as the US and China descend into a trade war.

It's grounded in the famous Soros Fund Management short of the British pound.

But are there signs that this could be happening to the Yuan?

Let's explore the Bessent short 🧵:

First let's explore the dynamics that Bessent exploited shorting the pound.

• UK joined ERM, a system design to stabilize European currency
• Britian was in a recession
• This conflicted with the principle of currency stabilization

But how was Bessent was key to the scheme?

Bessent joined Soros Fund Management in 1991, quickly rose to the head of the London office and part of Soros inner circle by 1992.

Scott was an expert in the UK's weaknesses.

He provided the research and analysis that Soros and Stanley Druckenmiller used to execute the short.

Read 16 tweets

The Reckoning 💥

@sethjlevy

Apr 7

Scott Bessent played a significant role in the famous 1992 trade against the British pound while working for George Soros at Soros Fund Management. This event, often referred to as "Black Wednesday," resulted in Soros’s fund earning over $1 billion and cemented his reputation as "the man who broke the Bank of England." Bessent, then a key member of Soros’s team, contributed to the strategy and execution of this audacious currency bet.

In 1992, the British pound was part of the European Exchange Rate Mechanism (ERM), a system designed to stabilize European currencies by pegging them to the German deutsche mark within a fixed band. Soros and his team, including Bessent, identified a vulnerability: they believed the pound was overvalued relative to economic conditions in the UK, such as high inflation, low interest rates, and a struggling economy. The British government was committed to maintaining the pound’s value within the ERM, which required intervention if it deviated too far from the agreed range. Soros’s fund saw an opportunity to exploit this mismatch.

Bessent, who was based in London and served as head of global research at Soros Fund Management during this period, provided critical insights into the UK economy. He observed signs of weakness, such as a troubled housing market burdened by floating-rate mortgages. These mortgages meant that rising interest rates—used by the Bank of England to defend the pound—would increase borrowing costs for homeowners, further straining the economy. This analysis reinforced the team’s view that the UK could not sustain the pound’s pegged value without causing significant domestic harm.

The strategy, spearheaded by Soros and his top deputy Stanley Druckenmiller, with Bessent’s input, involved amassing a massive short position against the pound. The fund borrowed billions of pounds and sold them in the foreign exchange market, converting them into stronger currencies like the German mark or U.S. dollar. This created immense selling pressure on the pound. Soros’s team reportedly built a position worth $10 billion—far exceeding the fund’s own capital of about $5 billion—using leverage through derivatives like options and futures to amplify their bet.

As the pound came under pressure in early September 1992, the Bank of England intervened by raising interest rates (from 10% to 12%, with a promise to go as high as 15%) and spending billions of its foreign reserves to buy pounds and prop up the currency. However, the market forces, driven by Soros’s fund and other speculators, overwhelmed these efforts. On September 16, 1992, the British government capitulated, withdrawing the pound from the ERM and allowing it to float freely. The pound promptly plummeted—dropping about 15% against the German mark and 25% against the dollar in a single day—handing Soros’s fund a profit estimated at over $1 billion.

Bessent’s specific contribution was not as the mastermind—Soros and Druckenmiller held those roles—but as a key strategist who helped identify the economic conditions that made the trade viable. His on-the-ground analysis in London, including his understanding of the housing market’s vulnerability, supported the decision to go all-in on the short. The trade’s success hinged on the team’s ability to spot an unsustainable policy and their willingness to bet big against a central bank, a move that shifted perceptions of the power balance between markets and governments.

This episode remains a defining moment in financial history, showcasing how Bessent, under Soros’s mentorship, helped execute one of the most profitable and infamous currency trades ever.

Yes, the implementation of tariffs and the current market crash could indeed put significant pressure on China’s central bank, the People’s Bank of China (PBOC). Here’s how these factors might interact and challenge China’s monetary authorities based on economic dynamics and recent developments:

Tariffs, especially those imposed by the United States, directly impact China’s export-driven economy. Historically, China has relied heavily on exports as a key growth engine. For instance, during Donald Trump’s presidency, tariffs on Chinese goods—such as the 20% increase noted in early 2025—have disrupted trade flows. These measures raise the cost of Chinese exports, reducing demand from major markets like the U.S. and potentially shrinking China’s trade surplus. A notable example is the escalation in April 2025, where China faced additional punitive tariffs, prompting retaliatory measures like a 34% tariff on U.S. goods. This tit-for-tat trade war squeezes export revenues, a critical source of foreign exchange and economic stability for China.

The current market crash—evidenced by global stock market declines, with the S&P 500 dropping nearly 6% in a single week in April 2025 and the Nasdaq entering bear market territory—amplifies this pressure. Financial market turmoil often signals declining investor confidence, which can lead to capital outflows from China. As foreign investors pull back, the yuan faces downward pressure, a trend already observed with its weakening by nearly 1.8% since November 2024. The PBOC must then decide whether to intervene in currency markets to stabilize the yuan, which could deplete foreign exchange reserves, or allow a controlled depreciation to boost export competitiveness—a delicate balancing act given the risk of inflation and capital flight.

China’s domestic economic challenges compound these external shocks. Tax revenues have fallen, as reported in early 2025, limiting fiscal firepower to support exporters or stimulate consumption. The housing market crash and local government debt issues further constrain Beijing’s options, leaving the PBOC as a primary responder. Deflationary pressures persist, with weak consumer demand and industrial overcapacity—retail sales grew only 4% in early 2025, barely outpacing December’s 3.7%. Tariffs exacerbate this by reducing external demand, potentially forcing the PBOC to ease monetary policy, such as cutting the 1-year loan prime rate (steady at 3.1% since October 2024) or the 7-day policy rate (1.5%).

However, easing isn’t straightforward. Lowering rates could weaken the yuan further, risking a sharper depreciation that spooks markets—something the PBOC has resisted, as Governor Pan Gongsheng emphasized maintaining currency stability. Posts on X in April 2025 suggest Beijing might consider a “massive devaluation” to counter tariff effects, but this remains speculative and unconfirmed. Alternatively, the PBOC could ramp up liquidity injections or relax reserve requirements, though thin bank margins (already under pressure) limit the scope of such moves.

The market crash also raises global recession fears—JP Morgan pegged the odds at 60% by year-end 2025—potentially reducing demand for Chinese goods beyond just tariff-affected markets. This could force the PBOC to act preemptively, aligning with analysts’ predictions of monetary easing if economic conditions deteriorate further. Yet, the Fed’s cautious stance—holding rates steady in March 2025 with only modest cuts projected—limits China’s room to maneuver, as a wider interest rate differential could accelerate capital outflows.

In short, tariffs shrink China’s export earnings, while the market crash signals broader economic unease, pressuring the PBOC to either defend the yuan at the cost of reserves or ease policy to spur growth, risking currency instability. With fiscal tools constrained and deflation looming, the central bank faces a high-stakes dilemma, likely nudging it toward cautious easing

A debt crisis in China would likely have a significant impact on the interest costs (yields) of the U.S. 10-year Treasury note, driven by a mix of flight-to-safety dynamics, global economic ripple effects, and shifts in investor behavior. Here’s how this could play out, grounded in current conditions as of April 6, 2025, and economic principles:

In the immediate aftermath of a Chinese debt crisis—say, a wave of defaults by local governments or major firms like Evergrande escalating into a systemic collapse—global financial markets would likely panic. China’s total debt, at roughly 300% of GDP, includes vast corporate and local government liabilities. If this unraveled, with losses estimated at $5-10 trillion (a plausible range given the scale), global risk appetite would crater. Investors would flee riskier assets—stocks, emerging-market bonds, commodities—and pile into safe-haven assets like U.S. Treasuries. The 10-year Treasury, a benchmark for global borrowing, would see surging demand, driving its price up and its yield down. For context, the yield was 4.6% in late March 2025 after a Fed pause; a crisis could push it toward 3.5-4% or lower, echoing the drop during the 2020 COVID shock when it hit 0.5%.

This flight-to-safety effect would dominate initially. China’s $3.2 trillion in foreign reserves (as of late 2024) might be tapped to stem the crisis, potentially involving sales of U.S. Treasuries—China holds about $800 billion of them. A mass sell-off (say, $200-300 billion) could temporarily nudge yields up by 20-30 basis points, as supply floods the market. But this would likely be overwhelmed by global demand for Treasuries as a refuge, especially if U.S. markets, despite their own volatility (S&P 500 down 6% in a week in April 2025), remain relatively stable compared to China’s chaos. Historical precedent supports this: during the 2008 financial crisis, 10-year yields fell from 4% to 2.5% as investors sought safety.

Over the medium term, however, the picture shifts. A Chinese debt crisis would tank its economy—growth might drop to 1-2% or worse, as outlined earlier—slashing demand for U.S. exports ($150 billion annually) and commodities like oil (China consumes 15% of global supply). This would cool U.S. growth, already shaky with recession odds at 60% by year-end 2025 per JP Morgan. Lower growth and deflationary pressure (e.g., oil prices falling from $70 to $50 a barrel) would reinforce expectations of Federal Reserve rate cuts—perhaps 50-100 basis points from the current 4.25-4.5% range. Markets would price this into Treasuries, keeping 10-year yields suppressed, potentially in the 3-3.5% range for 2026, barring a Fed misstep.

Yet, there’s an upward counterforce: U.S. fiscal strain. The U.S. national debt is $35 trillion, with annual interest costs nearing $1 trillion at current rates. A global slowdown from China’s crisis might widen U.S. deficits—say, by $200-300 billion annually—if tax revenues dip and stimulus kicks in (e.g., Trump-era tax cuts or infrastructure spending). Investors might demand a higher risk premium for holding U.S. debt, pushing 10-year yields up by 50-75 basis points over time, toward 4.5-5%, especially if inflation persists (CPI was 2.7% in early 2025). Posts on X in April 2025 hint at fears of a “Treasury glut” if China dumps bonds and U.S. borrowing spikes, though this assumes no coordinated global response.

The net effect hinges on timing and severity. Short-term (3-6 months), yields likely fall to 3.5-4% as safety trumps all, mirroring past crises. Longer-term (1-2 years), they could creep back to 4.5-5% if U.S. debt concerns outweigh deflationary forces. A wild card is the dollar: a Chinese devaluation (e.g., yuan to 10-12 vs. the dollar) would boost the dollar’s value, enhancing Treasury appeal and capping yield rises. Conversely, if the Fed overreacts with aggressive cuts, yields could stay low, but that risks inflation later, flipping the script.

Read 6 tweets

The Reckoning 💥

@sethjlevy

Apr 3

x.com/jules31415/sta…

Let’s discuss Vietnam as an example of how some of the negotiations to reduce reciprocal tariffs may go.

1/

x.com/i/grok/share/V… x.com/jules31415/sta…

The US is Vietnam’s number 1 export market.

This is true for many countries on that list Trump published yesterday.

They exported $136.6 billion to the US in 2024, representing nearly 30% of their total exports.

They obviously can’t survive a 46% tariff.

2/

Vietnan has the second largest known reserves of rare earth minerals, with China number one.

Vietnam doesn’t have refining capacity.

It exports ore to China.

It restricts ore to every other country on the premise that it wants to one day refine the ore domestically.

3/

Read 5 tweets

The Reckoning 💥

@sethjlevy

Mar 27

1/ If this was a true “mistake” and not done intentionally as an info op then given what is already publicly known about how it happened and the details of how Signal works when setting up a group chat, this was likely accomplished via a social engineering attack where someone in the lead up to this event gained temporary access to Waltz’s phone and changed the number for an existing contact known to be a established member of the top level working group.

2/ This would explain Waltz made a mistake, is a good guy, it may have been a staffer and concerns about how Signal may have failed in keeping conversations private.

If this is true there could be a ongoing investigation to figure out who gained physical access to Waltz’s phone.

3/ The reason I suspect this was what happened is that when a contact is added to Signal, you are adding a name not seeing the associated number.

It is likely Waltz had set up this same group for other purposes and there had never been an issue.

He would have no reason to think there was a problem.

Read 6 tweets

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