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 revisited: the awakening of the silent majority and the polarization of the median voter

For the six decades surrounding the introduction of the “median voter theorem,” the silent majority revealed by this principle has continually shaped the operating logic of the U.S. political system—For any political party or politician to win a very large number of votes, its campaign platform and program must 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 seeking to win an election must remain moderate... This is exactly what the two U.S. parties have done in the past.The larger the share of a society made up of median voters, the less likely the society as a whole is to make extreme choices and the socioeconomic life of the society is more likely to become rationalized rather than move toward extremes.

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

And this conditioning mechanism is fundamentally based on one premise:

The median voter remains a core beneficiary of the system.

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

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

Median voters are now leading the polarization, and Trump’s core voters are precisely these median strata—the former “silent majority” of America.When median voters are systematically hollowed out, that creates a structural problem. At some point, people who have been silent will suddenly say, “This system is unfair to me.” Then 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 America’s 19 richest families increased by 1 trillion dollars, equivalent 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%, a record high. In other words, when we discuss how “retail sales” data are performing, we are really asking “how are the rich doing?” The bottom half of the population is now almost irrelevant to the consumption “data.”

In other words, the share of consumption and economic output attributable to the highest-income 10% of the U.S. population, relative to the overall economy, is now at a record high.GLOBAL MARKET NOTES

Chart: 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 rent collectors from global arbitrage.The root of the problem is that if some resources are taken from this 10% group to subsidize lower-income people, the marginal effect of each dollar is entirely different.

As manufacturing reshoring begins under Trump, the jobs it brings back (those shifted overseas by globalization)(This is also what most ordinary Americans born and raised in the country 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 the mainstream culture or family upbringing of the American population.)，precisely cover those whose position in the income distribution is the median.

The countercurrent to polarization brought about by these 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 the possible path ahead...

Chart: Notes 250513 Unemployment Logic and Credit Assets

Chart: Notes 250509 A Second Look at the May Meeting

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

Today, the Republican Party repeatedly claims to be the party of the working class—whereas that used to be the Democrats’ label.The Democrats talk about “endless wars”; they worry about billionaires on Wall Street losing money; they support free trade and oppose tariffs, speaking for 10% beneficiaries of globalization—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, just along 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 also the common basis for the political divisions, Trump’s policies, and market reactions we see today—the status quo has to change.

We are currently in a transition period, a phase in which change is being pursued, and the coming years will show how this transformation ultimately takes shape.

What does this mean for the market?

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, there will be no room for credit risk repricing，even if GDP slips into zero growth or even slightly negative growth，credit investors can still “survive.”

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

1) Imports are disrupted; shortages of goods lead to lower consumption + excess capacity and surplus labor in supply chains

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

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

But a key link in this chain is that unemployment may indeed not worsen quickly

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

Second, For overseas producers, having orders is actually more important; for a long time, they may be willing to “pay the tariff themselves” and continue exporting in order to maintain orders and cash flow.In real industries, if you actually talk to some business owners, for them a smaller loss is better than a complete shutdown, and earning less is still a win.

Third, tariffs have moved from being a trade on expectations to actual implementation; the process has now entered 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 also face employment concerns at home. Both sides therefore 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 anticipating the tariffs’ implementation to anticipating the outcome of negotiations. If the situation is only temporary, 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 for now. Moreover, in the medium term, the U.S. is also promoting domestic substitute production. Although this transition will push inflation higher, it will instead provide a floor for employment.

Finally, Structurally, the U.S. is facing reduced immigration and a retirement wave among the baby boom generation. This will automatically shrink labor supply—even without layoffs, the number of people participating in the labor force will fall, masking an increase in the unemployment rate.

Therefore, unemployment may—and is likely to—avoid a significant deterioration, while inflation may indeed rise again and growth enter a period of stagnation.（See Notes 250428 Another Counterintuitive Macro Combination of More Likely Paths) That is, A structure of low growth, low unemployment, and high interest rates may persist for a long time, which also means that credit markets may relatively outperform.

The logical argument about unemployment in this Notes can also be applied to judgments about Federal Reserve policy, which is also why we are more bearish than market expectations.

2025.05.13

Continuing the discussion of unhedged dollar exposure

An increasing share of U.S. assets is held by private investors rather than central banks, making these positions less “sticky” year after year, The declining stickiness naturally also means that these positions are more sensitive to a weakening of “American exceptionalism.”