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

I. Foundation 

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

The K-Shaped Economy, Continued: The Awakening of the Silent Majority and the Polarization of the Median Voter

For the sixty years surrounding the proposal of the “median voter theorem,” the silent majority revealed by this rule continued to shape 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 platform and agenda align with the wishes of the median voter.

For the previous discussion, see: Notes 250401, Locating America (Four): Leverage, Illusion, and “Paper Prosperity”

This means that any party or politician must remain moderate to win an election... This is precisely what the two U.S. parties have done in the past.The larger the share of median voters among a society’s members, the less likely society as a whole is to make extreme choices, the more conditions society has to rationalize its economic and social life rather than move toward extremes.

In fact, median voters have not always been moderate; they have merely been conditioned by the U.S. political system over the past 60 years to become synonymous with “moderation”。

And this conditioning mechanism is fundamentally based on one premise:

The median voter remains the system’s core beneficiary.

But what if the median voter is no longer silent...

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

Median voters are leading the polarization, and Trump’s core supporters are precisely these median-income groups—the former “silent majority” of America.The systematic hollowing out of median voters is a structural problem. At some point, people who have been silent suddenly say, “This system is unfair to me.” And then a wave of populism begins.

The economic expression of populism’s core logic is essentially an answer to the question of whether to “maximize GDP” or “maximize ordinary people’s well-being” (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 wealth of America’s 19 richest families increased by a combined 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 richest 10% of the population account for 50%, already a record high. In other words, when discussing how “retail sales” data are performing, the real question is “how are the rich doing?” The bottom half of the population is almost irrelevant to the consumption “data.”

In other words, the consumption and economic output of the highest-income 10% of Americans now account for a record-high share of the overall economy.

Figure: Notes 250401, Locating America (Four): Leverage, Illusion, and “Paper Prosperity”

The highest-income 10% are essentially the true beneficiaries of globalization—they are generally the first rentiers of global arbitrage.And the root of the problem is that if some of the 10% are taken away to subsidize lower-income groups, the marginal effect of each dollar is entirely different.

As manufacturing reshoring under Trump begins, the jobs it brings back (those that were moved overseas because of globalization)(This is also what most ordinary native-born Americans really want. The actual life paths and values of Americans are not “study to support a family, go to college, study computer science or finance.” That is not part of mainstream U.S. domestic culture, nor is it the path by which their families grow up.)，It is precisely those whose position in the income distribution is the median.

The counterwave of polarization driven by these median voters will continue to drive a recovery in employment (or keep it stable).. but GDP may decline—because the distribution structure is changing.

This is also another reason for our judgment about the possible path ahead...

Figure: Notes 250513, Unemployment Logic and Credit Assets

Figure: Notes 250509, Revisiting the May Meeting

GDP maximization and the most-preferred path at the median level are in conflict.

Today’s Republicans repeatedly claim to be the party of the working class—whereas that used to be the Democrats’ label.The Democrats talk about “endless wars,” worry about Wall Street billionaires losing money, support free trade and oppose tariffs, speak for the globalization beneficiaries of 10%—whereas that used to be the Republicans’ label.

The two major U.S. parties have completed a polarity reversal, and in fact both are moving left in different ways; their paths are simply different.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 also the common basis underlying the political divisions, Trump’s policies, and the market reaction 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. The “easy-win” era of 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 managers is about to begin.

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, the scope for pricing credit risk will not open up, even if GDP falls to zero growth or even slightly negative growth, credit investors can still “survive.”

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

1) Disruptions to imported goods and shortages of goods lead to lower consumption + excess capacity and surplus labor in supply chains

2) Lower consumption causes companies to lay off workers and unemployment to surge

3) The economy quickly falls into recession, possibly accompanied by stagflation

But a key link in this chain is that unemployment may indeed not deteriorate rapidly

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

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

Third, tariffs have moved from being traded on expectations to actually taking effect; we are now in a period of negotiation and fine-tuning. If inflation or unemployment indicators worsen, the U.S. government will face domestic political pressure; governments in exporting countries face employment problems at home as well. Therefore, both sides have incentives and leverage to negotiate, At least the situation is unlikely to get “worse.”

For U.S. domestic companies, this also means expectations will shift from the expected implementation of tariffs to the expected outcome of negotiations. If the situation is only short term and workers are difficult to replace quickly after layoffs (everyone learned that lesson 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 production as a substitute; although this transition will push inflation higher, it will instead provide a floor for employment.

Lastly, Structurally, the United States is facing a decline in immigration and a peak in Baby Boomer retirements, which will automatically reduce labor supply—even without layoffs, labor force participation will fall, thereby masking an increase in unemployment.

Therefore, unemployment may—and is likely to—avoid a significant deterioration, while inflation may indeed rise again and growth may enter a period of stagnation.（See Notes 250428 for more: A more likely combination of paths that is counterintuitive at the macro level), 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 unemployment-related reasoning in this Notes piece can also be applied to judgments about Fed policy; this is also why our view is 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 is declining year by year.

Naturally, lower stickiness also means they are more sensitive to a weakening of “American exceptionalism.”

Chart: Notes250430 Revisiting that huge rectangle that lasted 25 years and 4500 days

(Here, it is worth emphasizing that the increase in foreign investors’ holdings of U.S. stocks is not a valuation illusion...)

Based on Bloomberg data, The market value of U.S. stocks currently held by overseas investors accounts for 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 overseas holdings of U.S. assets has come entirely from private investors, not central banks 

Chart: Overseas purchases of U.S. assets have increased mainly in U.S. stocks

This difference is especially pronounced compared with other asset classes 

Chart: There is real buying of U.S. stocks

Over the past ten years, the U.S. net international investment position (NIIP) deficit has worsened from 40% of GDP to a deficit of 80%.The change was driven mainly by the continued deterioration of the portfolio investment account; that deficit has reached 15.6 trillion dollars, 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’s deterioration is mainly due to 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 risen sharply

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

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

Chart: Notes250430 Revisiting that huge rectangle that lasted 25 years and 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. The dollar market reflects this structural shift in allocation flows more fully than the U.S. stock market.

Chart: Notes250430 Revisiting that huge rectangle that lasted 25 years and 4500 days

The great transformation is taking shape in the foreign exchange market: this is a once-in-a-century repricing of the dollar.

Chart: Notes250506 The key answer to the question of when to buy back

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

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

Chart: Overseas holdings of dollar assets

Chart: Notes250430 Revisiting that huge rectangle that lasted 25 years and 4500 days

We update our positioning on this trade every week in Weekly Wrap (every Sunday):

Chart: EURUSD

Chart: Zoom in for a closer look

This 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 has indeed overshot; don’t jump into the sea when the waves are rough.

Chart: Weekly Wrap 250504

The reason we are not rushing is that this would be another major structural adjustment by global institutions, following gold...

According to research by Du and Huber(Reading material: NBER - DOLLAR ASSET HOLDINGS AND HEDGING AROUND THE GLOBE), foreign mutual funds, pension funds, and insurance companies alone hold approximately 8.4 trillion dollars in U.S. assets, Their foreign exchange 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, which can provide a natural hedge when risk appetite declines.

Further reading: Notes250429 A definitive answer to “which asset is truly a safe haven?”

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

Chart: Notes250430 Revisiting that huge rectangle that lasted 25 years and 4500 days

This data is consistent with our long-held view: as the short-term interest rate differential between the U.S. and other countries has widened and the dollar’s strength has persisted, foreign exchange hedging costs have remained high, prompting most investors to leave their foreign exchange exposure to U.S. assets unhedged.

Chart: Notes250430 Revisiting that huge rectangle that lasted 25 years and 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 U.S. equity exposure of about 9.8 trillion dollars, and unhedged exposure to U.S. fixed-income assets (including Treasuries, agency debt, and corporate bonds) of about 3.9 trillion dollars.

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

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 pounds and Canadian dollars, 800 hundred million dollars in yen, 450 hundred million dollars in Swiss francs, 370 hundred million dollars in Norwegian kroner, 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 significant risks. If there is a systematic reduction in U.S. asset allocations, this could trigger a “convexity effect” (FX convexity) in the foreign exchange market—that is, capital flows themselves would amplify selling pressure on the dollar, causing exchange rate movements (the extent of the dollar’s depreciation) to far exceed and deviate from what traditional fundamentals (such as monetary policy and interest rate differentials) can explain.

And Potential volatility will naturally create trading opportunities.

Those well versed in investment history should be very attuned to this kind of 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 still trapped within that rectangle from back then

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 flows returned heavily toward Europe.

If the pattern from 17 were to repeat, 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) The ships are on their way: if tariff cuts happen before 520

Over the weekend, the U.S. and China are meeting. Before the talks, various media outlets had already begun reporting that the U.S. might lower tariffs on China after trade negotiations, but Looking at the shipping data and supply chain timing themselves, the window for tariff adjustments had actually become apparent long ago.

After a precipitous drop in exports shipped from China at the end of 4, there was a clear rebound in the first week of 5，The Port of Los Angeles also expects many ships to arrive in the third week of 5... in timing, this lines up exactly with vessels that departed China at the beginning of 5.

The shipping data is not coming out of nowhere.

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

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

Another fact is that this actually happened during the COVID period, when major North American companies also began policy front-running, It is commonplace in U.S. business history for large retailers (who provide campaign funding) to receive insider information, Anyone who truly believes in “equal treatment for all” under the U.S. system of business and politics is incredibly naive.

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

Large retailers get an insider heads-up in advance, while small and midsize businesses lag by at least 1 months.

So 5/12 and 5/20 are two key points for tracking shipping schedules and policy follow-through, If no adjustment is seen by then, the above inference needs to be reassessed; if it materializes, that would indicate that this round of shipping spikes reflects “insiders” pricing in expectations about the policy path.

Keep a close eye on them.

2025.05.12

The Big Beautiful Bill, and fiscal and bond markets exceeding expectations

Time is passing quickly; we are about to enter the second half of 2025 with you. Longtime friends of the Planet will know that, the second half of the year means U.S. domestic policy is about to take over from tariffs as the focus of macro trading.

Trump is trying to advance a new Big, Beautiful Bill, The bill could add around 5000 hundred million dollars in primary deficits each year, on top of the existing fiscal deficit, equivalent to pushing the U.S. fiscal deficit up by another 1.5 percentage points or more.

At this point, it is clear that Bessent’s 333 (three million barrels of oil production, 3% growth in GDP, and a 3% deficit ratio) and the deficit reduction that Trump talked up extensively using DOGE before taking office can now be officially retired, The fantasy is over: the government is increasing defense spending, leaving social benefits untouched, and DOGE has gotten its fill of political gimmickry, while fiscal restraint has achieved very little.

We have discussed this extensively before, we have consistently disagreed with the logic of spending cuts and with Bessent’s 333:

Chart: Notes250217 A not very optimistic 3-3-3 plan

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

333 has brought us to today. First, they have barely increased production on a large scale, because oil prices are too low and U.S. shale producers have no incentive to bring production back online. Second, the promised 3% GDP: although the Q1 data are not negative on the headline measure, the actual underlying growth rate is only around 1.5%. Third, the deficit target? It is already heading toward 7%.

So what the market is actually facing is a fiscal situation of “expansion beyond expectations.”Although interest rates have risen somewhat, this topic has not yet been discussed enough. Some rhetoric has calmed things down, but the fundamental fiscal trajectory has not changed.A bond-market upheaval will come sooner or later, and it may happen when the bill passes. Energy is building in the market; once the fiscal bill is truly settled, or reaches the critical stage of “potential passage in the summer,” people may really start to panic.

Early in the upheaval, two things can be expected to happen; these are also among the few cards the U.S. government has left:

1/SLR (supplementary leverage ratio) adjustment—exclude Treasury securities from banks’ leverage ratio calculation, making it easier for banks to buy bonds (the prerequisite for using tools like SLR to suppress yields is that yields first rise sharply; only then would these tools be considered)

2/ buyback programs, or other measures to squeeze out short sellers

Until the Treasury steps in, and finally global pension funds and insurers decide that the terms are attractive enough to re-enter the market.

2025.05.16

Note: All content in this article 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 their decisions.