Even before Trump’s tariff wave, developed economies were flashing early stagflation signals. In Europe and Japan, growth remains fragile while real interest rates creep higher. The eurozone just posted its third straight month of negative retail sales growth, and Germany’s manufacturing PMI remains in contraction. Japan’s wage growth is stalling, even as energy prices rebound. Central banks are increasingly boxed in—fighting inflation that may soon be tariff-driven while growth stays muted. The global economy is entering Q3 with weaker growth, stickier prices, and rising trade barriers—an environment ripe for policy error.

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China’s Collapse Is Reshaping Global Capital Flows

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China’s property crisis has metastasized into a broader confidence collapse, with Kyle Bass calling it “the largest macro imbalance in the world.” A slow-motion banking crisis is underway, driven by collapsing collateral, tightening capital controls, and a growing flight to safety. But instead of stimulating aggressively, China is opting for surveillance over stimulus—accelerating capital outflows.
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That capital isn’t disappearing; it’s landing in the U.S. U.S. Treasury bonds have seen rising foreign demand because the dollar remains the world’s only deep, liquid refuge.  In effect, China’s slowdown is doing the Fed’s job for it—pulling down bond rates as rising demand drives bond yields down.
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For investors, the key takeaway is that China is no longer a growth partner but is instead  a source of systemic risk. The U.S. may be the relative winner in a capital flight scenario, but deteriorating global demand could start to bite. Markets may be rallying on safe-haven inflows today, but the long-term fallout from a structurally weaker China is just beginning to show.

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