Bits + Bips: Expectations for the U.S.-China Tariff Pause

This episode dissects the volatile interplay of US-China trade policies, domestic fiscal pressures, and their surprising ripple effects on crypto asset performance and regulatory outlooks, offering critical insights for investors navigating macro-driven market shifts.

Episode Introduction

• This episode of Bits and Bips explores the collision of macroeconomics and cryptocurrency, focusing on the recent US-China tariff pause, its geopolitical underpinnings, the state of US fiscal policy, and the evolving landscape for crypto assets like Bitcoin and Ethereum, including the stalled progress on US crypto legislation.

1. Introduction of Guests and Disclosures

• Steven Erlick, host, introduces co-host Rahm Alawalia and special guests Peter Cheer and Zach Pandle.
• Peter Cheer, First Night of the Academy Securities Roundtable, shares his background in traditional Wall Street, structured products (including synthetic CDOs and the CDX suite of indices – financial instruments that bundle debt obligations and credit risk, respectively), and his current role focusing on macro strategy from a fixed income and credit perspective, uniquely incorporating geopolitical intelligence from retired military and CIA personnel.
• Peter emphasizes his work with asset managers, large corporations, and municipal issuers, and the value of integrating geopolitical insights, especially given some colleagues' direct experience in the Trump 1.0 administration.
• Zach Pandle, Truth Seeker of the Asset Realms at Grayscale, is also welcomed.
• Standard disclaimer: Nothing discussed is investment advice.

2. US-China Trade Relations: Tariff Pause and Market Reactions

• The discussion kicks off with the recent announcement of a 90-day pause on new US tariffs against China, reverting to baseline levels, following hints of a "big China deal" from the Trump administration.
• Rahm Alawalia interprets this as the market discounting a resolution to trade and geopolitical wars, with Trump seemingly prioritizing market stability.
• He notes the 10% tariff level is significantly lower than the previously floated 45% and highlights Trump's stated intention to open China's markets, though questioning the practicalities for US tech and financial services.
• Rahm sees this as a reduction in policy risk, signaling a return of "American exceptionalism" with capital rotating back into US markets (semiconductors, QQQ, MAG7).
• He observes that hedge funds are "offsides," with low net exposure, potentially forcing them to cover shorts and buy into dips, a sentiment echoed by institutional capital chasing retail-driven market rises. Rahm states, "I expect dips will be bought. I think a lot of institutional capital is offsides."

3. Geopolitical Dimensions of the US-China Trade Deal

• Steven Erlick probes the deeper geopolitical strategy, suggesting the US aims to reshape the Chinese economy towards consumer focus, potentially reorienting manufacturing back to the US.
• Zach Pandle describes the market's "roller coaster" ride, from the "tariff tantrum" in early April to the relief rally.
• He concurs with Rahm that the announced deal is unlikely to fundamentally remake either the US or Chinese economy in the short term.
• Zach highlights a key observation for crypto investors: "Bitcoin has been outperforming in both market phases, both in the draw down and the initial tariff tantrum in early April and in the recovery." This outperformance against stocks in both down and up swings suggests Bitcoin is responding as a resilient asset to uncertainty.
• Peter Cheer expresses skepticism about a grand strategy, believing Trump initially expected a quick deal. He feels the US is now "backpedaling" and in a "worse situation globally."
• He credits Trump for pivoting away from a path potentially leading to a depression but still sees recession risk.
• Peter suggests Trump will now seek "easy wins," potentially focusing on crypto legislation, given figures like David Sacks and Howard Lutnik's involvement in the space, and the budget.
• Strategic Implication: Investors should monitor potential shifts in administration focus towards crypto as a politically appealing area.

4. China's Economic Realities and US Leverage

• Steven Erlick recounts a past conversation with Colin Powell, where a Chinese counterpart identified maintaining 8% growth (the standard at the time, though lower now) as a primary concern, questioning if the US misjudged China's pain tolerance.
• Rahm Alawalia discusses the UK deal, where the UK lowered tariffs and the US increased them to 10%, effectively a sales tax on Americans buying UK goods. He deems it "noise" compared to the China situation.
• He notes China's suppression of unfavorable economic data (e.g., youth unemployment) but also points to emerging protests, suggesting Xi Jinping is optimizing for political control and may need to "bend" for a "mutual face-saving de-escalation."
• Peter Cheer, drawing on Academy Securities' analysis, downplays the risk of an imminent military invasion of Taiwan by China.
• He points to China's military's lack of recent war experience, internal corruption issues (e.g., rocket division), and the lessons from Russia's struggles in Ukraine.
• Instead, Peter sees China more likely using its "maritime militia" (a large fleet of ostensibly civilian vessels that can be used for strategic purposes) to disrupt trade without an official act of war.
• He emphasizes China's technological advancements, particularly in chip packaging, where they are not as far behind as in lithography (the process of printing circuits on silicon wafers). ASML is a key Dutch company producing advanced lithography machines.
• Peter introduces the concept of "Made by China" versus "Made in China," signifying China's shift from being a low-cost manufacturer for foreign brands to developing and selling its own brands globally (e.g., Temu, Shein, BYD, Huawei). He states, "China can't survive by making our goods anymore, right? They need to sell their own brands."
• Strategic Implication: Investors must recognize China's increasing sophistication and its strategy to build trade relationships with autocratic, resource-rich nations, moving beyond its old image as a maker of "cheap trinkets." This shift has long-term implications for global supply chains and competition.

5. The "Economic Divorce" and Shifting Alliances

• Zach Pandle characterizes the US-China relationship as a "slow motion economic divorce" playing out over time, with both leaderships recognizing the unsustainability of the previous model due to high vulnerabilities.
• He points to deep existing linkages (e.g., China's rare earth minerals, reliance on the USD for the Hong Kong dollar peg) creating "mutually assured destruction" in the short run.
• Zach views the recent tariff pullback as a "tactical retreat" by the White House, not an end to the underlying tensions.
• Rahm questions the "divorce" narrative if tariffs settle at 10%, though acknowledging a focus on moving sensitive supply chains. He highlights China's edge in certain technologies like fusion reactors (experimental), nuclear fission plants, and battery technology (BYD).
• Steven Erlick notes the difficulty of unwinding the deeply integrated US-China economic relationship and Europe's recalibration in response to US policy volatility.
• Rahm mentions Trump's comment that "the EU is nastier than China" regarding trade, highlighting complexities like GMO and beef disputes. He believes the "repatriation trade" to Europe is over.
• Peter Cheer observes a critical shift: "I think every country in the world right now is trying to figure out how they do business away from the US. I think we've lost a lot of trust." He contrasts US multinational corporations with "Chinese Inc.," where government and companies are aligned, giving China a coordinated advantage.
• Actionable Insight: The erosion of trust in US policy consistency may lead other nations to diversify away from reliance on the US, creating new geopolitical and economic alignments that crypto and AI investors should monitor for shifts in capital flows and technological partnerships.

6. US Fiscal Policy: Debt Ceiling and Deficit Concerns

• The discussion shifts to US domestic issues, particularly the approaching debt ceiling (a legislative limit on the amount of national debt that can be issued by the US Treasury).
• Zach Pandle notes that while the debt ceiling issue is recurrent and institutions have risk management procedures, the bigger problem is the continuously growing US debt stock, the largest as a share of GDP since World War II.
• He sees no political will for large budget cuts, even from Republicans, implying large deficits will persist.
• Strategic Implication: Persistent large deficits and increasing debt supply will continue to pressure the long end of the Treasury curve and support non-sovereign money assets. Zach states, "the pressure of deficits is going to show up in asset markets in the relief valve of gold and bitcoin."
• Peter Cheer finds it "sad and somewhat good" that the DOGE (Department of Government Efficiency) initiative didn't find as much waste as anticipated, making budget work harder.
• He criticizes the federal government for not locking in long-term debt at low yields during ZIRP (Zero Interest Rate Policy – a period when central banks maintain their benchmark interest rate at or near zero).
• He warns of a risk that if Trump and Treasury Secretary Bessant fail to control the deficit and lower rates, "bond vigilantes" (investors who protest inflationary monetary or fiscal policies by selling bonds, thus driving up yields) could return, pushing 10-year Treasury yields above 5%.
• Rahm Alawalia shares a chart showing rising CDS (Credit Default Swap – a financial derivative that allows an investor to "swap" or offset their credit risk with that of another investor) pricing on American debt.
• He points to proposed 8% deficits as "wartime deficits," bullish for stocks and the economy in the short term, but not overly concerned about bond vigilante risk due to disinflationary trends, especially with lower China tariffs.

7. Bitcoin as a Safe Haven and the MicroStrategy Playbook

• Steven Erlick notes Bitcoin's recent behavior, decoupling from stocks and correlating with gold, acting like a safe haven asset.
• The conversation turns to companies adopting the MicroStrategy treasury strategy (holding Bitcoin as a primary reserve asset), with new, heavily funded players emerging.
• Peter Cheer draws parallels to past financial crises, where leverage in seemingly "safe" assets led to bubbles (e.g., S&L crisis, Long-Term Capital Management, AAA mortgages in 2008).
• He expresses concern about the premium on MicroStrategy's stock (MSTR) and leveraged ETFs built on it, suggesting a risk of cascading triggers if the market turns. "I do think it sets us up for that sort of you know bubble type scenario where you start forcing one person after the other to create these and once the market knows about these triggers and levels it tends to go after it pretty hard."
• Zach Pandle believes there's a limit to firms directly copying the MicroStrategy playbook, seeing it as an "access vehicle" for investors who can't hold Bitcoin directly.
• He anticipates more companies will add Bitcoin to their balance sheets for fundamental business reasons, such as hedging currency or trade risks, rather than as a pure access play.
• Rahm Alawalia is skeptical about widespread corporate adoption of Bitcoin on balance sheets because liabilities are dollar-denominated. He sees MicroStrategy's branding and capital markets infrastructure as difficult to displace.

8. Ethereum's Resurgence and the "Trady Chain" Narrative

• Steven Erlick raises the point that most of the market, including new treasury strategy companies, has largely skipped over Ethereum, despite its recent 30% jump.
• Rahm Alawalia attributes Ethereum's rally primarily to a "massive short squeeze," as it was a funding leg for dollar-neutral crypto strategies.
• He suggests that while the initial rally is technical, a narrative can follow, attracting genuine interest.
• Rahm reiterates his view of Ethereum as a "trady chain" – well-positioned for decentralized settlement between traditional financial institutions (TradFi), citing examples like financial institutions putting bonds on-chain.
• Peter Cheer adds that investors who missed Bitcoin's rally might look to Ethereum as relatively "cheap" with perceived utility beyond scarcity, providing fuel for the short squeeze.
• Zach Pandle agrees with Rahm's "trad chain" concept, emphasizing Ethereum's attractiveness to institutions due to its security, neutrality, and resilience.
• He believes Ethereum is "very well placed" for the current outlook, especially with potential regulatory changes in the US.
• Zach views the recent Pectra upgrade (a planned Ethereum network upgrade) as a reminder of ongoing development, though not addressing core L1 (Layer 1 – the base blockchain, like Ethereum itself) scaling issues. He states, "I believe that Ethereum is very well placed uh and has a kind of unique lane uh to compete."
• Actionable Insight: Ethereum's potential as an institutional-grade settlement layer, coupled with regulatory clarity, could drive its outperformance. Researchers should monitor institutional adoption and L1 scaling solutions.

9. US Crypto Legislation: Stalled Progress and Implications

• The discussion addresses the disappointment over the Genius Act (a hypothetical bill name, likely referring to a pro-crypto bill) not moving to a Senate vote, casting doubt on future crypto legislation, including the once-anticipated stablecoin bill.
• Rahm Alawalia believes crypto legislation will eventually happen, partly due to its "rent-seeking opportunity for politicians" and Treasury Secretary Bessant's support for stablecoins as a US deficit funding source.
• He notes the irony that the Genius Act, if passed, might have hurt Tether by benefiting US-based stablecoin issuers like Circle.
• Zach Pandle expects good legislation on stablecoins and market structure eventually, but acknowledges risk.
• He argues the main implication of legislative delay is for Bitcoin dominance: "Bitcoin does not need regulatory clarity in the same way that many other aspects of the crypto industry do." If clarity is delayed, his views would lean more towards Bitcoin.
• Peter Cheer highlights the underestimated power of the crypto community, with its $3 trillion in assets and aligned lobbying potential.
• He suggests that if federal legislation stalls, more states, particularly red states, will push forward with their own crypto-friendly laws.
• Strategic Implication: The crypto industry's lobbying power and the potential for state-level legislative action could create a patchwork regulatory environment if federal efforts remain stalled, impacting project domiciliation and investment strategies.

10. Recession Risks and Market Outlook

• Rahm Alawalia dismisses immediate recession risks, citing rallying equity markets, strong earnings, and robust job prints, though acknowledging potential summer stagflation if tariffs remain low.
• Zach Pandle emphasizes policy uncertainty, suggesting markets signal an environment where assets like "dollar shorts and Bitcoin are going to perform better" than equities. He cites Bitcoin's ~50% rise since the election versus the S&P 500's 1%.
• Peter Cheer expresses caution, pointing to potential damage to US corporate earnings from foreign sales due to backlash against US policies.
• He challenges the accuracy of non-farm payroll data, suspecting the birth/death model (an economic model used to estimate job creation from new business formations and job losses from business closures) is overstating job creation due to gig economy EID applications.
• He believes the economy will be slower and advises against complacency, noting a need to fix domestic economic issues.
• Rahm counters, highlighting continued data center spending and arguing that backlash against US brands is unlikely to significantly impact S&P 500 earnings, which are driven by tech giants like Google, Nvidia, and Microsoft.

11. Final Thoughts and Contrarian Takes

• Peter Cheer:
  • Watching: For Trump to pivot to budget and deregulation, away from trade/tariffs.
  • Concern: Long-term damage to US reputation causing global asset managers to reduce dollar exposure; China striking new trade deals and Huawei competing in data center tech.
• Zach Pandle:
  • Watching: Competition between smart contract chains (Ethereum, Solana, Tron, Toncoin, Sui, Aptos, Stacks, Near, Avalanche) at the Consensus conference.
  • Contrarian Take: "I believe that Ethereum is very well placed uh and has a kind of unique lane uh to compete" in the smart contract platform race.
• Rahm Alawalia:
  • Contrarian Take: "American exceptionalism is is back." Believes the dollar won't drop much, bond yields are attractive, and US stocks will remain preferred for earnings growth.
  • Crypto Outlook: Bitcoin dominance may have peaked locally; "Alt season could be here." Small-cap crypto names could do well.
• Steven Erlick:
  • Watching: Potential trade party meeting between Putin, Trump, and Zelenskyy regarding the Ukraine conflict, and its wide-ranging implications for Europe and global stability.

Reflective and Strategic Conclusion

The episode underscores how US policy volatility—from trade wars to fiscal debates and crypto regulation—creates both risks and unique opportunities. Crypto AI investors and researchers must track these macro shifts closely, as assets like Bitcoin and Ethereum are increasingly influenced by geopolitical posturing and institutional adoption narratives.