“Well, I don't know why I came here tonight
I got the feeling that something ain't right
I'm so scared in case I fall off my chair
And I'm wondering how I'll get down the stairs.
Clowns to the left of me
Jokers to the right
Here I am, stuck in the middle with you”
This is the opening stanza to the 1972 song by the band Stealers Wheel, made famous by this classic scene from Quentin Tarantino’s 1992 classic film noir, “Reservoir Dogs.”
Suppose you've never seen the movie and have two minutes and twenty-one seconds to spare, brace yourself and click below. You won’t be disappointed, but might be shocked.
USA v. Brasil: The World Cup of Tariffs
I, too, am stuck in the middle, between two countries, my native United States of America and my adopted country, the Federal Republic of Brazil. They are just a few missteps away from declaring full-blown economic, ideological, and geopolitical war on each other. As we will see, what plays out in Brazil might spill over into world markets.
The week before last, on July 9th, President Trump sent a letter to left-wing President Luiz Inácio Lula da Silva of Brazil, informing him that a 50% tariff would be applied to all imports from Brazil.
Trump wrote (boldface is mine):
Due in part to Brazil's insidious attacks on Free Elections, and the fundamental Free speech Rights of Americans (as lately illustrated by the Brazilian Supreme Court, which has issued hundreds of SECRET and LAWFUL Censorship Orders to U.S. Social Media platforms, threatening them with Millions of Dollars in Fines and Eviction from the Brazilian Social Media market), starting on August 1, 2025, we will charge Brazil a Tariff of 50%.
The mainstream media has described Trump’s over-the-top tariff threat as politically motivated. They have a point: Trump is furious that Bolsonaro is on trial for allegedly planning a coup against Brazil, with an all-but-sure guilty verdict just days or weeks away. The former President has already had his right to political office suspended, taking him out of next year’s Presidential election. But not to mention censorship and the Supreme Court, is bad faith.
Here are some of the misleading headlines. Note that none mentions the systematic overreach of the Brazilian Supreme Court:
A Chronology of the Crisis
The situation is complex, but Trump's motivations are more geopolitical, ideological, and economic than political. An abbreviated chronology is necessary to understand why:
Since 2019, when Bolsonaro was elected, the Supreme Court has stretched its constitutional authority to censor journalists and imprison Bolsonaro supporters, without any semblance of due process. Its overreach extended to injunctions against social media platforms, including a temporary shutdown of X (Twitter). If you would like substantiating details, please read my September 2024 post entitled “X-Communication, Democracy dies in Darkness.”
My fellow Americans, do not confuse a renegade judiciary with an independent judiciary. The latter is necessary for a democracy to work; the former guarantees its destruction.
In June of this year, the Supreme Court advanced its unilateral control over social media platforms again, ruling that the platforms themselves could be held liable for content posted by users. The platforms will need to “self-censor” posts, or face fines. It is the Supreme Court that determines whether a post is illegal, and its criteria are vague and subjective. “Anti-democratic” posts are now illegal. Whatever “anti-democratic” means is up to Moraes.
One day before Trump’s letter to Lula, on July 9th, at the BRICS summit held in Rio de Janeiro, Lula stated:
"We are tired of being subordinate to the North... We are discussing the possibility of having our own currency and not depending anymore on the dollar."
Lula openly denigrating the dollar is like David spitting in Goliath’s face, but the Brazilian David (not me!) has no stone in his sling.
This past Friday, it was the Supreme Court’s turn to spit in Trump’s face, opening a new “investigation” into Bolsonaro, this time accusing him of conspiring with Trump to influence the Brazilian judicial system. The Court immediately put the former president under house arrest, forcing him to wear an ankle monitor and prohibiting him from speaking to any foreign diplomats. They also forbade him from talking to his son! Senator Eduardo Bolsonaro, who is in self-imposed exile in the United States, has been lobbying both Trump and Congress for sanctions against Brazil.
Later on Friday, came the bombshell: US Secretary of State Marco Rubio revoked the American visas of six of the nine justices of the Supreme Court (those appointed by Lula), including, of course, Moraes.
Rubio posted (boldface mine):
“Brazilian Supreme Federal Court Justice Alexandre de Moraes's political witch hunt against Jair Bolsonaro created a persecution and censorship complex so sweeping that it not only violates basic rights of Brazilians, but also extends beyond Brazil's shores to target Americans.”
Lula, instead of scaling down the rhetoric to pave the way to a diplomatic solution, doubled his defiance, replying to Rubio later on Friday:
“It is an unacceptable interference in the sovereignty of our judiciary and an affront to Brazil’s democracy. We will not allow foreign pressures to intimidate our institutions.”
Brazilian Market Implications
This chronology hopefully illustrates that the Trump administration is motivated by much more than simply influencing the outcome of Bolsonaro’s trial. Although Brazil is the world’s eighth-largest economy and has the largest territory in Latin America, it supplies virtually nothing that the United States can’t source from other countries. On the other hand, Brazil is dependent on foreign investment from the United States ($40 billion/year), patents, technology, and military support. Trump, the bully, has found a target that can’t fight back.
The market implications for Brazil are huge. The Brazilian currency, the real, depreciated last week and will continue to depreciate if neither side backs off. Interest rates will be pressured, and stocks are likely to fall. The market is pricing in a new “tail” risk to the creditworthiness of the country.
Global Markets Implications
On a macro level, international investors will watch the escalation between my two countries unfold.
These are some of the questions they will want answered:
Will the US also double down and invoke the Magnitsky Act? This is the legal mechanism the President can use to freeze the assets of foreign nationals who are human rights offenders. If the Justices of the Brazilian Supreme Court are restricting freedom of speech (a human right), then they could see their foreign assets frozen.
Would the US branches of Brazilian Banks comply? If they did, they would be subject to harsh remedies imposed at home. If they did not, they would be isolated from the global financial system.
Will Brazil recall its ambassador from Washington, in retribution? That would push any positive endgame into the future.
Will the United States remove Brazil, like it did Russia, from the SWIFT payment system? That would isolate Brazil, depress its economy, and perhaps force an approximation with China, which is already Brazil’s chief trading partner, buying tens of billions of dollars of soybeans and iron ore yearly.
Will Trump apply further sanctions on Brazil for trading with Russia? Brazil buys fertilizer and oil products from Putin. Those sanctions could be crippling.
Finally, will the worst possible outcome come to pass? Would Trump seize the dollar assets of the Brazilian Central Bank, an action that has been taken against Russia and Iran?
Such a move would trigger another wave of US dollar devaluation against other G7 countries.
The weakness of the dollar in 2025 (the $ has devalued 15% year to date versus the Euro, for example) has been a reaction to the unpredictability of Trump’s economic and geopolitical posture and policies. Isolating Brazil would mean yet another leg toward a lower dollar, an outcome that may be desired by the Trump administration.
Stuck in the Middle
this wolf of wall street is a gringo lost in the Brazilian Jungle. I am stuck in the middle, with clowns to the left of me and jokers to the right.
Any advice you can give me to stop the torture?
*Rest in Peace, Michael Madsen, the actor who gave this brilliant performance in Reservoir Dogs. He passed away earlier this month.
The Macro Monitor
The Macro Monitor this week indicates a slight “risk-on,” for the S&P, based on positive earnings, a strong retail sales report, and a bounce in China.
