March twenty-fourth, two thousand twenty-five to March twenty-fifth, 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

During the past few 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 led the semiconductor industry, and In fact, this industry emerged in the 60s, 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 byproducts of highly coordinated US federal government policy.

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

Therefore, the core purpose of tariffs is actually to bring industries back home. They are a means to rebuild US local 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 intend to transmit this 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 restrained inflationary pressure that could have resulted from domestic manufacturing.

40 years ago, the United States accounted for 25% of global manufacturing; now it accounts for only 15%. China had almost no presence then, but now accounts for 35% of global manufacturing.The core objective of the so-called “Mar-a-Lago Accord” is to find a way to weaken the dollar without disrupting capital flows that finance US 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 measures, such as the CHIPS Act, in an attempt to promote the development of 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 in the end, Building a high tariff wall is essentially a bet that private capital will invest inside that wall.

Although Trump publicly criticized the CHIPS Act as “terrible,”The reality, however, is that both CHIPS subsidies and the incentives from another major Biden administration policy, the Inflation Reduction Act, have taken root across the United States, particularly in “red states.” This means that if the Trump administration wants to eliminate 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 critical defense industries, high tariffs alone are not 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

II. Insights 

Our Viewpoints and ideas on market.

A follow-up on the European trade: trimming positions and structurally using small caps for Europe exposure

We captured the entire move in this European trade on Cross-Asset Planet; last week, Planet updated its Notes250321: European fiscal-spending risk skews toward overreaction actually was warning that this part had run too far in the short term; we trimmed some positions and shifted to India (readers who follow the Notes closely should have noticed that we once again caught the macro low in the India market trade) (see Notes250313: see the India trade), and the India trade is still in the initial, probing stage. First, let’s discuss the structural allocation on the European side and what to do next.

Since we called for going long Europe, the market consensus has broadly followed our lead and shifted to Long Europe vs. US equities. This capital is essentially dumb money lifting our positions; don’t stay alongside dumb money for too long.

As quarter-end flows tilt heavily toward US equities (with an estimated +1000 billion dollars flowing in), non-US equities face outflow pressure of around 820 billion dollars, In the short term, Long SPX / Short SX5E is the main thesis for a reversal of the pain trade. Expectations of tariff de-escalation are also supporting the relative strength of US equities in the short term, especially benefiting growth sectors.

In the medium term, we still favor increasing European equity allocations because eurozone GDP growth over the medium to long term should benefit from fiscal expansion, defense spending, and expectations of a ceasefire in Ukraine. This could bring eurozone economic growth to levels comparable to or even higher than that of the United States. We still favor cyclical sectors, including industrials, banks, and heavily shorted autos.

This trade has indeed moved too fast at this stage. When we called for going long German equities in the second half of last year, we expected the trade to take around 2 years, but it has reached our expected range in just over half a year. Although relative EPS trends support continued outperformance by European equities, the recent risk structure in US 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 US equities to pair with a reduction in European equities. Over the medium term, the China trade will certainly outperform the Europe trade. On the European side, while reducing index exposure, investors can shift some of it into European small caps; this segment should continue to catch up for a while and is worth watching. The core position is not being sold; only the trading portion is being adjusted.

2025.03.24

What will happen on the eagerly anticipated 4 month 2 day?

The market is in countdown mode. 4 month 2 day has been named “Liberation Day” by Trump himself. It is more than a symbolic political statement and could genuinely become a turning point in a new round of trade policy.. Under the America First Trade Policy Memorandum, federal agencies must complete their assessment of the US trade deficit and report it to the White House by 4 month 1 day; the actual policy timetable is largely anchored to this window. Judging from the administrative process and Trump’s high-profile buildup, this 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 simple taxation by product category to a comprehensive assessment system 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, Factors considered for the proposed tariffs would extend beyond import duties to include a broad range of issues, such as digital services taxes, subsidy systems, intellectual property protection, and non-tariff barriers. The intent is clearer: use “layers and tiers” as bargaining chips to build more durable negotiating leverage.

The market is broadly underestimating the medium-term impact of this policy shift on asset pricing, especially as the macroeconomic backdrop deteriorates in parallel and growth momentum slows markedly. 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 greater weight in the Federal Reserve’s policy path.

The negotiating strategy is beginning to take shape: Bessent disclosed that several countries have proactively reached out to seek tariff relief. The EU has announced that it will postpone its retaliatory tariffs from 4 month 1 day to 4 month 13 day; Japan, the United Kingdom, and Mexico have also begun consultations.The United States 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.

Tariffs on China are likely to expand further, but as rates continue to rise, the government may introduce certain exemption mechanisms to ease pressure on specific industries. Meanwhile, long-term tariffs on products such as steel and aluminum, which involve national security, are likely to remain fixed and will not be loosened easily.

Although the “three-tier plan” is the market’s main focus, it is also possible that the US Trade Office is preparing a multi-tier alternative. The process may be to first group countries into tiers (three or more), then have the Office of the US Trade Representative assign them to tariff levels based on their goods trade deficits and overall degree of trade restrictions, and conduct bilateral negotiations accordingly.

It could still be presented as “overall reciprocity” in form, but the key is the ranking mechanism. During negotiations, the Office of the Trade Representative could rank trading partners from the largest deficit downward, assess their trade barriers one by one, and ultimately set a target tariff rate high enough to “correct the imbalance.”

Which industries are most likely to be affected on 4 month 1 day 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. Autos are highly likely to be a major target, especially the automotive industry from the EU. Complete vehicles and parts account for around 12% of total US imports, while the trade-weighted tariff gap in this sector is 2 percentage points (that is, the rates the United States charges other countries are lower).

Pharmaceutical products have been mentioned, but taxes are uniformly low around the world, 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 their share is only 1%, the weighted tariff gap reaches 2.5%, making them an easy scapegoat as “high-priced imports” in the narrative.

Policy risk is priced with a right-tail skew, and the market does not fully recognize the idea of “tariffs as a long-term bargaining tool.” This trade-policy turning point is probably not just another round of “Trump-style tariff hikes.”

2025.03.24

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

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

The root cause is an imbalance in the federal budget: the deficit accounts for 7% of GDP, which means debt also grows each year by 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, Social Security pensions—and the other is medical coverage—that is, Medicare for the elderly.

If you actually lay out the federal budget, what Elon Musk and DOGE are constantly demanding be cut is only a small part of federal spending. Yet this small portion concerns education, transportation, housing, and infrastructure—the parts that support the “broad economy”—or, in other words, spending on key areas that build human capital, physical public capital, and housing stock.This entire budget amounts to only 7000 billion 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 does the rest of the big spending go? Interest expense, retirement security, defense, and healthcare. Together, these items make up almost the entire structure of government spending. So the fiscal situation is now truly in a bind.Only when those budget reconciliation bills 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 billion dollars in spending over 10 years, or about 1000 billion dollars per year on average. These cuts are concentrated mainly in Medicaid, transportation, housing, and education.

Medicaid spending is about 6000 billion dollars a year, while transportation, education, housing, and the like add up to 7000 billion dollars. So The purported annual cut of 1000 billion dollars would actually 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, on tips, overtime pay, and Social Security income, among other things, discussions that are already underway—then that is not “addressing the deficit” at all; it is continuing to flood the system with money。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 about the Mar-a-Lago Accord in Notes. If you have not read them, please do so 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 reiterate, 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 achieve a larger goal, namely bringing manufacturing back to the United States.

See Notes250325 Bringing Manufacturing Back to America

Both the Mar-a-Lago Accord and the set of “rationalized” theoretical structures forming around Trump can ultimately be traced back to Miran’s paper, which puts forward the most systematic and comprehensive strategic framework to date.He himself admits that the scope for this strategy to be truly effective is very narrow. To some extent, Trump has already taken the initiative—for example, by imposing sweeping tariffs and threatening to withdraw the U.S. security commitment to NATO.

These two measures are precisely the key “sticks” Miran recommends using to compel foreign central banks and investors to keep buying U.S. Treasuries at favorable rates, thereby preserving the ability to finance U.S. budget deficits and debt expansion. As Ray Dalio has pointed out, the United States has in fact entered a stage in which a debt crisis is looming.

See:Notes250325 Why the United States Will Have to Keep Issuing Large Amounts of Debt

And in the so-called “Mar-a-Lago Accord” proposal, The core idea is:The United States could lower its debt costs by encouraging foreign investors to exchange their short-term Treasuries 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, extending the duration would ease the debt-service burden.

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

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

In this framework, there are two “sticks.” First, if your foreign government does not cooperate, it will 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 keep protecting your borders and defending against potential threats such as Russia, you must exchange the short-dated 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 the next century, effectively eliminating its refinancing risk and achieving a “duration extension.”

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

On one hand, it “extends duration”; on the other, it reduces the long-term interest burden. That is the original purpose of the so-called century-bond exchange strategy.

But this proposal has many problems. The biggest one is that In the current ownership structure of U.S. Treasuries, less than 15% are held overseas—and this share has fallen sharply in recent years. Many of those holdings are not owned by foreign governments or sovereign institutions, but by private investors abroad.

That is, even if this group could be successfully persuaded to participate in the debt exchange, the volume of debt involved would be very small, with limited impact.

The remaining 85% of 36 trillion dollars in U.S. Treasuries are held by the United States itself.Some are held in government accounts, such as Social Security and Medicare trust funds; others are held by domestic U.S. institutions and individuals, including banks, insurers, endowments, wealthy individuals, mutual funds, and money market funds.

So pushing through this kind of “duration extension” operation would, in effect, mean turning against oneself.

The usual logic behind the “stick” is:If you do not participate in the restructuring plan, you may ultimately receive only the residual assets of a bankrupt company, after a long delay and with major losses—so you might as well accept the agreement now. The problem is that if the U.S. government wants to use a “carrot and stick” strategy, it is very difficult to wield the “stick” without hurting oneself.For example, if interest rates really surge and market signals begin to question whether the U.S. government will repay its debt, that would be a systemic shock to the entire financial market that might be impossible to repair.

And the carrot should be:No additional tariffs, and continued security protection. But The reality is that, even though these commitments matter, the market’s trust in them has already weakened significantly. Trump’s constantly shifting, erratic stance on tariff policy over the past two months has caused many people to lose confidence.

If the “tariff threat” and “withdrawal of security guarantees” are meant to serve as bargaining chips, frankly, 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 over everyone’s head”; they are a “script everyone saw through long ago.”

The market is genuinely concerned that he could backtrack the day after reaching an agreement.

As for NATO’s “security umbrella,” NATO countries are now unlikely to view the United States as a reliable pillar of defense. Germany has already lifted its debt ceiling and is preparing to sharply increase defense spending so it can protect itself without U.S. protection. Poland has done the same. Countries near Russia’s 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, rendering these “inducement mechanisms” completely ineffective. In this short-term-for-long-term debt swap scenario, the so-called “diplomatic exchange deal” lacks both an effective threat and a credible reward.

A more realistic “variant” might be this: in exchange for giving up short-term debt, the United States would allow industry to be built on its soil—for example, China building a BYD factory in the United States.This type of deal is actually quite “traditional”: high-tech countries export manufacturing, and technology transfer follows. The recipient country learns to build mega-factories and master the entire industrial chain—this is how European and American companies historically outsourced production to Asia.

The biggest problem with the Mar-a-Lago Accord at present is that interest rates are too high.The interest cost on U.S. Treasuries is currently high. Yields on 10-year Treasuries are around 4.3%, while those on 30-year Treasuries are even higher. By comparison, The weighted-average interest rate on all U.S. debt currently stands at 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, it would instead push up its annual interest expense of about 1.1 trillion dollars.

In other words, the theoretical framework behind the so-called “Mar-a-Lago Accord” has an obvious flaw. In particular, its target group—overseas creditors—accounts for only a small share of the debt structure, so it is unrealistic to expect this limited structural operation 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 reported version is worth noting: the sovereign wealth fund concept being developed within Trump’s team..

We’ll talk about this tomorrow..

2025.03.25

III. Market Pulse 

Our latest Comments on the economic and market environment

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 make decisions based on or rely on this information.