May twelfth, two thousand twenty-five to May fourteenth, two thousand twenty-five

I. Foundation 

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

The K-shaped economy continues: the awakening of the silent majority and the polarization of median voters

For the sixty years surrounding the introduction of the “median voter theorem,” the silent majority revealed by this rule had continually shaped the operating logic of the U.S. political system—Any party or politician seeking to win an exceptionally large number of votes must make its campaign proposals and platform align with the preferences of median voters.

For earlier discussion, see: Notes 250401, “Locating America (Four): Leverage, Illusions, and ‘Paper Prosperity’”

This means that any party or politician seeking to win an election must remain centrist... This is exactly what the two U.S. parties have always done.The greater the share of median voters among members of a society, the less likely the society as a whole is to make extreme choices and the socioeconomic life of society is therefore more able to become rationalized rather than move toward extremes.

In fact, median voters have not always been moderate; it is only over the past 60 years that the U.S. political system has conditioned them to become synonymous with “centrism”。

And this conditioning mechanism is fundamentally based on one premise:

Median voters remain the system’s core beneficiaries.

But what if median voters are no longer silent...

That is exactly what is happening today, 60 years later.

Median voters are leading the polarization; Trump’s core voters are precisely these middle-income strata, once known as America’s “silent majority.”When median voters are systematically hollowed out, that is a structural problem. At some point, silent people suddenly say, “This system is unfair to me,” and a wave of populism begins.

The economic expression of populism’s core logic is essentially an answer to the question: should we “maximize GDP,” or “maximize the well-being of ordinary people” (employment)?That is, Whether a society chooses to optimize the average outcome or the median outcome may sound similar, but the two are fundamentally different.

In 2023, the combined wealth of the 19 richest U.S. families increased by 1 trillion dollars, equal to the total increase in wealth of the bottom 40% of the U.S. population (1.2 hundred million people).In total U.S. retail sales, the top 10% wealthiest people account for 50%, the highest share on record. In other words, when we ask how “retail sales” are performing, we are really asking how the rich are doing. The bottom half of the population is almost irrelevant to the consumption “data.”

In other words, the share of overall economic activity represented by consumption and output from the highest-income 10% group in the United States is now at a record high.

Chart: Notes 250401, “Locating America (Four): Leverage, Illusions, and ‘Paper Prosperity’”

The highest-income 10% group are, in essence, the true beneficiaries of globalization—they are generally the first rentiers of global arbitrage.And the root of the problem is that, if some resources are taken from this 10% group to subsidize those at the bottom, the marginal effect of each dollar is completely different.

As manufacturing reshoring begins under Trump, the jobs it brings back (those shifted overseas because of globalization)(This is also what most ordinary native-born Americans truly want. Their actual life paths and values are not “study to support a family, go to college, study computer science or finance”; that is neither part of mainstream culture among ordinary native-born Americans nor the path by which their families grow up.)，It is precisely the people whose income distribution is at the median.

This polarization countercurrent brought about by median voters will continue to drive employment recovery (or keep it stable)... but GDP may decline—because the distribution structure is changing.

This is another reason behind our judgment about possible future paths...

Chart: Notes 250513, “Unemployment Logic and Credit Assets”

Chart: Notes 250509, “Revisiting the May Meeting”

Maximizing GDP and the most favorable path at the median level are in conflict.

Today the Republican Party keeps claiming to be the party of the working class—a label that originally belonged to the Democrats.The Democrats talk about “endless wars,” worry about Wall Street billionaires losing money, support free trade and oppose tariffs, speak for the beneficiaries of globalization 10%—which was originally the Republican Party’s label.

The two major U.S. parties have completed a polarity reversal, and in fact both are moving left in different ways, though by different paths.What this reflects is a deeper issue: both U.S. parties are realizing that Something is seriously out of balance, and “maintaining the status quo” is no longer possible.

This is the common foundation of the political divisions, Trump’s policies, and market reactions we see today: the status quo must change.

We are currently in a transition period, a phase of trying to drive change, and the coming years will show how this transformation ultimately takes shape.

What does this mean for the markets?

A more volatile phase is unfolding. “Easy-win” passive index investing will come to an end amid shocks from all directions. A major turning point in the investment paradigm has arrived—the era of active management is coming.

2025.05.14

II. Insights 

Our Viewpoints and ideas on market.

Unemployment logic and credit assets

In credit markets, the most important variable is—unemployment.

In fact, If it does not rise significantly, there will be no room for credit risk to be repriced even if GDP falls to zero growth or even slight negative growth credit investors can still “survive.”

The market’s prevailing expectation can essentially be summed up as: “Things will get very bad soon,”Their chain of reasoning is:

1) Disruption to imported goods; shortages lead to weaker consumption, plus excess capacity and surplus labor in supply chains

2) Weaker consumption leads to corporate layoffs and a surge in unemployment

3) A rapid slide into recession, possibly accompanied by stagflation

But a key link in this chain is that unemployment may in fact not worsen rapidly

First, U.S. consumers may still be willing to pay higher prices to keep obtaining goods, This is true of many goods, because their prices are not as sensitive as the market assumes.

Second, For overseas producers, having orders to fulfill is actually more important; for a long time, they may be willing to “pay the tariffs themselves” and continue exporting to maintain orders and cash flow.In the real economy, if you actually talk to business owners, losing less is better than shutting down completely; earning less is still a win.

Third, tariffs have moved from being traded on expectations to actual implementation; now comes a period of negotiation and fine-tuning. If inflation or unemployment indicators deteriorate, the U.S. government will face domestic political pressure, while governments in exporting countries also face employment concerns at home. Both sides therefore have incentives and leverage to negotiate, At least the situation probably won’t get “worse.”

For U.S. domestic companies, this also means expectations will shift from tariff implementation to the outcome of negotiations. If the situation is only temporary, and layoffs are difficult to reverse quickly (a lesson everyone learned once during the pandemic),they may choose not to lay off workers yet. Moreover, over the medium term, the United States is also promoting domestic substitute production. Although this transition will push inflation higher, it will instead provide a floor for employment.

Finally, Structurally, the United States is facing reduced immigration and the peak of Baby Boomer retirements, which will automatically shrink the labor supply—even without layoffs, the number of people participating in the labor force will fall, masking a rise in unemployment.

Therefore, unemployment may—and most likely will not—deteriorate significantly, while inflation could indeed rise again and growth enter a stagnant range.（See Notes250428 for another, counterintuitive yet more likely macro-level combination of paths) That is, A structure of low growth, low unemployment, and high interest rates will persist for a long time, which also means that credit markets may outperform on a relative basis.

The logical argument about unemployment in these Notes can also be applied to our assessment of Federal Reserve policy, which is why we are more pessimistic than market expectations.

2025.05.13

Continuing the discussion of those unhedged dollar exposures & the EUR/USD target price

U.S. assets increasingly held by private investors rather than central banks, making the “stickiness” of these positions declines year after year.

The flip side of this declining stickiness is, naturally, that these positions are more sensitive to a weakening of “American exceptionalism.”

Chart: Notes250430 revisiting that enormous rectangle from 25 years ago that lasted 4500 days

(One point to emphasize here: the increase in foreign investors’ holdings of U.S. stocks is not a valuation illusion...)

Calculated using Bloomberg data, the market value of U.S. stocks currently held by foreign investors is about 30% of total U.S. market capitalization, up from about 27% in 2020; investors from G10 countries currently hold about 20%, also above the previous level of about 18%. By contrast, foreign investors’ share of U.S. Treasury holdings has fallen from about 40% to about 34%.

Chart: The expansion of foreign holdings of U.S. assets has come entirely from private investors, not central banks

 Chart: Most of the increase in U.S. assets purchased abroad has been in U.S. stocks

This difference is especially pronounced compared with other asset classes

 Chart: They are buying U.S. stocks in real terms

Over the past decade, the U.S. net international investment position (NIIP) deteriorated from a deficit of 40% of GDP to a deficit of 80%.The deterioration was driven mainly by the continued worsening of the portfolio investment account, with that deficit reaching 15.6 trillion dollars, or about 53% of GDP.

A further breakdown of the asset side (that is, foreign assets held by U.S. investors) and the liability side (that is, U.S. assets held by foreign investors) shows that NIIP deteriorated mainly because of increased foreign investment in the United States, particularly in equity holdings.

Chart: The U.S. net international investment position (NIIP) deficit is driven by the portfolio investment balance

 Chart: Equity liabilities in NIIP have surged

U.S. investors currently hold 13 trillion dollars in foreign stocks, roughly unchanged from a decade ago as a share of GDP; meanwhile, foreign investors’ total holdings of U.S. stocks have exceeded 18 trillion dollars, or about 60% of U.S. GDP, whereas this share was still below 40% in 2015.

This means that if U.S. stocks perform poorly, it will have a direct impact on the dollar...

Chart: Notes250430 revisiting that enormous rectangle from 25 years ago that lasted 4500 days

This is also why we have always said that the dollar and U.S. stocks are one and the same...the core reason to look at the dollar alongside U.S. stocks when trading U.S. equities. The dollar market reflects these structural shifts in allocation flows more fully than the U.S. stock market.

Chart: Notes250430 revisiting that enormous rectangle from 25 years ago that lasted 4500 days

The great transformation is playing out in foreign exchange: this is a once-in-a-century repricing of the dollar.

Chart: Notes250506 the key answer to when to buy back

Among investors in G10, which hold the most U.S. assets, the largest share of capital comes from Europe

—This means that if the dollar undergoes another genuine correction later on (a correction driven by actual hedging of dollar exposure), EUR/USD will be the key currency pair to trade.

Chart: Dollar assets held by foreign investors

Chart: Notes250430 revisiting that enormous rectangle from 25 years ago that lasted 4500 days

We update our positioning in this pair each week in the Weekly Wrap (every Sunday):

Chart: EURUSD

Chart: Zoom in

The currency pair is now moving as we expected..

After touching the lower boundary, we are waiting for confirmation of an upward move.

No rush. The dollar really has overshot; don’t jump into the sea when the waves are rough.

Chart: Weekly Wrap 250504

The reason not to rush is that this would be another major structural adjustment by global institutions, following gold...

According to research by Du and Huber(Accompanying reading material: NBER - DOLLAR ASSET HOLDINGS AND HEDGING AROUND THE GLOBE), foreign mutual funds, pension funds, and insurance companies alone hold about 8.4 trillion dollars in U.S. assets, Their The FX hedge ratios are 44%, 35%, and 21%, respectively.

Hedging differences are even larger across countries:

Swiss pension institutions hedge as much as 60% of their foreign-currency assets, while the overall hedge ratio of Canada’s largest pension funds may be below 15%，mainly because the Canadian dollar is positively correlated with equities, providing a natural hedge when risk appetite declines.

Further reading: Notes250429 fully answers the question, “What exactly is a safe-haven asset?”

This difference exists not only across countries, but also across institution types: in Japan, life insurers currently hedge about 50% of their FX exposure, while the Government Pension Investment Fund of Japan (GPIF) does not hedge its FX exposure at all.

Chart: Notes250430 revisiting that enormous rectangle from 25 years ago that lasted 4500 days

These data are consistent with our long-held view: as short-term interest rate differentials between the U.S. and other countries widened and the dollar remained strong, FX hedging costs stayed high, prompting most investors to leave their FX exposure to U.S. assets unhedged.

Chart: Notes250430 revisiting that enormous rectangle from 25 years ago that lasted 4500 days

Based on the hedge ratios above, the net unhedged exposure to U.S. assets is 13.7 trillion dollars, of which foreign investors currently hold unhedged about 9.8 trillion dollars in U.S. equity exposure, and about 3.9 trillion dollars in unhedged U.S. fixed-income assets (including Treasuries, agency debt, and corporate bonds).

If we assume G10 investors modestly reduce their holdings of U.S. stocks and bonds by 5%, respectively (even then, their holdings of U.S. stocks would remain above pre-pandemic levels), that would mean about 7000 hundred million dollars of dollar assets being sold down.

This amount is equivalent to about two-thirds of the U.S. annual current-account deficit.

From an exchange-rate perspective, this repatriation of dollar funds would roughly correspond to the following amounts of purchases of non-U.S. currencies:about 2700 hundred million dollars in euros, about 1000 hundred million dollars each in British pounds and Canadian dollars, 800 hundred million dollars in yen, 450 hundred million dollars in Swiss francs, 370 hundred million dollars in Norwegian krone, 300 hundred million dollars in Australian dollars, 190 hundred million dollars in Swedish kronor, and 30 hundred million dollars in New Zealand dollars.

Although this is a hypothetical scenario, the logic behind it is clear——The current overweight in dollar assets poses substantial risks; if a systematic reduction in U.S. asset allocations occurs, this could trigger a “convexity effect” (FX convexity) in the foreign-exchange market—capital flows themselves would amplify selling pressure on the dollar, causing exchange-rate movements (the extent of dollar depreciation) to far exceed and diverge from what traditional fundamentals (such as monetary policy and interest-rate differentials) could explain.

And Potential volatility will naturally create trading opportunities.

Those well versed in investment history should recognize this trading backdrop; countless macro hedge funds made their fortunes this way...

Target range?

Chart: The last exchange-rate overshoot occurred in 2017

From a broader perspective, we are actually still trapped within that rectangle from back then

In 2017, EURUSD rose above 1.25, far beyond the reasonable level implied by the U.S.–Europe interest-rate differential at the time, driven by structural capital inflows as asset reallocation returned heavily toward Europe.

If the same pattern as in 17 happens again, the target price would probably fall between 1.24 and -1.25.

2025.05.15

III. Market Pulse 

Our latest Comments on the economic and market environment

(Causal Chain) Ships are on the way: tariff cuts if before 520

The U.S.–China talks are scheduled for the weekend. Before the talks, various media outlets had already begun reporting that the U.S. might lower tariffs on China after trade negotiations, but the shipping data and supply-chain timing themselves show that the window for tariff adjustments had already become apparent.

After Chinese export shipping plunged at the end of 4, it rebounded markedly in the first week of 5，The Port of Los Angeles also expects a large number of ships to arrive in the third week of 5...timing that corresponds exactly to vessels departing China at the beginning of 5.

The shipping data are not baseless.

Earlier, Walmart, Target, and Home Depot, three major retailers, met behind closed doors with the White House during the week of 4/24, explicitly citing “shelf clearance risk.” The meeting was reportedly productive, and afterward the retail giants resumed placing orders with China.The timing of these major retailers’ orders exactly matches the turning point in the rebound of shipping data, forming a plausible causal chain.

The first replenishment vessels to set sail are expected to arrive on 5/12 (clearly closely aligned with the policy window, right after the U.S.–China trade meeting over the weekend); more ships are expected to arrive before 5/20.

Another fact is that this had already happened during COVID, when North American giants also began policy front-running, it is commonplace in U.S. business history for large retailers (who provide campaign funding) to receive inside information, Under the U.S. business–political system, anyone who truly believes in “equal treatment for all” is extremely naive.

Chart: U.S.-session retail stocks are a key signal to watch closely before the 20

Large retailers received an insider heads-up in advance, while small and medium-sized businesses lagged by at least 1 months.

So 5/12 and 5/20 are two key dates for monitoring shipping schedules and policy follow-through, If no adjustment is seen by then, the preceding inference needs to be reassessed; if it materializes, that would indicate that this round of shipping spike reflects “informed” pricing of expectations for the policy path.

Worth keeping a close eye on.

2025.05.12

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