SignalPlus Macro Analysis Special Edition: The Art of the Deal

Is it "Liberation Day" or "Settlement Day"? Macroeconomic assets have plummeted comprehensively, with the Nasdaq index falling nearly 25% from its peak, U.S. stocks down 4%, and the Hong Kong and China stock markets experiencing a sharp decline of 9% this morning. The market is showing signs of a modern-day "Black Monday." The recent wave of selling was triggered by China's retaliatory measures against the U.S. (such as restrictions on rare earth exports), but no domestic stimulus measures have been introduced to offset the impact. China announced a 34% tariff on all U.S. imports starting April 10 and has added 11 U.S. companies to the "unreliable entity list," along with other targeted countermeasures. Is the current situation evolving into a competition of "who can endure more pain without backing down"? Have all parties bet too deeply and cannot easily retreat?

The U.S. stock market is heading towards the largest market value loss in history, having evaporated more than $5 trillion in the past few days, with losses exceeding $10 trillion since the president's inauguration. This turmoil has left almost nowhere to hide, as concerns over the depreciation of the yuan have intensified, causing the USD/CNH to surge sharply; Japanese government bond yields have fallen significantly by 20 basis points, marking a historic rebound; the U.S. bond market has begun to price in 4.5 rate cuts before the end of this year (although Chairman Powell has refuted market expectations); and the market is also pricing in consecutive rate cuts from the European Central Bank.

Investor reactions were as expected, with many selling off their long positions. Wall Street reports indicate that hedge funds are experiencing the most aggressive selling pressure and de-risking behavior in history. According to data from JPMorgan, retail investors in the U.S. alone net sold over $1.5 billion in stock positions just last Friday. From the perspective of market sentiment, we may be transitioning from the stages of denial and anger to the stage of acceptance of reality.

Funding pressure is also beginning to spread, with Citigroup's "Keyrate" indicator nearing the high point before the SVB crisis, credit spreads are starting to widen, and Japanese and European bank stocks plummeted more than 10% in a single day last Friday.

So what should we focus on during this wave of sell-offs? Our basic stance is that this government is one of the most coordinated administrative teams in history, and they have made it clear from the beginning that they want to "reset" the globalized landscape. We believe that Wall Street has been reluctant to truly face and understand the determination of the Trump administration (just like the misjudgment of the Federal Reserve's interest rate hikes back in the day), and now they are finally starting to accept this new era of bilateral relations. "Mr. President, my philosophy is that all foreigners want to take advantage of us, so our responsibility is to take advantage of them before they do." -- John Connally, Secretary of the Treasury during the Nixon administration, 1971. Quote source: Yanis Varoufakis. Younger readers in the cryptocurrency space may think this is the first time the U.S. government has acted so "irrationally" in trying to intervene in the global order for its own advantage, but the reality is far from that. History has repeatedly shown that the U.S. will not hesitate to disrupt traditional allies to expand its hegemonic position or endure short-term financial pain for long-term economic strength. "An orderly dissolution of the global economy was a legitimate goal of the 1980s." -- Paul Volcker, Chairman of the Federal Reserve during the 1982 'Volcker Shock', when aggressive interest rate hikes by the Fed led to an economic recession. Quote source: Yanis Varoufakis. Do you remember how the Federal Reserve aggressively raised interest rates back in the day, dragging the world into recession, which indirectly led Japan into the "lost decade" in the 1990s? Or do you recall that Trump expressed strong dissatisfaction with the decline of American manufacturing as early as the late 1980s when he published "The Art of the Deal"? "We are a debtor nation, and something is bound to happen in the coming years because you cannot continue to lose two hundred billion dollars (the trade deficit at that time)." Donald Trump stated on The Oprah Winfrey Show in April 1988. We firmly believe that the Trump administration is taking this reset very seriously, and the so-called "Trump put option" has never been aimed at the stock market, but rather placed in the U.S. Treasury market. The primary task is to lower long-term yields through an economic slowdown and a reduction in DOGE spending, in order to alleviate the U.S. government's debt refinancing burden. With the Federal Reserve yet to clearly pivot to a dovish stance, the 10-year U.S. Treasury yield has already dropped by more than 80 basis points. So far, everything is going according to script.

With the financing situation in the United States under control, the government can now take more aggressive geopolitical actions to weaken the dollar and buy time to initiate a lengthy process of relocating some manufacturing back to the U.S. At this stage, the plan is in the so-called "deterrence" phase, where the focus is not on the actual scale of the trade deficit, but rather on Trump using tariffs to force countries back to the negotiating table one by one. We have already seen Vietnam, South Korea, and Japan seeking to reach new bilateral trade arrangements with the Trump administration, and Trump is very confident in his ability to gain structural advantages in one-on-one negotiations. This has never been about the trade deficit. Everyone understands that the United States cannot complete the reshoring of industries tomorrow (and may never do so), but the real core of it all is to negotiate more favorable terms under the new global order.

At the same time, the economic impact on trading partner countries will force their central banks to devalue their currencies or implement easing policies to support their domestic economies, thereby alleviating the inflationary pressure of US import prices. As a condition for lifting tariffs, we expect the US may require that important key components must be manufactured in the United States, allies need to increase purchases of US military exports, or increase allocations to long-term US Treasury bonds, using these as bargaining chips in negotiations. For unfriendly trading partners, these tariffs generate additional revenue for the U.S. treasury, further providing the U.S. side with greater fiscal flexibility to sustain its tough negotiating stance.

Of course, none of this is without risk. The current government is effectively betting that they can devalue the dollar while the cost of financing falls, striking some kind of balance with a slowing economy and manageable stagnant inflation, without losing the dollar's global dominance. Economic pain is inevitable, but it's a 18- to 24-month gamble that promises a structural advantage for the United States. Unforeseen retaliatory actions by trading partners will also pose additional risks to this strategic framework. This uncertainty poses significant challenges for the market. Considering the aforementioned risk combination, the Federal Reserve is unlikely to implement aggressive rate cuts or initiate a new round of quantitative easing unless these policies align with the strategic initiatives and timing of the executive branch, and this interdependence of policies is indeed the reality we find ourselves in. Therefore, various signs indicate that the macro market has currently entered a "bear market" mode, with investors forced to sell on rallies and accept this new long-term layout under the new policy direction. This is actually similar to the strategies of other countries that advocate for short-term sacrifices in exchange for long-term benefits; the road ahead of us is destined to be challenging. What about cryptocurrencies? For a brief moment, BTC seemed to decouple from the global market sell-off, managing to hold the key level of $81k last Friday despite the significant drop in global stock markets, but this "decoupling" was short-lived.

Cryptocurrency prices ultimately "caught up" with the trend of the stock market. BTC broke below the support level of 80k USD, falling about 9% over the week, closing at 75k USD, while ETH plummeted by 18%. A wave of liquidations was triggered on Sunday when market liquidity was low, and any hopes regarding the narrative of BTC as a "store of value" have to be temporarily shelved.

From a long-term perspective, technical patterns may indicate that BTC has broken out relative to the global stock market, and there may even be room to catch up to the performance of spot gold. However, the market currently lacks clear catalysts, and risk management (which means prices may continue to decline) is likely to continue dominating the market until the global market stops its plunge; it's just uncertain when that will be. Currently, the negotiation positions of leaders from various countries have gone too far, leaving almost no possible room for easing. As a result, the market has to strive for survival amidst uncertainty and pain, which also means that the market is likely to continue to disrupt and shake investor confidence for some time.

What should be done if things continue to spiral out of control, with leaders of various countries escalating trade conflicts, causing asset prices to become innocent victims? If the situation worsens, who in the market can provide enough liquidity to save the day? Interestingly, the legend seems to still be in play...

This week looks like it will be very difficult. I wish all readers successful operations, take care of your capital, and weather the volatility!