From March twenty-fourth, two thousand twenty-five to March twenty-sixth, two thousand twenty-five

I. Foundation 

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

Bringing manufacturing back to the United States

Over the past several decades of globalization, the United States has run large trade deficits for a long time, especially in manufacturing. It has had to rely on imports for many critical systems that are vital not only to the defense industry but also to manufacturing itself. The United States once led 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, AT&T, then commercialized through procurement policies by NASA and the Department of Defense. Ultimately, the United States gave rise to the calculator, computer, and television industries, among others, but these were all by-products of highly coordinated U.S. federal government policies.

Fast-forward four or five decades: today, most advanced semiconductor manufacturing is concentrated in a geographically highly vulnerable place, Taiwan, separated from mainland China by only the Taiwan Strait. This dependence is not limited to semiconductors; it also extends to several advanced manufacturing fields, 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 industries back home. Tariffs are a means to the end of rebuilding local communities in the United States that were severely hollowed out by the wave of globalization after China joined the WTO in the early 2000s.

And one of the key mechanisms they intend to use 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 benefited from cheap imports thanks to the strong dollar, which has also suppressed inflationary pressures that domestic manufacturing could have caused.

40 years ago, the United States accounted for 25% of global manufacturing; now it accounts for only 15%. At the time, China was barely on the map; now it accounts for 35% of global manufacturing.The core aim 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, the key to this manufacturing revival plan is that it must be carried out 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. Indeed, this approach reflects a typical Republican preference: favoring private capital and downplaying the role of public investment in industrial policy.

But at the end of the day, 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, however, is that both CHIPS subsidies and the incentives created by the Biden administration's other major 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 remove 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 leadership in manufacturing, especially in defense-critical industries, high tariffs alone will not be enough. It must also combine them 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 enhance the international competitiveness of U.S. manufacturing is now under consideration 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 foreign-exchange markets and deliberately push the dollar lower.

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 tool. So for the United States now to establish a sovereign wealth fund and use it instead for foreign-exchange intervention to deliberately weaken the dollar is itself a rather unusual “reversal.”

This sounds like the United States will shift from issuing “unsecured Treasuries” to “secured 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; if you use too many, you will eventually run out. It is true that the United States is the world's largest economy and, in theory, may be the country best positioned to back its debt with collateral. But the question is: what exactly would serve as collateral?

Conventionally, collateral is assessed along two dimensions: first, the loan-to-value ratio; second, cash flow coverage.

From this perspective, the U.S. “balance sheet” actually contains many hidden assets, and many are not recorded at market value. Take the gold reserves often mentioned recently: the U.S. Treasury still books them at 42 dollars per ounce, while gold prices have already surpassed 3000 dollars per ounce.If the gold bars at Fort Knox were revalued at market prices, they would be worth roughly 8,000 to 9,000 hundred million 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” either.

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 practically “absentee landlords,”These vast tracts of undeveloped or inefficiently used public land could also be considered for inclusion in a 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 framework is being reshaped, any “public asset” that was once considered off-limits could become one of the options in the toolkit.The questions are: are they willing to touch these assets? Can they bear the political cost afterward? Will the market truly accept it? This is not only a matter of financial engineering, but also a profound contest over ideas of national governance.

2025.03.26

II. Insights 

Our Viewpoints and ideas on market.

Follow-up on the European trade: reducing exposure + using small caps structurally in the European allocation

We captured the full move in this European trade through our cross-asset community platform. The Notes updated on the platform last week Notes250321 The risk of European fiscal spending was skewed toward overreaction In fact, was actually warning that this part had run too far too quickly in the short term. We reduced some positions and shifted to India (readers who look closely at the notes should have noticed that we once again caught the macro low in the Indian market trade) (see Notes250313 A look at the India trade), the India trade is still at the starter-position stage for now. First, let us discuss the structural allocation on the European side and what to do next.

Since we issued our call to go long Europe, the market consensus has broadly followed our lead and shifted to Long Europe versus US equities. This capital is essentially dumb money lifting our positions; do not stay with dumb money for too long.

As quarter-end flows shift heavily toward U.S. equities (with an estimated +1000 hundred million dollars of inflows), non-U.S. equities face outflow pressure of around 820 hundred million dollars, In the short term, Long SPX / Short SX5E is the core thesis for a reversal of the pain trade. Expectations of tariff de-escalation are also supporting the relative strength of U.S. equities in the near term, especially growth stocks.

Over the medium term, we still favor increasing our allocation to European equities. 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, potentially bringing Eurozone economic growth in line with or even above that of the United States. In terms of allocation, we still favor cyclicals, including industrials, banks, and the heavily shorted automobile sector.

However, this trade has indeed run too far, too fast at this stage. When we called for going long German stocks in the second half of last year, our expected trade horizon was around 2 years, but it has now reached our expected range in just over half a year. Although the relative EPS trend supports 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 positioning strategy than as a chase higher now.

In the short term, we will try to trade a rebound in U.S. equities to pair with reductions in European equities. Over the medium term, China trades will certainly outperform Europe trades. In Europe, while reducing index exposure, investors can shift some allocation into European small caps; this segment still has some catch-up upside ahead and is worth watching closely. Core holdings are not being sold; only the trading positions are being adjusted.

2025.03.24

What will happen on the eagerly awaited 4 month 2 day

Markets are in countdown mode. 4 month 2 day has been named “Liberation Day” by Trump himself. This is more than a symbolic political statement; it has a real chance of becoming a turning point in a new round of trade policy.According to the “America First Trade Policy Memorandum,” federal agencies must complete their assessment of the U.S. trade deficit and report it to the White House by 4 month 1 day, so the actual policy timeline is largely anchored to this window. Judging by the administrative process and Trump’s high-profile buildup, this time it looks less like rhetoric and more like a substantive policy announcement.

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

Under the new plan, countries would be assigned different tariff levels according to the extent of their trade barriers against the United States, The factors considered for proposed tariffs would include not only import duties but also a broad range of factors such as digital services taxes, subsidy mechanisms, intellectual property protection, and non-tariff barriers. The intent is clearer: use “layers + tiers” as bargaining chips to build more durable negotiating leverage.

Markets broadly underestimate the medium-term impact of this policy shift on asset pricing, especially in an environment where the macro backdrop is deteriorating at the same time and growth momentum is clearly slowing. The tariff shock itself may not trigger a recession, but it will change corporate expectations and investment appetite, 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 emerging: Bessent disclosed that multiple countries have proactively reached out seeking tariff relief. The EU has announced that it will postpone its retaliatory tariffs from 4/1 to 4/13, while Japan, the UK, and Mexico have also begun consultations.The U.S. may set different tariff levels through a “one-country-one-bracket” mechanism 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.

Tariffs on China are very likely to expand further, but as rates continue to rise, the government may introduce certain exemption mechanisms to ease pressure on specific industries. Meanwhile, tariffs on products involving national security, such as steel and aluminum, are likely to be locked in over the long term and will not be loosened 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 backup plan. The process may be to first classify 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 conduct 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 can rank trading partners from largest to smallest deficit, 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 month 1 day or 2 day?

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 very likely to be a primary target, especially the auto industry from the EU: finished vehicles and parts account for around 12% of total U.S. imports, while the trade-weighted tariff gap in this sector is 2 percentage points (that is, the rates the United States imposes on other countries are lower).

Pharmaceutical products have been mentioned, but tariffs are uniformly low worldwide and the tariff imbalance is relatively small, so the United States is unlikely to move rashly on this front. 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 this narrative.

Policy risk is priced with a right-tail bias. The market has not fully grasped the idea of “tariffs as a long-term tool of geopolitical bargaining”; this trade policy turning point is very likely to be more than another round of “Trump-style tax hikes.”

2025.03.24

Why the United States will have to continue issuing large amounts of debt in the future

In broad terms, the ratio of U.S. federal debt to GDP is now 1:1, and the 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 by 7% of GDP each year. 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 debt to repay old debt.”

The United States has now entered the stage of “borrowing new debt to pay interest on old debt” and must address its fiscal imbalance as soon as possible. One part 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 portion of federal spending. Yet this small slice of spending is precisely what relates to education, transportation, housing, and infrastructure—the part that supports the “broad economy,” or, put another way, spending in key areas that build human capital, physical public capital, and housing stock.That entire budget is only 7000 hundred million dollars, while total federal spending is as high as 6.75 trillion dollars.

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

Where does the rest of the major spending go? Interest expense, retirement security, national defense, and health care. Together, these items make up almost the entire spending structure of the government. That is why the fiscal situation is now truly at an impasse.Only when those budget reconciliation bills actually reach the congressional voting process, in the fall or earlier, will we see whether Congress has enough political courage to confront these resource-allocation issues.

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

Among these, Medicaid spending is about 6000 hundred million dollars per year, and transportation, education, housing, and the like total 7000 hundred million dollars as well. So The proposed annual cut of 1000 hundred million dollars would in fact come out of 1.3 trillion dollars in social spending. The amount is not especially large, and it is not enough to truly change the trajectory of the fiscal deficit.

If new tax cuts are also added at the same time—for example, tax cuts on tips, overtime pay, Social Security income, and so on—those discussions are already underway—then that is not “addressing 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 stillborn Mar-a-Lago Accord

Some time ago, we published two articles in Notes about the Mar-a-Lago Accord. If you have not read them, please do so before reading today’s article. See Notes250310 Understanding the “Mar-a-Lago Accord” in one article+Notes250312 Understanding the “Mar-a-Lago Accord” in one article (continued)。

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

See Notes250325 Bringing manufacturing back to the United States

The Mar-a-Lago Accord and the “rationalized” theoretical structure formed around Trump can both be traced back to Moran’s paper, which presents the most systematic and comprehensive strategic framework available so far.He himself acknowledged that the room for this strategy to be truly effective is actually very narrow. And to some extent, Trump has already acted first, for example by imposing tariffs on a massive scale and threatening to withdraw the United States’ security commitments to NATO.

These two measures are precisely the key “sticks” that Miran recommends using, with the aim of forcing foreign central banks and 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 large amounts of debt in the future

And in the so-called “Mar-a-Lago Accord” proposal, The core idea is:The United States could reduce its debt costs by encouraging 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 burden by “extending duration.”

How could foreign investors be induced to take part in such an exchange?

In his paper, Miran laid out two key strategies, much like private-market debt exchanges: a “carrot and stick” approach—offering incentives while creating fear.

In this framework, there are supposedly two “sticks.” First, if your foreign government does not cooperate, it will have to face high tariff barriers. Second, the United States will withdraw its security guarantees to you—in other words, the U.S. military “umbrella.”

In other words, if you want the world’s most powerful military to continue protecting your borders and deterring potential threats such as Russia, then you must exchange the short-term U.S. Treasuries you hold for low-interest-rate century bonds.For the United States, this would mean not having 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 the maturity or convert debt into equity.

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

But this proposal has quite a few problems. The biggest is that In terms of the ownership structure, less than 15% of U.S. Treasuries 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 these holders could be persuaded to take part in a debt exchange, the amount of debt involved would be very small and the impact limited.

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

So to actually move forward with this “duration extension” operation would, in effect, mean taking action 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 a bankrupt company, after a long delay and at a large loss—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 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 additional tariffs, and continued provision of the security umbrella. But The reality is that even if these commitments matter, market trust in them has already weakened significantly. Trump’s repeated flip-flopping on tariff policy over the past two months has caused many people to lose confidence.

If “tariff threats” and “cancellation of security guarantees” are meant to be used as bargaining terms, honestly, Trump has played these cards too early and too poorly. He put the threats on the table too soon, without creating a sense of pressure. In other words, these “threats” are no longer a “sword hanging overhead”; they are a “script everyone has already seen through.”

Markets are genuinely concerned that he might go back on the agreement the day after it is reached.

As for NATO’s “security umbrella,” NATO countries are now unlikely to see the United States as a dependable pillar of defense. Germany has abolished its debt ceiling and is preparing to sharply increase defense spending, with the aim of being able to defend itself even without U.S. protection. Poland has done the same. Countries near Russia’s borders—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, ultimately rendering these “inducement mechanisms” completely ineffective. Judging by this short-debt-for-long-debt exchange concept, the so-called “diplomatic exchange deal” no longer has an effective threat or a credible reward.

A more realistic “variant” might be: swap out short-term debt, and the United States will allow industries to be built on its soil—for example, China building a BYD factory on U.S. soil.This kind of deal is actually quite “traditional”: high-tech countries export manufacturing, followed by technology transfer, and the host country learns how to build superfactories and master a complete industrial chain. Historically, this is how industrial outsourcing from Europe and the United States to Asia worked.

The biggest problem for the Mar-a-Lago Accord at present is that interest rates are too high.The interest cost on U.S. Treasuries is currently high. The yield on 10-year Treasuries is around 4.3%, while the 30-year yield is even higher. By comparison, The weighted average interest rate on all U.S. debt today is about 3.3%. So if the United States now “extends the duration” of short-term debt at a rate of 4.3% or higher, it would instead raise 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. In particular, its target group—overseas creditors—accounts for only a small part of the debt structure, so it is unrealistic to expect this limited structural maneuver to solve a major problem.

If the ultimate goal of this plan is to weaken the dollar and improve the international competitiveness of U.S. manufacturing, another version of the rumor is worth noting: the Trump team is said to be considering a sovereign wealth fund concept..

We’ll talk about this tomorrow..

2025.03.25

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

Discussing whether “U.S. Treasuries are still safe” and whether they are “truly risk-free” is, in essence, discussing 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, but from confidence in the “strength of the U.S. economy” and the expectation that the “government is capable of collecting taxes and repaying its debt.” The reliability of the debt depends on the economy’s capacity for sustained growth, and the two are closely linked and mutually reinforcing.

This is also what Dalio has repeatedly stressed: once debt reaches a certain level and begins to undermine confidence in the ability to repay it, or when the interest burden starts crowding out the various types of government spending that sustain economic vitality, the entire system of confidence begins to weaken.In other words, excessive debt can in turn become a “brake” on 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 troubling.

Bessent recently gave a speech at the Economic Club of New York. His position was to fully unleash the private sector’s vitality, reduce regulation, ease restrictions on banks and encourage them to lend to the private sector; at the same time, roll back the large-scale fiscal stimulus of the Biden era—including industrial subsidies and government procurement policies—withdraw the government’s “visible hand” from the economic system, and let the market regain the lead.

This is essentially a renewed contest between the “state capitalism path” and the “laissez-faire path.”The question is whether, amid the triple pressure of high debt, high inflation and low trust, the risk is worth taking, and whether we are willing to believe that private capital can truly take on the long-term structural reconstruction of the U.S. economy. No one has a definite 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—such as connecting people and 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 not tasks the market can accomplish on its own; they are basic functions the government must assume.

Not to mention the importance of government investment in research and development and technology in fields where commercial potential is still unclear and private capital is reluctant to enter. Basic research projects advanced by NIH (the U.S. National Institutes of Health) and the National Academies are typical examples.这些前沿研究往往没有明确的商业路径，但却是未来产业突破的起点。These frontier research efforts often have no clear commercial pathway, yet they are the starting point for future industrial breakthroughs.

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

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

The risk now is that, as the total debt continues to climb, 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 urgently needed.

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

2025.03.26

III. Market Pulse 

Our latest Comments on the economic and market environment

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.