Riffing on themes: fading fade america trade; winning the trade war; stablecoins; and the trouble with ETFs

9 Charts on all things big and small

• find the capital flight

• the most unsubstitutable good (came as a surprise to me)

• there never were any supplychain snagglepies, for the same reason that inflation was never transient

• stablecoins, what are they good for? Absolutely—-

• the trouble with ETFs

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Riffing on themes: fading the fade america trade; winning the trade war; stablecoins; and the trouble with ETFs

Just a few quick riffs on themes and/or random asides for a Friday

Fading the Fade America Trade (reprise)

If you can find the capital flight, please let me know.

Record high foreign ownership of US Stock:

Apollo

Near record highs of foreign treasury holdings:

Bloomberg

We are the TALLEST MIDGET!!!

But hey, NATO is going to spend 5% of its GDP on defense. Supposedly. I have my doubts.

China is losing the Trade War (reprise)

I stand by my claim that it is far easier for the US to find substitute goods than it is for China to find a substitute for 300M of the richest people in the world to buy their stuff.

Allow myself to quote myself:

‘China is losing the trade war’ is probably true, but also irrelevant

Anyway, somehow I missed this excellent chart from McKinsey on the relative substitutability of our Chinese imports.

McKinsey came up with a “rearrangement ratio” to measure the degree of substitution difficulty. It’s pretty straightforward, if imperfect, but the basic idea is divide the total of US imports from China by global exports in that category.

• If the ratio is more than 1, then it means that the rest of the world simply does not export enough of the thing to meet US demands, and therefore substitution is impossible.

• If the ratio is less than 1, then it is technically possible (although perhaps difficult) to obtain that import from elsewhere.

Anyways, you will be shocked to learn what is absolutely irreplaceable from China:

McKinsey via Axios

How will we ever live without our frozen tilapia fillets?!! TACO, please TACO, anything but a tilapia shortage! And fake eyelashes?! The horror.

Obviously it’s a bit more complex, and rare earths is really where it’s at, and while the report cites rare earth magnets as an import with an impossible ratio higher than 1, it’s not on the chart, for some reason.¹

But, I think it’s fair to say that some of that “empty shelves” hysteria was just that.

Also, as a final aside, goods imports are remarkably on-trend, recent spikes notwithstanding:

Wells Fargo

Imports have been steadily increasing with nary a hiccup since 2011. Presumably there will be a lull, following that spike, but we shall see.

The other thing I like about this chart is that it highlights (in the green circle) a long-ago Random Walk observation: there was no “supplychain snagglepuss.” There was an unprecedented stimmy-driven surge of buying stuff that overwhelmed heroic-levels of supply-chaining.

The snagglepuss story was pure ‘transient inflation’ copium intended to deflect responsibility from policymakers who were still busily injecting the economy with stimulants, while blaming the supply-chains for rising prices.

Stablecoins, what are they good for? Absolutely—-

A coda to the observation that perhaps ~50% of stablecoin transaction volume is related to illicit activity.

The claim ruffled some feathers, but is as yet unrebutted (but there’s still time). And look, that criminals would be early- and motivated-adopters is only natural, and isn’t necessarily an indictment of crypto. Time will tell.

Anyways, there is another thing that stablecoins are good for, apparently.

They buy a *isht-ton of T-Bills:

BIS

Stablecoins bought the third-most T-Bills in 2024, behind only JPM’s money market fund, and China.

I guess it shouldn’t be that surprising, and it’s good to see that stablecoins are in fact backed by collateral, but it’s kind of amusing to think that crypto-hype demand is actually a primary source of financing for Uncle Sam.

The more you know.

The trouble with ETFs

A little while back, Random Walk stumbled across some research that raised some questions about the predominance of ETF-driven passive flows.

The problem with too much passive flow, of course, is that at a certain point, it’s unclear what the herd is indexing to—it may, in fact, just be chasing its own tail . . .

For indexing to work (according to its business logic), someone still needs to decide how much individual stocks are worth, based on that individual company’s performance.

That price-discoverer is not passive indexes, of course, because the whole point of passive is to track, but not lead—but if the majority of the market are just passive flows chasing prices driven by passive flows chasing prices driven by . . . well, you get the idea.

In other words, passive flows are the mother of all momentum trades.

ETFs push stock prices up by buying baskets of stock with rising prices thereby pushing prices up, etc. It’s all fun and games on the way up, but if the herd turns, well, we’ve all seen Lion King, so we know how that goes.

Here’s another little related chart making a similar point.

It turns out that order-flow has a non-linear relationship with price changes:

Carlyle

The most liquid companies in the top decile (but even quintile) of order-flow see outsized price-changes.

The point is, again, that flows are attracting flows, and it creates some very odd distortions on price.

The other point is the so-called “liquidity paradox,” i.e. that while it’s true that liquidity provides a margin of safety in a downturn, it’s true for everyone. So, in a downturn, the most-liquid names get sold the most (and therefore suffer the biggest losses):

This phenomenon was evident during the April 2025 stock market drawdown, when the market value of the most liquid quartile of stocks declined by over 400bps more than the least liquid quartile.

Statistical tests suggest that it was liquidity (ease of sale) that explains these price declines rather than the individual stocks’ exposure to tariffs or related macroeconomic risk.

Food for thought.

Keep in mind that Carlyle is making the case for a larger private market allocation, so they wear their ulterior motives on their sleeves, but there’s definitely something there.

When ETFs own the majority of the equity (and layer-in oodles of leverage), it’s fair to wonder whether anyone is actually steering the ship.

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Other interesting reads

• State of Consumer AI (Menlo Ventures). Lots of survey results and charts.

• State of the software engineer. Deep dive on the current state of hiring within tech, which is relevant to the broader slowdown in hiring (and the fact that AI is not taking anyone’s job).

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Previously, on Random Walk

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1. I actually used the Axios reproduction of the chart because the original McKinsey chart is a bit of a mess

Fireworks are literally un-American.