The Trumpian Wave & Systemic Risk
- 4 days ago
- 6 min read
"Went to see the captain, strangest I could find
Laid my proposition down, laid it on the line
I won't slave for beggar's pay, likewise gold and jewels
But I would slave to learn the way to sink your ship of fools"
"Ship of Fools"
May 26, 2025 | Happy Memorial Day, the day when Americans honor those who died while serving in the United States Armed Forces. Sadly, as with Rome and Great Britain before us, the greatest threat to the future of the nation seems to come from within. Even as the market for US Treasury debt shows growing stress, members of the Trump Administration seem more focused on cutting taxes and encouraging various new speculations than on reducing deficits and financial risk.
Normandy American Cemetery
We have compared President Donald Trump to President Andrew Jackson because of the former's demonstrated potential to disrupt and destabilize the US economy, but perhaps we are being unfair. In addition to Jackson, analogies about the Trumpian era should also include equal measures of President Ulysses S. Grant, whose administration was marked by a period of reckless speculation and financial crisis. Grant did, however, restore the convertibility of the dollar into gold in 1879.
As we noted in an earlier post originally written for The Daily Reckoning (“The First Crypto Currency: The Dollar”): “Around 1869 the already wealthy speculator Jay Gould, who was a partner of Jim Fisk in the Erie Railroad, took notice of the fluctuation between the price of gold and greenbacks." In the years after the Civil War, Gould and Fisk tried to corner the gold market. The result was a near collapse of the US economy.
On September 24, 1869, better known as "Black Friday," the infant US markets experienced the first systemic event. The situation was only rescued by Grant's decision to authorize additional Treasury sales of gold, thwarting the scheme of Fisk and Gould. Wind the clock forward 150 years. The tax legislation that just cleared the House will add trillions to the federal debt, yet the message coming from U.S. Treasury Secretary Scott Bessent is to endorse bitcoin and reaffirm his pro-crypto stance.
"We believe that the United States should be the premier destination for digital assets," Bessent said. "Our goal is to encourage firms to reshore, reshore or bring back to the United States best practices that are digital asset innovation and experimentation here in the United States without scaling back their ambition to influence the global industry," he added.
We view crypto tokens as an amusing form of fraud, but apparently President Trump and Secretary Bessent think otherwise. It is important to recall, however, that periods of speculative frenzy are often encouraged by government. In fact, Bitcoin is not the hot speculative vehicle in 2025, but rather residential housing, specifically the government sponsored enterprises, Fannie Mae and Freddie Mac. If you want some real "AA" -- artificial alpha --the GSE trade is the buzz. Strange that Secretary Bessent has not picked up on this point.
Last week, during remarks to the MBA Secondary & Capital Markets event in New York City, FHFA Director Bill Pulte commented that he thought the estimates for the valuations for Fannie Mae and Freddie Mac were too low. Pulte then made clear that releasing the GSEs from conservatorship “is a decision for the President of the United States.” That was a hint. The next day, by no coincidence, President Trump said on Truth Social: “I am giving very serious consideration to bringing Fannie Mae and Freddie Mac public,” declaring that he would make a decision “in the near future.”
The common penny stocks of these two de facto appendages of the state, Fannie Mae and Freddie Mac, are up over 600% in the past year, generating huge gains for the likes of Bill Ackman and John Paulson. Bitcoin is up a paltry 50% LTM. Indeed, much like old fintech stocks such as PayPal (PYPL) and Block Inc (XTZ), bitcoin seems to be losing the special novelty that always seems to drive these manic stories. Is bitcoin now just another boring Wall Street ETF?
When it comes to the arbitrage between public interest and private gain, Ackman and Paulson are no different than Fisk and Gould. Both seek to profit at public expense. They want to leverage a relationship with the President of the United States, as did Fisk and Gould in their unsuccessful efforts to win the support of President Grant for their audacious scheme to corner the gold market. But the now prospective release of Fannie Mae and Freddie Mac from conservatorship promises to be one of the great speculative bubbles of the Trump Administration. But can we release the GSEs before the next maxi housing correction? That is the question.
John Chancellor wrote about speculative bubbles in The New York Review of Books in 2021:
“Governments frequently have a leading role. The French and British governments encouraged bubbles in the Mississippi and South Sea Companies because they wanted public creditors to swap their debt holdings for overpriced stock in these companies. Modern politicians often view the level of the stock market as a measure of their personal success: during his term in office, President Trump tweeted new highs on Wall Street and browbeat the Federal Reserve to loosen monetary policy in order to send shares even higher. The financial media, whose advertising incomes rise and fall with the markets, encourage trend-following behavior. Roger Ailes joined the business channel CNBC in 1993, just before the dot-com boom took off.”
During our quarterly conference call for subscribers to the Premium Service of The Institutional Risk Analyst, one astute reader named Stephen asked perhaps the key question facing financial markets, namely why is the line item known as “Other Loans & Leases” of US banks growing so rapidly? The short answer: The Treasury, hedge and private equity funds, and other nonbank financials firms are crowding out other borrowing. What are the three fastest growing asset categories for US banks? Other loans and leases was up 21% in Q4 2024, unearned income was up 44% and other real estate owned was up 27%.
Source: FDIC
As Adam Josephson notes in his excellent blog, “As the Consumer Turns,” the growth in other loans and leases comes from one source: “the rapid and accelerating growth in bank lending to levered nondepository financial institutions (NDFIs) compared to limited loan growth to the real economy (commercial and industrial loans, real estate loans and consumer loans).”
Perhaps the biggest part of this growth in lending to nonbank financial institutions is the inventories of primary dealers, whose holdings of Treasury debt are at record levels and will only grow further with the rising federal deficits. As we described earlier ("The Single Fed Mandate & Bank Stocks"), President Trump's trade offensive may have fatally damaged the basis trade that is essential to the operations of the Treasury market. Of note, the same market is used for hedging interest rate risk in the mortgage market.
When you consider the harm already done to the financial markets in the first few months of the Trump Administration, it seems fair to ask what will happen as Washington doubles down on trade sanctions against the EU and China over the summer. When President Trump says that the Fed should lower interest rates, he has no idea just how accurate is that statement. In our next issue, we’ll be providing subscribers to our Premium Service with the Outlook on Housing Finance and discuss the latest mega transaction in the rapidly consolidating world of residential housing. Just about every company in the residential mortgage market is for sale right now, an illustration of how late the Federal Open Market Committee is to the party.
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