From March twenty-fourth, twenty twenty-five to March twenty-seventh, twenty twenty-five

I. Foundation 

resistance to change and hence greater dependability for the results shown in the past.

Bring manufacturing back to the United States

Throughout the past decades of globalization, the United States has run large trade deficits for a long time, especially in manufacturing: many critical systems have had to rely on imports. These systems are vital not only to the defense industry but also to manufacturing itself. The United States once dominated the semiconductor industry, and In fact, this industry emerged in the 60s of the last century, driven by a series of U.S. government policies.At the time, semiconductor technology was developed through research and development funding for IBM and AT&T, then commercialized through NASA and the procurement policies of the Department of Defense. Ultimately, the United States gave rise to the calculator, computer, and television industries, among others, but these were all byproducts of highly coordinated U.S. federal government policies.

Fast-forward four or five decades: today, most advanced semiconductor manufacturing is concentrated in a geographically extremely vulnerable place, separated from mainland China by just the Taiwan Strait—Taiwan. This dependence extends beyond semiconductors to several advanced manufacturing sectors, and the United States relies heavily on imports for these critical technologies and intermediate products.

Therefore, the core purpose of imposing tariffs is actually to bring industry back home. It is a means to the goal of rebuilding local U.S. communities that were hollowed out by the wave of globalization after China joined the WTO in the early 2000s.

And one of the key mechanisms through which they aim to transmit this effect is the dollar exchange rate.A strong dollar means expensive exports and cheap imports. For a long time, the United States has enjoyed the benefits of cheap imports thanks to a strong dollar, which has also curbed the inflationary pressure that domestic manufacturing might otherwise create.

40 years ago, the United States accounted for 25% of global manufacturing; now it accounts for only 15%. China barely registered at the time, but now accounts for 35% of global manufacturing.The core goal of the so-called “Mar-a-Lago Accord” is to find a way to weaken the dollar without disrupting the capital flows that finance U.S. debt. At the same time, this round of manufacturing reconstruction is meant to be carried out primarily by private capital.

The Biden administration did introduce some stimulus policies, such as the CHIPS Act, in an effort to promote certain key industries, but Trump’s focus, by contrast, is on creating a market environment conducive to private capital investment. This approach does reflect a typical Republican preference: favoring private capital and diminishing the role of public investment in industrial policy.

But ultimately, Building a high tariff wall is essentially a bet that private capital will invest within that wall.

Although Trump publicly criticized the CHIPS Act as “terrible,”the reality is that both CHIPS subsidies and incentives from another major Biden administration policy, the Inflation Reduction Act, have taken root across states throughout the country, especially in “red states.” This means that if the Trump administration wants to cancel these support measures in the future, it will also face political resistance from state governments in its own party.

Returning to the fundamental question: if the United States truly wants to restore its leading position in manufacturing, especially in key defense industries, high tariffs alone are not enough. They must also be combined with research and development subsidies, investment incentives, and a new industrial ecosystem in which government procurement creates demand.

2025.03.25

The Trump administration and a potential “U.S. sovereign wealth fund”

Another version of the effort to weaken the dollar and improve the international competitiveness of U.S. manufacturing is currently being considered by the Trump administration: establishing a U.S. sovereign wealth fund.Concentrate some of the U.S. government’s existing assets in a central sovereign fund managed by the Treasury Department, allowing the Treasury to intervene directly in the foreign exchange market and actively push down the dollar’s exchange rate.

This is interesting because Historically, resource-rich countries have usually established sovereign wealth funds to maintain a strong domestic currency and serve as a countercyclical stabilizer. So for the United States now to establish a sovereign wealth fund and use it in the opposite way—to intervene in foreign exchange markets and actively weaken the dollar—is a rather unusual “reversal” in itself.

It sounds as if the United States will shift from issuing “unbacked Treasury securities” to “backed debt,” and Once this comes up, asset encumbrance will be an unavoidable topic.

“Asset encumbrance” means that the assets available to pledge as collateral for issuing bonds are limited; use too many and eventually they will run out. Yes, the United States is the world’s largest economy, and in theory it may be the best positioned to back its debt with collateral. But the question is: what exactly would serve as collateral?

Typically, collateral is assessed along two dimensions: first, the “loan-to-value” ratio, and second, the “cash flow coverage” ratio.

From this perspective, the U.S. “balance sheet” actually contains quite a few hidden assets, many of which are not recorded at market value. For instance, the gold reserves that have been mentioned frequently of late are still carried on the Treasury’s books at 42 dollars per ounce, while gold prices have already exceeded 3000 dollars per ounce.If the gold bars at Fort Knox were revalued at market prices, they would be worth roughly 8,000 hundred million to 9,000 hundred million U.S. dollars.

Of course, compared with total debt of 36 trillion dollars, this is just a drop in the bucket—but it cannot be called “meaningless.”

Another example: the U.S. federal government actually owns nearly one-third of the land west of the Mississippi River. Western states often complain that the federal government and the Bureau of Land Management (BLM) are essentially “absentee landlords,”these vast tracts of undeveloped or inefficiently used public land could also be considered for inclusion in the collateral framework.

So, So-called “national park-backed bonds” are not impossible under Trump—for example, National park-backed bonds..

It sounds crazy, but it is not entirely far-fetched, In an era when the sovereign debt architecture is being reshaped, any “public asset” that was previously considered off-limits could become an option in the toolkit.The questions are: are they willing to touch them? Can they withstand the political consequences if they do? Will the market really accept it? Behind this lies not only financial engineering, but also a profound contest over ideas about national governance.

2025.03.26

II. Insights 

Our Viewpoints and ideas on market.

Follow-up on the European trade: trimming positions + a structural allocation to small caps in Europe

We captured the full rally in this round of European trades on Cross-Asset Planet. In last week’s Planet update, Notes250321 The risk of European fiscal spending skewed toward overreaction in fact was actually warning that this segment had run too far too fast in the short term, so we sold part of the position and moved into India (readers who look closely at the notes should notice that once again we caught the macro low for the India market trade) (see Notes250313 Take a look at the India trade). The India trade is still in the pilot-position stage, so first let’s discuss the structural positioning in Europe and what to do next.

Since we issued our signal to go long Europe, the market consensus has now shifted in our direction to Long Europe vs. US equities. This capital is essentially dumb money lifting our positions, and we should not stay alongside dumb money for too long.

As quarter-end flows tilt sharply toward U.S. equities (with estimated inflows of +1000 hundred million dollars), non-U.S. equities face outflow pressure of about 820 hundred million dollars, In the short term, Long SPX / Short SX5E is the main thesis for a reversal of the pain trade. Expectations of tariff easing are also supporting the relative strength of U.S. equities in the near term, especially benefiting growth sectors.

In the medium term, we still favor increasing our allocation to European equities, because eurozone GDP growth over the medium to long term is indeed likely to benefit from fiscal expansion, defense spending, and expectations of a ceasefire in Ukraine. This could bring eurozone economic growth in line with, or even above, that of the United States. In terms of positioning, we still favor cyclicals, including industrials, banks, and the heavily shorted auto sector.

However, this trade has indeed moved too fast at this stage. When we called for going long German stocks in the second half of last year, we expected the trade to run for around 2 years, but it has reached our expected range in just over half a year. Although relative EPS trends favor continued outperformance by European equities, the recent risk structure in U.S. equities makes reversal trades extremely risky. Going long European equities is better suited as a medium-term allocation than as a chase at current levels.

In the short term, we will try to trade a rebound in U.S. equities to pair with a reduction in European equities. In the medium term, China trades will certainly outperform European trades. In Europe, while reducing index exposure, investors can shift part of it into European small caps, which still have some catch-up gains ahead and are worth watching. We are not selling the core position; we are only adjusting the trading portion.

2025.03.24

What will happen on the much-anticipated 4 month 2 day?

The market is in countdown mode. Trump himself has named 4 month 2 day “Liberation Day.” This is more than a symbolic political statement; it has a real chance of becoming a turning point in the next round of trade policy.. Under the America First Trade Policy Memorandum, federal agencies must complete their assessments of the U.S. trade deficit and report them to the White House by 4 1. The actual policy timeline is essentially anchored to this window. Judging by the administrative process and the high-profile buildup by Trump, this looks less like rhetoric and more like a concrete policy announcement.

The policy’s central thrust has shifted from the reciprocal tariffs initially discussed to the more detailed “three-tiered tariff structure.” In essence, this is a move away from simply taxing goods by category toward a comprehensive assessment based on structural trade barriers.

The new plan would assign different tariff tiers according to the level of each country’s trade barriers against the United States, Beyond import tariffs, the factors considered for proposed tariffs would include a broad range of issues, such as digital services taxes, subsidy mechanisms, intellectual property protection and non-tariff barriers. The intent is clearer: use “layering + tiering” as a bargaining chip to build more durable negotiating leverage.

The market is broadly underestimating the medium-term impact of this policy shift on asset pricing, particularly as the macro backdrop worsens at the same time and growth momentum slows markedly. The tariff shock itself may not trigger a recession, but it will change corporate expectations and willingness to invest, thereby weighing on capex and margin expansion and indirectly reinforcing the narrative of policy dependence—that is, Non-economic drivers will carry more weight in the Federal Reserve’s policy path.

Signs of the negotiating strategy are already beginning to emerge: Bessent revealed that multiple countries have proactively reached out seeking tariff relief. The EU has announced that it is postponing its retaliatory tariffs from 4 month 1 to 4 month 13, and Japan, the UK, and Mexico have also begun consultations.The U.S. may use a “one-country-one-bracket” mechanism to set different tariff tiers and tailor the pace of negotiations accordingly. In other words, this is an incentive-compatible framework: it can apply pressure, negotiate and still leave room for exemptions.

Tariff policy toward China will most likely expand further, but as rates continue to rise, the government may introduce some exemptions to ease pressure on specific industries. Meanwhile, long-term tariffs on products involving national security, such as steel and aluminum, are likely to remain in place and will not be relaxed easily.

Although the “three-tier plan” is the main scenario discussed by the market, it is also possible that the U.S. Trade Office is preparing a multi-tier alternative. The process may be to first place countries into tiers (three or more), then have the Office of the U.S. Trade Representative assign them to the corresponding tariff levels based on each country’s goods trade deficit and overall degree of trade restrictions, and proceed with bilateral negotiations accordingly.

It could still be presented as “overall reciprocity,” but the core is the ranking mechanism: during negotiations, the Trade Representative’s Office could rank trading partners from the largest deficit to the smallest, assess their trade barriers one by one, and ultimately set a target tariff rate sufficient to “correct the imbalance.”

Which industries are most likely to be affected on 4 1 or 2?

From an industry perspective, agricultural products are unlikely to be the main battleground. Although the tariff gap is large, the United States has strong domestic production capacity and a low import share. Automobiles are highly likely to be a primary target, particularly the automotive industry from the EU: finished vehicles and parts account for around 12% of total U.S. imports, while the trade-weighted tariff differential in this sector is 2 percentage points (that is, the rates the U.S. charges on imports are lower than those charged by other countries).

Although pharmaceutical products have been mentioned, tariffs are uniformly low worldwide, so the tariff imbalance is relatively small, and the United States is unlikely to act rashly in this area. Beverages, by contrast, could become an unexpected target. Although they account for only 1%, the weighted tariff gap reaches 2.5%, making them an easy scapegoat as “high-priced imported goods” in the narrative.

Policy risk is priced with a right tail, and the market has an insufficient understanding of the idea of “tariffs as a long-term instrument of leverage.” This trade-policy turning point is most likely not just another round of “Trump-style tariff increases.”

2025.03.24

Why the United States will have to continue issuing debt on a large scale in the future

At a high level, the ratio of U.S. federal debt to GDP is now 1:1, and total debt equals GDP’s total output.The current fiscal deficit is 7% of GDP, while economic growth is only between 1% and 2%. In other words, U.S. debt is growing far faster than the economy.

The root cause is the imbalance in the federal budget: the deficit is 7% of GDP, which means debt is also growing each year by an amount equivalent to GDP of 7%. Debt is growing faster than GDP, creating long-term structural pressure. Even in federal budget outlays, “interest expense” has become the second-largest item—The United States is now “borrowing new money to repay old debt.”

The United States has now entered a stage of “borrowing new money to pay interest on old debt” and must address its fiscal imbalance as soon as possible. One side of the problem is income security—that is, pensions (Social Security); the other is health coverage—that is, health insurance for the elderly (Medicare).

If you actually lay out the federal budget, what Elon Musk and DOGE keep clamoring to cut is only a small part of federal spending. Yet this small outlay is precisely what concerns education, transportation, housing and infrastructure, and supports the “broad economy”—in other words, spending in key areas that build human capital, physical public capital and housing stock.The entire budget is only 7000 hundred million dollars, while total federal spending is as high as 6.75 trillion dollars.

Further reading: Notes250217 How much spending can Musk’s DOGE actually cut?

Where did the rest of the major spending go? Interest expense, retirement security, defense and healthcare. Together, these items make up nearly the entire structure of government spending. So the fiscal situation is now truly at an impasse.Only when those budget reconciliation bills reach the congressional voting process in the fall, or earlier, will it be possible to see whether Congress has enough political courage to confront these allocation-of-resources issues.

Under the House budget reconciliation framework, the goal is to cut 8800 hundred million dollars in spending over 10 years, or only around 1000 hundred million dollars per year on average. These cuts are concentrated mainly in areas such as Medicaid, transportation, housing and education.

Medicaid spending is about 6000 hundred million dollars per year, and transportation, education, housing and the like add up to 7000 hundred million dollars. So The so-called annual cut of 1000 hundred million dollars would in fact come out of 1.3 trillion dollars in social spending. But the amount is not particularly large, and the cuts are not enough to truly change the trajectory of the fiscal deficit.

If new tax cuts are also added at the same time, for example on tips, overtime pay, Social Security income and so on—these discussions are already underway—then that is not “fixing the deficit” at all; it is continuing to pump money into the economy。Therefore, the United States will still have to continue issuing large amounts of debt in the future.

2025.03.25

The Mar-a-Lago Accord that never got off the ground

A while ago, we published two articles about the Mar-a-Lago Accord in Notes. If you haven’t read them, take a look before reading today’s piece; see Notes250310 Understanding the Mar-a-Lago Accord in one article+Notes250312 Understanding the Mar-a-Lago Accord in one article (continued)。

First, to emphasize once again, the Mar-a-Lago Accord is essentially a debt restructuring agreement, second, beyond the tariff façade, people such as Bessent and Miran have built a theoretical framework around Trump, arguing that tariffs are merely a tactical means to a larger end: bringing manufacturing back to the United States.

See Notes250325 Bringing manufacturing back to the United States

The Mar-a-Lago Accord and the “rationalizing” theoretical structure that has formed around Trump can both be traced back to Moran’s paper, which presents the most systematic and comprehensive strategic framework to date.He himself acknowledges that the scope for this strategy to be truly effective is actually very narrow. To some extent, Trump has already acted first, for example by imposing tariffs on a massive scale and threatening to withdraw the U.S. security commitment to NATO.

These two measures are precisely the key “sticks” that Miran recommends using, with the aim of forcing foreign central banks and foreign investors to continue buying U.S. Treasuries at favorable rates, thereby preserving the ability to finance the U.S. fiscal deficit and debt expansion. This is because, as Ray Dalio has noted, the United States has in fact entered a stage in which a debt crisis is approaching.

See:Notes250325 Why the United States will have to continue issuing debt on a large scale in the future

And in the so-called “Mar-a-Lago Accord” proposal, The core idea is:The United States could lower its debt costs by steering foreign investors to exchange the short-term U.S. Treasuries they hold for century bonds (Century Bonds).. These century bonds would carry lower interest rates, and the United States would not face refinancing pressure in the short term. In effect, it would ease the debt-servicing burden by “extending duration.”

How could foreign investors be induced to participate in this exchange?

In his paper, Miran laid out two key strategies, very similar to private-market debt exchange transactions: both use a “carrot-and-stick” approach—offering incentives while creating fear.

In this framework, there are two so-called “sticks.” First, if a foreign government does not cooperate, it will have to face high tariff barriers; second, the United States will withdraw its security guarantees—that is, the U.S. military’s “protective umbrella.”

In other words, if you want the world’s most powerful military to continue protecting your borders and defending against potential threats such as Russia, then you must exchange the short-term U.S. Treasuries you hold for low-interest century bonds.For the United States, this means it would not have to deal with this portion of the debt for a century, effectively eliminating its refinancing risk and achieving a “duration extension.”

As we said a long time ago, there are only two ways to solve a debt problem: extend maturities or convert debt into equity.

On the one hand, “extend duration”; on the other, reduce the long-term interest burden—that is the original purpose of the proposed century-bond exchange strategy.

But this idea has quite a few problems. The biggest problem is that In terms of the ownership structure of U.S. Treasuries, less than 15% are currently held overseas—and this share has fallen sharply in recent years. Many of those are not held by foreign governments or sovereign institutions, but by private investors abroad.

In other words, even if this group could be persuaded to participate in the debt exchange, the amount of debt involved would be very small, with limited impact.

The remaining 85% of 36 trillion dollars in Treasury holders are Americans themselves.Some are in government accounts, such as Social Security and Medicare trust funds; another portion is held by U.S. banks, insurance companies, endowments, wealthy individuals, mutual funds, money market funds and other institutions and individuals.

So in practice, moving ahead with this kind of “duration extension” operation means acting against oneself.

The usual logic of the “stick” is:If you do not participate in the restructuring plan, what you ultimately receive may be only the residual assets of some bankrupt company, after a long delay and with heavy losses—so you might as well accept the agreement now. But the problem is that if the U.S. government wants to use a “carrot-and-stick” strategy, it is really difficult to wield the “stick” without hurting yourself.For example, if interest rates really surged sharply and market signals began to question whether the U.S. government would repay its debt, that would be a potentially irreparable systemic shock to the entire financial market.

And the carrot should be:No tariff increases, continued provision of the security umbrella. But The reality is that, even if these commitments matter, market confidence in them has already weakened markedly. Trump’s repeated flip-flops on tariff policy over the past two months have caused many people to lose confidence.

If “tariff threats” and “cancellation of security guarantees” are to be used as bargaining terms, frankly, Trump has played these cards too early and too poorly. He put the threats on the table prematurely, but failed to create a sense of pressure; in other words, these “threats” are no longer a “sword hanging overhead,” but a “script everyone saw through long ago.”

The market is genuinely worried that he will reverse course the day after reaching an agreement.

As for NATO’s “security umbrella,” NATO countries are now unlikely to regard the United States as a reliable pillar of defense. Germany has already scrapped its debt ceiling and is preparing to sharply increase defense spending so it can defend itself without U.S. protection. Poland has done the same. Countries near the Russian border—the three Baltic states and Poland—have almost all increased their military spending, realizing that they “can no longer rely on the United States.”

Trump may have revealed all his “bargaining chips” too early, thereby rendering these “inducement mechanisms” completely ineffective. Looking at the whole short-debt-for-long-debt scenario, the so-called “diplomatic exchange transaction” lacks effective threats and credible returns.

A more realistic “variant” might be to swap out short-term debt, with the United States allowing industry to be built on its soil—for example, China building a BYD factory in the United States.This kind of transaction is actually very “traditional”: a high-tech country exports manufacturing, technology transfer follows, and the target country learns how to build megafactories and master a complete industrial chain. Historically, this is how industrial outsourcing from Europe and the United States to Asia worked.

At present, the biggest problem with the Mar-a-Lago Accord is that interest rates are too high.The interest cost on U.S. Treasuries is at a high level. The yield on 10-year Treasuries is around 4.3%, and the 30-year yield is even higher. By comparison, The weighted average interest rate on all current U.S. debt is about 3.3%. So if the United States now “extends the duration” of short-term debt at an interest rate of 4.3% or higher, that would instead push up its annual interest expense of about 1.1 trillion dollars.

In other words, the theoretical framework of the so-called “Mar-a-Lago Accord” has obvious flaws. Its target group in particular—overseas creditors—accounts for only a small part of the debt structure, so it is unrealistic to expect such a structural operation to solve a major problem.

If the ultimate goal of this plan is to weaken the dollar and enhance the international competitiveness of U.S. manufacturing, another rumored version deserves attention: the idea of a sovereign wealth fund reportedly being developed within Trump’s team..

We’ll talk about this tomorrow..

2025.03.25

The “existential question” of U.S. Treasuries and the foundations of the global financial architecture

Discussing whether “U.S. Treasuries are still safe” and whether they are “truly risk-free” is essentially a discussion of an “existential question” concerning the foundations of the global financial architecture.

Since the end of the Bretton Woods system and the dollar’s departure from the gold standard, the dollar’s “credit” has no longer come from gold. It instead rests on confidence in “the strength of the U.S. economy” and “the government’s ability to collect taxes and repay debt.” The reliability of the debt depends on the economy’s capacity for sustained growth, and the two are tightly bound together and mutually reinforcing.

This is also what Dalio repeatedly emphasizes: once debt reaches a certain level and begins to undermine confidence in the ability to repay it, or once the interest burden starts crowding out the various types of government spending that sustain economic vitality, the entire system of confidence will weaken.In other words, excessive debt can in turn become an “inhibitor” of economic growth. That is the real threat of “debt overhang.”

So if the “vitality” of the U.S. economy itself is the foundation supporting its credit, the current situation is indeed worrying.

Bessent recently gave a speech at the Economic Club of New York, arguing for fully unleashing the private sector’s dynamism, reducing regulation, easing restrictions on banks and encouraging them to lend to the private sector. At the same time, he called for rolling back the large-scale fiscal stimulus of the Biden era—including industrial subsidies and government procurement policies—and withdrawing the government’s “visible hand” from the economy so that markets can regain the leading role.

This is, in effect, a renewed contest between the “state capitalism path” and the “laissez-faire path.”The question is whether, under the triple pressure of high debt, high inflation and low trust, the country can afford to take that gamble—and whether it is willing to believe that private capital can truly take on the long-term structural rebuilding of the U.S. economy. No one has a certain answer.

Free-market theory sounds appealing, but the reality is that the government has always played a key role in driving domestic economic growth.

From the most basic infrastructure—connecting people with markets by building roads, airports and railways—to ensuring that the workforce is healthy and educated so private businesses can find suitable talent, these are tasks the market cannot accomplish on its own; they are core responsibilities the government must shoulder.

Not to mention the importance of government investment in research and development and technology in fields where commercial potential remains uncertain and private capital is reluctant to get involved. Fundamental research projects supported by NIH (the U.S. National Institutes of Health) and the National Academies are typical examples.These frontier research projects often have no clear commercial path, yet they are the starting point for future breakthroughs in industry.

In the real world, no truly successful economy has achieved industrial upgrading and long-term growth by completely leaving the market alone and relying on no government investment.

This is one of the government’s most fundamental functions. The key question, then, is how to strike a “balance”—the United States’ past success was built on a “virtuous interaction between public and private investment.”

The immediate risk is that, as the total debt keeps rising, the more serious issue is that long-term reliance on deficits and debt financing is drawing the United States into a fiscal predicament it must confront. A “fiscal consolidation plan” is now urgently needed.

Put simply, a more reasonable balance must be established between revenue and spending. This balance does not have to be exactly one-to-one, but the key point is:The deficit cannot keep growing faster than the economy; otherwise, an unsustainable mountain of debt will continue to build up. At that point, this fiscal model will become increasingly difficult to sustain.

2025.03.26

Identifying the Precursors of Systemic Risk in the United States, Part Two

Spreads are finally twitching, and that’s not nothing.

If the market spent the past year “turning a blind eye” to credit risk, corporate credit—the taut rope that had been stretched tight—is now beginning to creak.We have been watching corporate credit for the past several years, and the long-awaited price discovery signals are finally appearing in the market—deterioration is at last being reflected in asset prices.

Credit spreads have finally moved, and they are “widening against the broader trend.”

One key change is this:Treasury yields have recently fallen, but High Yield and Investment Grade spreads have risen instead of narrowing. This means credit spreads are still widening significantly as interest rates decline. In other words, the credit market is “ignoring the rally in Treasuries” and actively demanding higher risk compensation.

This phenomenon has barely occurred in the past several years. In particular, during most of the selloff panics in 2023, credit spreads either held steady or narrowed, and investors continued to assume a combination of “low defaults + high liquidity.” But that belief is now beginning to weaken.

Although, if we take a longer view, Historically, this wave of widening is still relatively moderate, but it has indeed become somewhat “substantial.” For the market, such a substantial signal is not issued lightly, nor is it easily reversed once issued.

This widening is indeed moderate, but it is the most pronounced in several years—especially against the backdrop of the current wave of corporate bankruptcies, the largest since the global financial crisis.

The significance of credit spreads widening against the trend is that it often means the true pricing of default risk is returning.This is also another reason this market rebound looks more like “unrestrained emotional optimism,” with almost no fundamental basis in reality to support it.

All of this actually began to emerge last year. Credit spreads widened occasionally at the time, but nowhere near the extent we are seeing now, and the business community has also begun to recognize this as a real problem coming to the surface.

More substantial confirmation comes from Moody’s. In its recently released early warning report, the firm uses its own models to track and assess the probability of distressed defaults across industries.This report is unusual because people who lived through the subprime crisis and the subsequent financial crisis remember that Moody’s and other rating agencies were clearly far too optimistic and overconfident at the time. Rating agencies expressed their concerns about the subprime market with great restraint, to the point that their attitude could even be described as dismissive.

And Now, however, their warning system has begun to trigger a large number of signals—in some industries, such as media and health care, between 30% and 40% of companies are deemed to face potential default risk.That is a very high proportion. Moody’s has not gone so far as to “sound the alarm”; its current wording is still that “the early warning model is merely flagging risks,” and its tone remains restrained. But this shows that real-world pressures have become significant enough for even a consistently conservative rating agency to notice them...

In other words, if even Moody’s has noticed a problem, it may already be quite serious.

Earnings downgrades + high interest rates + approaching debt-limit deadline = the most dangerous combination

More seriously, this credit deterioration is not an isolated variable; it is occurring within a chain of multiple factors reinforcing one another:

1) Earnings expectations are being systematically revised downward (earnings revisions trending down);

2) A concentrated maturity window for corporate debt is approaching ($1T in 2025 + $1.2T in 2026);

3) High interest rates will raise the cost of rolling over debt;

4) Falling earnings → contracting cash flow → greater difficulty servicing high-cost debt.

Downward revisions to earnings expectations are usually truly bearish for equity and credit markets because, if companies earn less, it becomes very difficult for them to roll over their debt and refinance it at high interest rates.From now through year-end, the U.S. corporate sector has as much as one trillion dollars of debt to refinance, while another wave of refinancing totaling 1.2 trillion dollars is already lined up for 2026.

Unless interest rates fall substantially, companies will face a significant increase in debt costs against a backdrop of slowing or even declining earnings.Against this backdrop, Even a slight easing in interest rates does not mean companies’ financing costs have actually fallen, because spreads are widening and the all-in yield borrowers ultimately receive continues to rise.

The market has not yet realized how big this is.

Analysts at major banks broadly expect earnings forecasts to start being revised downward, with stock prices eventually repricing as a result. This is before even accounting for the peak in corporate debt maturities. In other words, The market is facing a “double hit”: two genuine headwinds—downward revisions to earnings expectations and a heavier credit burden—are intensifying at the same time.

In addition, liquidity-focused analysts such as Michael Howell and Darius Dale are deeply concerned that, as debt refinancing begins to hit in earnest this year, its drag on asset prices will grow heavier—10 trillion dollars of U.S. government debt is still coming due.

Competition for capital between the public and private sectors will be intense.

That is also why the most important point in the Fed’s decision last week was the slowdown in balance-sheet runoff. We will return to this in a later installment of this series..

The cracks in credit spreads have opened; this is only the first step.

2025.03.27

III. Market Pulse 

Our latest Comments on the economic and market environment

Positioning the United States (I): Is the worst over?

First, the deteriorating trend in fundamentals is being consistently confirmed, while the case for a rebound does not hold up even on the technical grounds most likely to support it.

The market has rebounded slightly from 10%’s downward correction, and sentiment has eased. Many investors are beginning to ask: Is the market’s “beating” finally over? Has the worst of this pullback passed?

On the surface, the market has indeed shown a structural recovery:The S&P hit bottom and rebounded at the start of 3, recovering nearly half of its losses. The market is more inclined to view this episode as a “healthy correction”—the market needed an adjustment, and the pullback simply offered a better price at which to buy.

Technically, several short-term indicators are signaling an oversold rebound. Some technical analysts point to conditions such as the indices reaching the lower Bollinger Band and speculative positioning turning bearish, all of which are providing momentum for a short-term rebound.

But if we take a step back, start with the fundamentals and combine them with actual feedback from businesses and consumers, this rebound looks more like a “dead cat bounce” driven by technical factors, sentiment and positioning than a trend reversal supported by earnings, improving policy or a shift in macroeconomic signals.

And it is not just the fundamentals, Even according to the foundational theories of the most traditional technical analysis, the current market rebound is unhealthy. The Dow, Nasdaq and S&P have never risen in unison. One of the most important tenets of Dow Theory, developed a century ago, is that a technical move lacking confirmation across indices cannot serve as a signal for determining the trend. Yet many people now study extensive technical analysis without understanding even its most basic principles.

Yesterday, the Dow rose while the Nasdaq and S&P fell. In terms of confirmation across indices, this rebound is nowhere near qualifying.

But today, let’s talk about the fundamentals first; we can discuss technical topics another time.

1) On the business side, a quarterly CFO survey jointly released by the Richmond Fed and Duke University shows:Business confidence fell markedly in the first quarter of 2024, and this pessimism was driven almost entirely by policy uncertainty.Specifically, “tariffs” became the foremost concern, followed by tax policy, while views on the regulatory backdrop have, by contrast, grown more optimistic.

CFO explicitly stated that, amid uncertainty over whether tariffs would disrupt supply chains, when they would take effect and how significant their impact would be, they had chosen to postpone capital spending and new hiring. This corporate “wait-and-see sentiment” is a typical reflection of delayed investment intentions.

In this environment, It is difficult for them to make decisions because they cannot tell whether these tariffs will disrupt supply chains. This directly suppresses many capital-spending and hiring plans that might otherwise have gone ahead.

2) Consumer confidence data are also concerning. The University of Michigan Consumer Sentiment Index has been released, reflecting consumers’ profound pessimism about the labor market. Notably, consumers often have a more accurate real-time sense of conditions, and their confidence tends to decline before the actual data do.Consumer surveys alone could be dismissed as noise, but today this forward-looking signal in consumer sentiment is corroborated by the CFO survey—businesses and consumers are delivering consistently weak feedback about expectations.

3) Looking at broader macroeconomic data, the Atlanta Fed’s latest nowcast shows consumer spending at Q1 for 0%, a classic recessionary print—a clear recession-level reading. If this forecast proves accurate, it would mean the weakest first-quarter consumer spending data since the Great Recession of COVID and 2008.

For consumption, if we exclude essential spending such as housing and health care, the remaining categories of consumption have in fact been in recession territory for some time.

Looking back at this rebound, some technical and structural flows have indeed provided support, such as technically oversold conditions, month-end and quarter-end portfolio rebalancing, systematic strategies trying to buy previously strong performers in oversold territory, and speculative positioning based on ETF flows, options skew and other factors..

But none of this can obscure one fact:The market as a whole has not undergone a reassessment of its underlying thesis or a recovery in earnings expectations.

Put another way: the market rebounded simply because it had fallen earlier. For those who remain optimistic, this is a good opportunity to add to their positions. But the rebound does not mean the fundamentals have improved—because they have not changed at all.

In short, This market move looks like a technical unwind without bad news, not the start of a new uptrend. The real tests—whether earnings downgrades continue, credit spreads keep widening, and consumer and business confidence truly turns positive—still lie ahead.

Until then, any “recovery” can only be called a respite, not a reversal.

For related reading: Notes250205 Reconsidering political noise and the ultimate performance of assets

Notes241031 In the U.S. equity market, micro-level performance matters more than macro-level politics

This series is expected to have seven installments and aims to give you a systematic overview of the fundamental logic shaping the U.S. equity market and the U.S. economy today. We’ll start with these topics.

2025.03.27

Note: All content in this article is for reference only and does not constitute investment advice or serve as a basis for any laws, regulations or regulatory policies. Investors should not use or rely on this information as a basis for their decisions.