Capital Controls Are Coming
The Trump Administartion is very likely putting into play the TAX on foreign holdings of US financial assets I warned CLUB/EDGE clients about on Feb 22nd and wrote about here:
At the time, I was most interested in protecting clients’ out-sized gains from trading long Chinese ADRs with precision into the run-up: BABA, KWEB, FXI, JD, BIDU
I even posted this little diddy from my live trading room: PROTECT CHINA LONGS !
That served as great timing given $KWEB -20% with $BABA -30% down since that call.
Now, as the trade war between US and China heats up on the eve of Trump's threat to levy an additional 50% tariffs on China if they do not accept his demands to remove their tariffs, we have Chief Economics Advisor, Stephen Miran, giving a speech Tuesday that implies follow through.
Michael McNair highlights:
Miran outlined 5 forms of "burden sharing" for countries benefiting from the US dollar reserve system:
Four of these deal with reducing trade surpluses (more US exports, less US imports, etc.) - essentially reducing their net accumulation of US financial assets.
But the 5th proposal is the bombshell: Countries "could simply write checks to Treasury that help us finance global public goods."
Translation: You can keep holding US Treasuries and dollar financial assets, but you'll now pay a tax for the privilege.
It's now almost a slam dunk that the administration's upcoming tax bill (likely in May) will include a provision bringing back the 30% foreign withholding tax on interest income that was eliminated in 1984.
Many will push back on this thesis, but I can absolutely see it. And if nothing else, it not only represents a clear and present danger for equity and bond holders, BUT it also would help explain why I still see (big picture) no buyers stepping in yet.
"One way of doing this is to impose a user fee (ie tax) on foreign official holders of Treasury securities, for instance withholding a portion of interest payments on those holdings." Stephen Miran
McNair again:
He sure didn't mean, buy more US Treasuries. His entire speech – and his ‘users guide’ - is about how foreigners buying US financial assets is why the US runs a trade deficit.
Miran again:
“The reserve function of the dollar has caused persistent currency distortions and contributed…to unsustainable trade deficits."
McNair with last word:
And he has consistently stated that the goal is for foreigners to buy fewer US financial assets and more US goods & services.This is fundamentally different from a tariff. It's a payment for the privilege of holding dollar assets, regardless of trade flows. A direct tax on financial asset holdings.
All of the above supports my MONEY GOES HOME mantra since coming up with this tagline in the February article above.
And every time I hear Trump, Bessent, Navarro, Miran et al speak about both military security AND dollar reserve status, I think they are going to put in place "Pay-to-Play" foreign financial taxes in place and/or capital controls.
Either way, this is only going to hurt US stocks and bonds as the longer we have uncertainty the more bearish the outlook.
Huge thank you for unlocking articles from time to time for the plebs like myself, your takes are so timely and to the point