March twenty-four, two thousand twenty-five to March twenty-eight, 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 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, which 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 came into being in the 60s of the last century, driven by a series of U.S. government policies.. At the time, semiconductor technology was developed with research and development funding for IBM, AT&T, and then commercialized through NASA and the Department of Defense’s procurement policies. Ultimately, the United States gave rise to industries such as calculators, computers, and television, but these were all byproducts of highly coordinated policies by the U.S. federal government.

Fast-forward four or five decades: today, most advanced semiconductor manufacturing is concentrated in a geographically vulnerable place separated from mainland China by just 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.

The core purpose of imposing tariffs is therefore to bring industry back home; tariffs are a means to rebuild local U.S. 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 aim to transmit this is the dollar exchange rate.A strong dollar makes exports expensive and imports cheap. For a long time, the United States has benefited from cheap imports thanks to a strong dollar, which has also suppressed inflationary pressures that domestic manufacturing might otherwise have created.

40 years ago, the United States accounted for 25% of global manufacturing; now it accounts for only 15%. China barely had a presence at the time, 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 the capital flows that finance U.S. debt. At the same time, private capital must play the key role in this round of manufacturing reconstruction.

The Biden administration did adopt some stimulus policies, such as the CHIPS Act, in an attempt to promote certain key industries, but Trump’s focus, by contrast, is on creating a market environment favorable to private investment. This approach does reflect a typical Republican preference: favoring private capital and diminishing the role of public investment in industrial policy.

But ultimately, 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 is that incentives from both CHIPS subsidies and the Inflation Reduction Act, another major Biden administration policy, have taken root across states nationwide, especially in “red states.” This means that if the Trump administration wants to cancel these support measures in the future, it will face political resistance from state governments in its own party.

Returning to the fundamental question: if the United States really wants to restore its leadership in manufacturing, especially in defense-critical industries, high tariffs alone are not enough. They must be combined 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 boost the international competitiveness of U.S. manufacturing is now taking shape in the Trump administration: creating a U.S. sovereign wealth fund.Some of the U.S. government’s existing assets would be pooled into a central sovereign fund managed by the Treasury Department, allowing the Treasury to intervene directly in the foreign exchange market and deliberately push the dollar lower.

This is interesting because Historically, resource-rich countries have generally established sovereign wealth funds to maintain a strong domestic currency and provide countercyclical stabilization. So the idea of the United States now establishing a sovereign wealth fund for the opposite purpose—foreign exchange intervention to actively weaken the dollar—is a rather unusual “reversal.”

This sounds as if the United States would shift from issuing “unsecured government bonds” 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; use too many and eventually they run out. To be sure, the United States is the world’s largest economy, and in theory it may be the best positioned to back its debt with collateral. But the question is: what exactly would be pledged?

Traditionally, collateral is assessed along two dimensions: “loan-to-value” and “cash flow coverage.”

From this perspective, the U.S. “balance sheet” actually contains quite a few hidden assets, many of which are not booked at market value. For example, the gold reserves often mentioned recently are still valued on the Treasury’s books at 42 dollars per ounce, while the price of gold has long since surpassed 3000 dollars per ounce.If the Fort Knox gold bars were revalued at market prices, they would be worth approximately 8,000 hundred million to 9,000 hundred million dollars.

Of course, compared with total debt of 36 trillion dollars, this is a drop in the bucket—but it cannot be called “meaningless.”

For 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 basically “absentee landlords,”these vast tracts of undeveloped or inefficiently used public land could also be considered for inclusion in a collateral system.

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 sovereign debt frameworks are being reshaped, any “public asset” that was once off-limits could become one of the options in the toolkit.The question is: are they willing to touch them? Can they bear the political consequences afterward? Will the market really accept them? This is not only a matter of financial engineering, but also a profound contest over ideas of national governance.

2025.03.26

Recalibrating the definitions of QE and QT

First, from an operational perspective, QE has three stages in all:

1) Quantitative easing: when The central bank increases its asset holdings through operations with positive net purchases (that is, it buys more bonds than mature and are redeemed from its balance sheet), at which point it is in the QE phase.

2) Reinvestment phase: when The central bank reinvests the proceeds from maturing assets, thereby keeping the balance sheet unchanged in size, at which point it is in the reinvestment phase.

3) Quantitative tightening: when the central bank enters the QT phase when it begins to reduce its asset holdings. In this phase, the pace of balance-sheet reduction may vary (for example, partial reinvestment, no reinvestment at all, or active asset sales).

Second, there is a distinction between “framework purchases” and “QE-style purchases”

One A central bank’s “standard monetary policy framework” is one in which its asset portfolio should be as small as possible, provided it can meet the banking system’s normal liquidity needs.

If the central bank uses a corridor framework (corridor framework, relatively tight liquidity), then its monetary asset portfolio should cover only autonomous factors and required reserves, with no excess liquidity; if it uses a floor system (floor system, ample liquidity), then its portfolio should be only large enough to maintain the ample liquidity required by that framework.

This means that a central bank holding a certain volume of assets is normal under the framework (so these purchases do not necessarily constitute QE, even if they may fall into the type of QE 1 defined below), while any additional purchases above that “framework asset level” should be regarded as quantitative easing (QE).—any action that slows the pace of balance-sheet reduction (whether through partial or full reinvestment) is also, in substance, QE.

More precisely, if a central bank’s asset holdings exceed the level needed for its policy framework to function normally, then any additional purchases (whether net purchases, reinvestment, or partial reinvestment) constitute QE.

For example, the Fed’s recent slowdown in QT and shift toward reinvesting in some bonds could be viewed as “framework purchases,” provided you believe the Fed is now close to the minimum liquidity level needed to maintain its monetary policy framework.Conversely, if you believe market liquidity is still ample, then this operation constitutes QE and could even be classified as type QE 4.

Conversely, Under the new ECB framework, a structural asset portfolio will be implemented at some point in the future, intended solely to cover autonomous factors and required reserves; such purchases should be regarded as “framework purchases.”

All purchases above the “framework level” are QE

Chart: from Crédit Agricole CIB

Whether to sell assets is another question worth exploring:

For example, if a central bank’s asset holdings are far above what its policy framework requires but it still does not sell them, that in itself could be regarded as a form of QE. Moreover, the market impact of large-scale bond sales by a central bank would distort market pricing too much, so The standard pace of QT should be “natural redemptions, no reinvestment.”

2025.03.28

Four different forms of QE: an introduction to the concept of monetary financing

In Notes250328, Recalibrating the Definitions of QE and QT we mentioned:If a central bank’s asset holdings exceed the level required by its monetary policy framework, then any form of bond purchase—whether net purchases, reinvestment, or partial reinvestment—should be regarded as quantitative easing (QE).. In other words, if the European Central Bank (ECB) slows the pace of its quantitative tightening (QT) through partial reinvestment—as the Federal Reserve is doing now—then this also constitutes QE.

To distinguish more clearly the objectives and effects of different bond-purchase programs, QE can be divided into three types, each with a different market impact.This framework is based on a talk by Ricardo Reis at a discussion group on 2022 10 1. Reis divided QE into three categories and acknowledged that central banks in practice often combine several types of QE. CA added A fourth category—monetary-financing QE (Monetary Financing), because this issue is more relevant today.

QE Type 1: Liquidity Injection

The essence of QE type 1 is to increase commercial banks’ deposits at the central bank.Before the Global Financial Crisis (GFC), most central banks’ monetary policy frameworks operated under liquidity scarcity (a corridor system): central banks injected only the minimum liquidity needed to keep markets stable, thereby anchoring the overnight rate.

Since QE type 1 was introduced, liquidity has become abundant, pushing interbank rates toward the lower bound of the central bank’s interest-rate corridor. In this way, central banks ensure market participants have ample liquidity and avoid disruptions to short-term markets caused by a “scramble for liquidity.”

Typical examples include the Fed’s QE program, launched in 2019 9, whose sole purpose was to increase excess liquidity in the system. In addition, the liquidity facilities from 2008 9 to 12 were also type QE 1, and some of the aims of the first QE in 2008 were also to inject liquidity into the market.

The ECB has never implemented a textbook QE-type 1, but its adoption, starting in 2008, of “fixed-rate full allotment” and the introduction of new refinancing instruments beyond three-month TLTROs can be seen as measures to inject reserves into the banking system and transition toward an excess-liquidity regime.

QE Type 2: Monetary Easing

QE type 2 concerns adjustments to the maturity structure of a central bank’s asset portfolio, with the aim of lowering long-term interest rates.What we commonly call QE usually refers to this type.QE type 2 can be carried out without injecting additional liquidity, for example: the central bank holds short-term government bonds and uses market operations to exchange them for long-term bonds, thereby“removes” duration (duration) from the market and compresses the term premium (term premium). That was the rationale behind the Fed’s “Operation Twist” in 2011–2012.

Of course, A central bank can also more directly exchange ultra-short-term assets, such as bank reserves, for long-term bonds.The Fed’s QE2 in 2010 was an example of this approach.

The key point is:The purpose of this type of QE is not to provide liquidity or support a particular risk asset, but to adjust the market’s duration structure and lower long-term interest rates. It is typically used when a central bank’s policy rate has reached its lower bound and further policy easing is needed, through type QE 2.

In the ECB’s APP (Asset Purchase Programme), launched in 2015, 3, looking only at its PSPP component (Public Sector Purchase Programme), it is a textbook example of a QE-type 2.

QE Type 3: Market Distortion and Financial Stability

QE type 3 means buying distressed assets or providing emergency liquidity to financial institutions.In this type of QE, the central bank acts as the lender of last resort (Lender of Last Resort).

The QE1 launched by the Federal Reserve in 2008, 11 is a textbook example of Type 3, centered on purchasing MBS (mortgage-backed securities) to prevent that market from collapsing. Another classic case is the Bank of England’s emergency intervention in the gilt market after the UK’s “mini-budget” triggered a gilt crisis in 2022; this too falls under the QE type 3.

The ECB’s SMP (Securities Markets Programme), launched in 2010–2011, falls under Type 3. Its purpose was to purchase government bonds of euro area peripheral countries to prevent the euro area sovereign debt market from collapsing. The subsequent OMT (Outright Monetary Transactions) and TPI (Transmission Protection Instrument) also belong to this category.

In addition, there is a “targeted intervention” type of QE intended to influence specific market segments. It is similar to financial-stability QE; for example, the ECB launched ABSPP (the Asset-Backed Securities Purchase Programme) to try to revive the ABS market, though unsuccessfully. CBPPs supported the bank-bond market, while CSPP supported the corporate-bond market; these follow a similar logic.

QE Type 4: Monetary Financing

CA added a new QE type 4, which combines characteristics of QE type 2 and type 3：When the central bank’s bond purchases are primarily intended to help finance the government, this constitutes monetary-financing QE.

By lowering long-term interest rates (QE type 2) or compressing credit spreads (QE type 3), a central bank can effectively reduce the government’s borrowing costs.

At this point, If the central bank’s policy rate has not yet reached its lower bound and spread levels have not seriously impaired policy transmission, then continued bond purchases are no longer conventional easing or market-stabilization tools, but substantive monetary financing, so this can be classified as type QE 4.

In other words, If there is no need for monetary easing or financial-stability intervention, yet the central bank continues to insist on buying bonds, it is difficult to call this a reasonable use of monetary policy tools. It looks more like covertly “helping the government issue debt”—that is, monetary financing.

“The central bank’s policy rate has not yet reached its lower bound”: this means there is still room to cut rates, so the central bank can stimulate the economy using conventional monetary policy tools (such as rate cuts), without relying on unconventional measures (such as QE) to ease policy.

“Spread levels have not seriously impaired policy transmission”: that is, the market has not seen excessively high government-bond yields or credit spreads that make it difficult for policy to transmit. In other words, there is no financial-stability or transmission-mechanism failure requiring the central bank to buy bonds to stabilize the market.

If neither of the first two conditions is present, yet the central bank still buys assets (such as government bonds) to lower yields or maintain large holdings, its actions can no longer be explained simply as “monetary easing” or “market stabilization”; its motive no longer has a macroeconomic policy necessity.

The direct result of bond purchases is to create demand for new government debt issuance and lower the government’s financing costs. This amounts to the central bank using its own balance sheet to “backstop the public finances,” which is a typical case of monetary financing.

So, in summary: if the central bank continues buying bonds without a sound policy rationale for monetary easing or financial stability, then in essence it is “printing money to help the government issue debt.” This is monetary support for fiscal policy; it is type 4 of QE—the monetary-financing type, QE.

2025.03.28

II. Insights 

Our Viewpoints and ideas on market.

Follow-up on the Europe trade: trimming positions and structurally adding European small caps

We captured the entire rise in this round of the Europe trade on the Cross-Asset Planet. The Notes the Planet updated last week Notes250321, Europe’s fiscal-spending risks skew toward overreaction actually was actually warning that this part had run too far too quickly in the short term; we sold part of our positions and shifted into India (readers who follow the notes closely should have noticed that once again we caught the macro low in the India market trade)(see Notes250313, “The India trade is starting to look clear”), while the India trade is still a starter position. First, let’s discuss the structural allocation on the Europe side and what to do next.

Since we flagged the long-Europe trade, the market consensus has now followed our lead and shifted toward 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 shift sharply toward U.S. equities (with an estimated +1000 billion dollars flowing in), non-U.S. equities face outflow pressure of about 820 billion dollars, In the short term, Long SPX / Short SX5E is the core thesis for a reversal of the pain trade. Expectations of tariff easing are also supporting the relative strength of U.S. equities in the short term, especially growth sectors.

In the medium term, we still favor increasing our allocation to European equities, because 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. This could bring eurozone economic growth in line with, or even above, that of the U.S. We still favor cyclical sectors, including industrials, banks, and heavily shorted automakers.

However, this trade has definitely run too far at this stage. When we called for long German equities in the second half of last year, we expected a trade horizon of around 2 years, but it has reached our expected range in just over half a year. Although relative EPS trends favor continued outperformance by European equities, the recent risk structure in U.S. equities makes reversal trades extremely risky. Long European equities are 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 U.S. equities to pair with reductions in European equities. In the medium term, the China trade will definitely outperform the Europe trade. In Europe, as everyone trims index exposure, some of it can be shifted into European small caps, which should continue to catch up for a while and are worth watching. The core position is not for sale; we are only adjusting the trading position.

2025.03.24

What will happen on the eagerly anticipated 4 2?

Markets are in countdown mode. 4 2 has been named “Liberation Day” by Trump himself. This is more than a symbolic political statement; it could genuinely become a turning point for the next round of trade policy. Under 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 1, and the actual policy timetable is essentially anchored to this window. Judging from the administrative process and Trump’s high-profile buildup, this looks less like empty rhetoric and more like a substantive policy announcement.

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

The new plan will assign different tariff levels according to the scale of each country’s trade barriers against the U.S.,The factors considered for proposed tariffs go beyond import duties and include a broad range of issues such as digital services taxes, subsidy mechanisms, intellectual-property protection, and non-tariff barriers. The intent is clearer: use “layers and tiers” as bargaining chips to build more durable negotiating leverage.

Markets are broadly underestimating the medium-term impact of this policy shift on asset pricing, especially amid a deteriorating macro backdrop and clearly slowing growth momentum. The tariff shock itself may not trigger a recession, but it will change corporate expectations and willingness to invest, thereby weighing on capex and margin expansion and indirectly reinforcing the policy-dependence narrative—that Non-economic drivers will carry more weight in the Fed’s policy path.

The contours of the negotiating strategy are beginning to emerge: Bessent disclosed that several countries have proactively reached out seeking tariff relief. The EU has announced that it is postponing its retaliatory tariffs from 4 month 1 to 4 month 13, while Japan, the United Kingdom, and Mexico have also begun consultations.The U.S. side 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.

Tariff policy toward China will most likely expand further, but as rates continue to rise, the government may introduce certain exemptions to ease pressure on specific industries. Meanwhile, long-term tariffs on products tied to national security, such as steel and aluminum, will most likely be locked in and will not be relaxed easily.

Although the “three-tier plan” is currently the market’s main focus, it is also possible that the U.S. Trade Representative’s Office is preparing a multi-tier alternative. The process could be to first assign countries to tiers (perhaps three or more), then have the Office of the U.S. Trade Representative place them in the corresponding tariff tiers based on each country’s goods trade deficit and the overall extent of its trade restrictions, and conduct bilateral negotiations accordingly.

Formally, it can 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 or 2?

From an industry perspective, Agricultural products are unlikely to become the main battleground. Although tariff gaps are large, the U.S. 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: complete vehicles and parts account for around 12% of total U.S. imports, while the trade-weighted tariff differential in this sector is 2 percentage points (that is, the rates the U.S. imposes on other countries are lower).

Although pharmaceutical products have been mentioned, taxes are uniformly low worldwide and the tariff imbalance is relatively small, so the U.S. is unlikely to move hastily on this front. Beverages, by contrast, could become an unexpected target: although they account for only 1%, the weighted tariff differential reaches 2.5%, making them an easy scapegoat as “high-priced imported goods.”

Policy risk is priced with a right-tail bias. The market has an inadequate understanding of the idea of “tariffs as a long-term tool of strategic competition”; this trade-policy turning point is most likely not just another round of “Trump-style tariff hikes.”

2025.03.24

Why the U.S. will have to keep issuing large amounts of debt in the future

At a high level, the ratio of U.S. federal debt to GDP is already 1:1, and total debt is equivalent to GDP of total output.The current fiscal deficit as a share of GDP is 7%, 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 also grows each year by GDP of 7%. Debt is growing faster than GDP, creating long-term structural pressure. Even in federal spending, “interest payments” have become the second-largest item—The U.S. is now “borrowing new money to pay off old debt.”

The U.S. has now entered the stage of “borrowing new money to pay the 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)—and another is health coverage—that is, health insurance for older adults (Medicare).

If you actually lay out the federal budget, what Elon Musk and DOGE keep clamoring to cut is only a small part of federal spending. Yet this small slice of spending is precisely what concerns education, transportation, housing, and infrastructure—the part that supports the “broad economy”—or, in other words, spending in key areas that build human capital, physical public capital, and the housing stock.That entire budget amounts to only 7000 hundred million 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 did the rest of the major spending go? Interest payments, retirement security, defense, and health insurance. Together, these items make up nearly the entire structure of government spending. So the fiscal situation is now truly trapped in a bind.Only when autumn arrives, or earlier, and those budget reconciliation bills actually reach the congressional voting process will we see whether Congress has enough political courage to face these resource-allocation issues.

Under the House budget reconciliation framework, their goal is to cut 8800 hundred million dollars in spending over 10 years, which averages only about 1000 hundred million dollars in cuts per year. These cuts are concentrated mainly in Medicaid, transportation, housing, and education.

Among these, Medicaid spends about 6000 hundred million dollars a year, while transportation, education, housing, and the like add up to 7000 hundred million dollars as well. So The so-called annual cut of 1000 hundred million dollars would in fact come out of 1.3 trillion dollars in social spending. But the amount is not very large, and the scale of the cuts 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, and Social Security income, among others—these discussions are already underway—then That is not “addressing the deficit” at all; it is continuing to pump in money.。Therefore, the U.S. will still have to keep issuing large amounts of debt in the future.

2025.03.25

The Mar-a-Lago Accord that died before it could be born

A while ago, we published two articles about the Mar-a-Lago Accord in Notes. If you haven’t 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 me emphasize again that 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: bringing manufacturing back to the United States.

See Notes250325 Bringing manufacturing back to the United States

Both the Mar-a-Lago Accord and the “rationalizing” theoretical structure that took shape around Trump can in fact be traced back to Moran’s paper, which offers the most systematic and comprehensive strategic framework to date.He himself acknowledges that the room for this strategy to work effectively is actually very narrow. To some extent, Trump has already acted first, for example by imposing tariffs on a massive scale and threatening to withdraw the U.S. security commitment to NATO.

These two measures are precisely the key “sticks” Miran recommends using, with the aim of forcing foreign central banks and foreign investors to keep buying U.S. Treasuries at favorable rates, thereby preserving the ability to finance the U.S. fiscal deficit and debt expansion. For, as Ray Dalio has noted, the U.S. has in fact entered a stage in which a debt crisis is approaching.

See:Notes250325 Why the U.S. will have to keep issuing large amounts of debt in the future

And in the so-called “Mar-a-Lago Accord” proposal, The core idea is:The U.S. can reduce its debt costs by encouraging foreign investors to exchange the short-term Treasuries they hold for century bonds (Century Bonds).. These century bonds carry lower interest rates, and the U.S. would not face refinancing pressure in the short term; in effect, extending duration would ease its debt-servicing burden.

How could foreign investors be induced to participate in this exchange?

Miran laid out two key strategies in his paper, very similar to private-market debt exchanges: both use a “carrot and stick” approach—offering an incentive while creating fear.

In this framework, there are two “sticks.” First, if a foreign government does not cooperate, it faces high tariff barriers. Second, the U.S. will withdraw its security guarantees to that country—in other words, the U.S. military’s “protective 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, you must exchange the short-term U.S. Treasuries you hold for low-interest century bonds.For the United States, this means it will not have to deal with this portion of the debt for a century, effectively eliminating the refinancing risk on this type of debt and achieving “duration extension.”

As we said a long time ago, there are only two ways to resolve a debt problem: extend the maturity or convert debt to equity.

On the one hand, “extending duration”; on the other, lowering the long-term interest burden—this is the original purpose behind the so-called century-bond exchange strategy.

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

In other words, even if this group could be successfully persuaded to participate 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 Treasuries are Americans themselves.Some are held 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 push ahead with this kind of “duration extension” operation is, in effect, to turn 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 with heavy losses—so you might as well accept the deal now. But the problem is that if the U.S. government wants to use a “carrot-and-stick” strategy, it is genuinely difficult to wield the “stick” without hurting oneself.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 systemic blow to the entire financial market that might be impossible to repair.

And the carrot should be:No tariff increases and continued security protection. But The reality is that, even though these commitments matter, market confidence in them has already weakened markedly. Trump’s repeated reversals and constant changes in his stance on tariff policy over the past two months have already caused many people to lose confidence.

To be honest, if the “threat of tariffs” and “cancellation of security guarantees” are to be used as bargaining chips, Trump has played these cards too early and too poorly. He put the threats on the table too soon but failed to create pressure; in other words, these “threats” are no longer “a sword hanging overhead,” but “a script everyone saw through long ago.”

The market is genuinely worried that he will renege the day after reaching an agreement.

As for NATO’s “security umbrella,” NATO countries are now unlikely to see the U.S. as a reliable pillar of defense. Germany has abolished 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 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, causing these “inducement mechanisms” to become completely ineffective. In the whole exercise of swapping short-term debt for long-term debt, the so-called “diplomatic debt-exchange deal” now lacks effective threats and credible rewards.

A more realistic “variant” might be this: exchange short-term debt, and the U.S. will allow industry to be built domestically—for example, China building a BYD factory on U.S. soil.This type of deal is actually very “traditional”: high-tech countries export manufacturing, and technology transfer follows; the target country learns how to build superfactories and master complete supply chains. Historically, the outsourcing of industry by Europe and the U.S. to Asia followed this model.

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 high. The 10-year Treasury yield is around 4.3%, and the 30-year yield is even higher. By contrast, The weighted average interest rate on all current U.S. debt is about 3.3%. So extending the duration of short-term debt now at 4.3% or higher would instead push up the U.S. interest bill, currently about 1.1 trillion dollars a year.

In other words, the theoretical framework behind the so-called “Mar-a-Lago Accord” has a clear flaw. In particular, its target group—overseas creditors—accounts for only a small part of the debt structure, so expecting this kind of structural operation to solve a major problem is unrealistic.

If the ultimate goal of this plan is to weaken the dollar and improve the international competitiveness of U.S. manufacturing, another rumored version is worth noting—the sovereign wealth fund concept reportedly being developed within Trump’s team..

We’ll talk about this tomorrow..

2025.03.25

The “existential question” of U.S. Treasuries and the foundations of 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 “credibility” has no longer come from gold. Instead, it comes from confidence in the “strength of the U.S. economy” and the expectation that “the government can tax and repay its debts.” The reliability of the debt depends on the economy’s ability to grow continuously, and the two are closely bound together and mutually reinforcing.

This is also what Dalio has repeatedly emphasized: 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 various government expenditures that sustain economic vitality, the entire system of confidence begins to weaken.In other words, excessive debt, in turn, becomes an “inhibitor” of economic growth. This 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 worrying.

Bessent recently gave a speech at the Economic Club of New York. His argument was to fully unleash the vitality of the private sector, reduce regulation, ease restrictions on banks, and encourage them to lend to the private sector; at the same time, to 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 restore the market’s primacy.

This is essentially a renewed contest between the “state capitalism path” and the “laissez-faire path.”The question is whether, under the triple pressure of high debt, high inflation, and low trust, the U.S. can afford to take the gamble 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.

The free-market argument 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 companies can find suitable talent, these are not tasks the market can accomplish on its own; they are fundamental functions the government must undertake.

Not to mention the importance of government investment in research and development and technology in areas where commercial potential is still unclear and private capital is reluctant to enter. For example, basic research projects supported by NIH (the National Institutes of Health) and the National Academies are typical cases.Such frontier research often has no clear commercial pathway, but it is the starting point for future industrial breakthroughs.

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

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

The immediate risk is that, as the total debt stock continues to climb, more seriously, prolonged dependence on deficit and debt financing is dragging the United States into a fiscal predicament it must confront. A “fiscal consolidation plan” is urgently needed now.

Simply put, a more reasonable balance must be established between revenue and spending. This balance need not be exactly one-to-one, but the key point is:The deficit cannot keep growing faster than the economy; otherwise, an unbearable mountain of debt keeps piling up. At that point, this fiscal model will become increasingly difficult to sustain.

2025.03.26

Positioning the United States (Two): Early Signs of Systemic Risk

Spreads are finally twitching, and that’s not nothing.

If the market spent the past year “turning a blind eye” to credit risk, now the once-taut rope of corporate credit is beginning to make strange noises.We have been watching corporate credit for the past several years, and the long-awaited price discovery signals are finally appearing in the market—the deterioration is at last beginning to show up in asset prices.

Credit spreads have finally moved, and they are “widening against the broader trend.”

One key change is:Treasury yields have recently fallen, but High Yield and Investment Grade spreads have risen instead of declined, meaning credit spreads are still widening significantly as interest rates fall. In other words, the credit market is “not playing along with the Treasury rally” and is actively demanding higher risk compensation.

This phenomenon has been rare over the past several years. In most of the downturn scares in year 2023, credit spreads either held steady or narrowed, as investors continued to assume a combination of “low defaults + high liquidity.” But that belief is now beginning to weaken.

Although, if we take a longer view, Historically, this wave of widening is still fairly moderate, but it has indeed become somewhat “material.” For the market, such a material signal is not issued lightly, nor is it easily reversed once issued.

This widening is indeed moderate, but it is the most pronounced in several years—especially against the backdrop of the current wave of corporate bankruptcies, the largest since the global financial crisis.

The countertrend widening of credit spreads matters because it often means that the true pricing of default risk is beginning to return.This is also another reason this market rebound looks more like “unrestrained emotional optimism,” with almost no fundamental basis to support it in reality.

All of this actually began to emerge last year. Although credit spreads occasionally widened then, they never reached anything like the levels we see now, and the business community has also begun to recognize that this is a real problem coming to the surface.

More solid confirmation comes from Moody’s. In its recently published early-warning report, it uses its own models to track and assess the probability of distressed defaults across industries.This report is highly unusual, because those who lived through the subprime crisis and the subsequent financial crisis remember that Moody’s and other rating agencies were clearly far too optimistic and blindly confident at the time. Rating agencies were extremely restrained in expressing concern about the subprime market, to the point of seeming indifferent.

And Now, however, their warning systems have begun to generate a large number of signals—in some industries, such as media and healthcare, between 30% and 40% of companies are judged to face potential default risk.That is a very high proportion. Although Moody’s has not yet reached the point of “sounding the alarm”—its current position is still that “the early-warning model is simply flagging risk,” in a restrained tone—this already shows that real-world pressures are becoming significant enough for even a typically conservative rating agency to take notice...

In other words, if even Moody’s has noticed the problem, it may already be quite serious.

Earnings downgrades + high interest rates + the approaching debt ceiling = the most dangerous combination

More seriously, this deterioration in credit is not an isolated variable; it is occurring in a chain where multiple factors are reinforcing one another:

1) Earnings expectations are being systematically revised downward (earnings revisions trending down);

2) A concentrated maturity window for corporate debt is approaching ($1 trillion in 2025 + $1.2 trillion in 2026);

3) High interest rates will increase the financing cost of debt rollovers;

4) Declining earnings → shrinking cash flow → greater difficulty servicing high-cost debt.

Downward earnings revisions are usually a genuine negative for equity and credit markets, because if companies earn less, refinancing their debt through rollovers at high interest rates becomes much more difficult.From now through year-end, the U.S. corporate sector has as much as one trillion dollars of debt to refinance, and another wave of refinancing totaling 1.2 trillion dollars is waiting in 2026.

Unless interest rates fall substantially, companies will face significantly higher debt costs amid slowing or even declining earnings.And against this backdrop, Even a slight easing in interest rates does not mean companies’ financing costs have actually fallen, because spreads are widening and the all-in yield borrowers ultimately obtain is still rising.

The market has not yet realized how big this is.

Analysts at major banks broadly expect earnings estimates to start being cut, and share prices will eventually be repriced as a result. That is before even accounting for the peak in corporate debt maturities, which means The market is facing a “double blow”: the two genuine headwinds of downward earnings revisions and a heavier credit burden are intensifying at the same time.

In addition, liquidity-focused analysts such as Michael Howell and Darius Dale are very concerned that, as debt refinancing really begins to occur in concentrated waves this year, its drag on asset prices will intensify—10 trillion dollars of U.S. government debt are now approaching maturity.

Competition for capital between the public and private sectors will be fierce.

That is also why the slowdown in balance-sheet reduction was the most important takeaway from the Federal Reserve’s decision last week. We will return to this in a later installment of the series..

The cracks in credit spreads have opened; this is only the first step.

2025.03.27

Operational framework: Why won’t the ECB restart QE in the near term?

First, combining Notes250328 four different forms of QE: An introduction to the concept of monetary financing Among the definitions mentioned, whether the ECB will restart QE (whether by fully or partially reinvesting its maturing assets) can be analyzed by considering each type of QE in turn.

Let’s start with the simplest: QE type 2 (monetary easing)

As long as the central bank’s policy rate has not reached its lower bound, there is no reason to further ease the monetary policy stance by pushing down the long end of the yield curve.Interest-rate tools are significantly more efficient, so there is no reason to restart QE while there is still room to cut rates.

More importantly,, the ECB is one of the central banks least willing to use QE tools worldwide, ECB has explicitly stated in its monetary-policy framework review that interest rates will be the main tool of monetary policy in the future, reinforcing its cautious stance toward QE.

Next, let’s look at the QE type 1 (liquidity injection)

In this respect, ECB will inevitably inject liquidity proactively at some point in the future Although autonomous factors and growth in required reserves can be accommodated by banks borrowing more through refinancing operations, this would require large-scale borrowing by banks and could distort the transmission of monetary policy.

Therefore ECB will indeed restart some form of “QE” in the future. More specifically, ECB itself also states that “once the Eurosystem balance sheet begins to expand persistently, a structural portfolio will be introduced at a later stage.”

In other words, ECB will restart QE. But The condition is that the Eurosystem balance sheet must first enter a genuinely sustainable expansion path. The specific timing depends on the banking system’s demand for excess liquidity.This situation is currently expected to arise no earlier than the end of 2027.

Next, the QE type 3 (market distortion / financial stability)

If sovereign spreads widen to the point of threatening monetary-policy transmission ECB could be forced to activate the QE type 3. The good news is that these The tools ECB are already in place, namely OMT (Outright Monetary Transactions) and TPI (Transmission Protection Instrument).

Once a country’s spreads widen sharply because of deteriorating public finances, it can apply for an ESM (European Stability Mechanism) program and, if it meets the conditions, activate the OMT program. Alternatively, if the country is not subject to an “Excessive Deficit Procedure” and ECB considers its debt sustainable (although the specific assessment criteria are not entirely clear), TPI could also be triggered.

But This requires spreads to be far above current levels.In 2023, 9, Italy’s 10-year government-bond spread reached 200bp, yet there was no discussion in the market whatsoever about TPI.

If If the market really faces a disruptive risk in the future, similar to the commercial-paper market in 2020 3, then ECB will most likely quickly introduce a temporary “bespoke tool”But, for now, this kind of scenario is outside the range of any reasonable forecast.

Finally, the QE type 4 (monetary financing)

This is very simple. Under Article 123 of the Treaty on the Functioning of the European Union:

“It shall be prohibited for the European Central Bank or the national central banks to provide overdraft facilities or any other type of credit facility to Union institutions, central governments, regional or local authorities, or other public entities, and to purchase debt instruments directly from them.”

In other words, The QE type of 4 is explicitly prohibited under the EU legal system.Therefore, Whenever ECB conducts any public-sector bond purchases, it must rigorously demonstrate that these do not constitute monetary financing.ECB will not buy government bonds to help governments raise funds or finance new spending.

Of course, some have pointed out that during the pandemic in 2020, ECB effectively had the effect of monetary financing through PEPP (the Pandemic Emergency Purchase Programme). Indeed, under the PEPP framework, ECB purchased almost all of the new pandemic-related debt, allowing governments to expand spending substantially without causing market disruption.

But PEPP is essentially a combination of the first three QE types but it is not a QE type 4:

1) It injects liquidity to ensure the banking system survives periods of extreme stress (QE type 1);

2) It eased financing conditions when core inflation was falling, interest rates were at their lower bound, and the market faced the risk of a collapse in demand (QE type 2);

3) It stabilized spreads and restored the functioning of the commercial-paper market, ensuring smooth monetary-policy transmission (QE type 3).

Therefore, ECB may launch another program similar to PEPP in the future, but For this condition to be met, policy rates would need to fall by 300bp, sovereign spreads to widen by 150bp, and short-term markets to freeze completely.And we are still nowhere near that state.

Conclusion: ECB will not restart QE in the near term

2025.03.28

III. Market Pulse 

Our latest Comments on the economic and market environment

Positioning the United States (One): Has the Worst Passed?

First, the recessionary trend in fundamentals is confirmed by consensus, while the case for a rebound does not even hold up on the technical grounds where it is most likely to be valid.

The market has rebounded slightly from 10%’s downward correction, sentiment has eased, and many investors are beginning to ask: Is the market’s “beating” over? Has the worst of this pullback passed?

On the surface, the market has indeed shown a structural recovery:The S&P bottomed out and rebounded at the beginning of 3, recovering nearly half of its losses. The market is more inclined to view this as a “healthy correction”—the market needed an adjustment, and the pullback simply offered a better price to buy.

Technically, several short-term indicators are signaling an oversold rebound. Some technical analysts point to the index reaching the lower Bollinger Band and to speculative positioning being bearish, among other conditions, as factors supporting a short-term rebound.

But if we take a step back, start with fundamentals, and incorporate real feedback from businesses and consumers, this rebound looks more like a “dead cat bounce” driven by technicals, sentiment, and positioning than a trend reversal supported by earnings, policy improvement, or a turn in macro signals.

And it is not just the fundamentals, According to the foundational theory of the most traditional technical analysts, the current market rebound is also unhealthy: the Dow, Nasdaq, and S&P have never risen in unison. One of the most important principles of Dow Theory, formulated a century ago, is that a technical move lacking confirmation across indices cannot be used as a signal for determining the trend. Yet many people now study technical analysis without understanding even its most basic principles.

In yesterday’s market, the Dow rose while the Nasdaq and S&P closed lower; in terms of confirmation, this rebound is nowhere near qualifying.

Still, let’s talk about fundamentals first today; we can discuss technicals another time.

1) On the corporate side, a quarterly CFO survey jointly released by the Richmond Fed and Duke University shows:Business confidence fell sharply in the first quarter of 2024, and this pessimism was driven almost entirely by policy uncertainty.Specifically, “tariffs” became the central concern, followed by tax policy, while views of the regulatory backdrop views of the regulatory backdrop have instead become more optimistic.

CFO explicitly stated that, amid uncertainty over whether tariffs would disrupt supply chains, when they would take effect, and how extensive their impact would be, they chose to delay capital spending and additional hiring. This “wait-and-see sentiment” among businesses is a typical sign of lagging investment intentions.

In this environment, They find it difficult to make decisions because they cannot tell whether these tariffs will actually disrupt supply chains. This directly suppresses many capital-spending and hiring plans that might otherwise have gone ahead.

2) Consumer confidence data are also concerning. The University of Michigan Consumer Sentiment Index has been released, reflecting consumers’ deep pessimism about the labor market. Notably, consumers often have a more accurate real-time sense of conditions, and their confidence tends to fall ahead of the actual data.Consumer surveys alone may be dismissed as noise, but today this forward-looking signal from consumer sentiment is corroborated by the CFO survey—businesses and consumers are giving consistently weak feedback about their expectations.

3) At the broader macro-data level, the Atlanta Fed’s latest nowcast shows the consumer-spending component for Q1 at 0%—a typical recessionary print, unmistakably recession-level data. If this forecast proves correct, it would be the weakest first-quarter consumer-spending data since the Great Recession of COVID and 2008.

As for consumption, if we exclude essential expenses such as housing and healthcare, the remaining components of consumption have in fact already been in recessionary territory for some time.

Looking back at this rally, it was indeed supported by some technical and structural flows, such as technical oversold conditions, month-end/quarter-end portfolio rebalancing, many systematic strategies trying to go long on previously strong-performing assets in oversold territory, speculative flows based on ETF flows, and positioning strategies involving options skew, among others...

But none of this can obscure one fact:The market as a whole has not seen a reassessment of the underlying thesis or a recovery in earnings expectations.

Put another way: the market rebounded simply because it had fallen before. For those who remain optimistic, this is a good opportunity to add to their positions. But this rebound does not mean that fundamentals have improved—because they have not changed at all.

In short, Overall, this market move looks like a technical unwind without bad news, not the start of a new upcycle. The real tests—whether earnings downgrades continue, credit spreads keep widening, and consumer and business confidence truly turn positive—still lie ahead.

Until then, any “recovery” can only be called a breather, not a reversal in trend.

For related reading: Notes250205 Revisiting political noise and the ultimate performance of assets

Notes241031 In the U.S. stock market, micro-level performance outweighs macro-level politics

This series is expected to have seven articles, systematically setting out the fundamental logic of the current U.S. stock market and U.S. economy. Let’s start with these topics.

2025.03.27

Note: All content in this article is for reference only. It 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.