"De-dollarization influenced by policies is a recession smoke screen; deviations caused by short-term shocks will quickly return to repair."
The market has welcomed a week of reversal (almost got caught again 🤦). The pessimistic voices about the market have not diminished due to Trump's 90-day suspension of tariffs. Whether Trump’s policy strategy gamble can ultimately 'extend' the influence of dollar hegemony or accelerate its decline is really hard to say. We can only continue to monitor which way the seesaw in this changing situation will tilt suddenly. However, I believe that at least this year, the market will not enter a recession, and there are still good trends ahead.
I should have mentioned earlier that Trump's MAGA is aimed at addressing the long-standing debt problem (currently there is $36 trillion in debt, with an estimated refinancing of about $9 trillion by 2025, see Figure 1), which has led to a wave of de-dollarization. The tariff war is one of the most important strategies (along with DOGE). Regardless of whether tariffs are a good solution, I curiously compared several major revenue-generating policies promoted by Trump with this year's expected expenditures (see Figure 2). It can be seen that if several of Trump's new policies can be effectively implemented to achieve the expected results, there is indeed a chance to achieve a balanced budget (or a slight surplus of $+275 billion) by 2025. However, considering factors such as the success rate of tariffs or expenditure cuts, there will still be a minor deficit. Furthermore, if we consider the upcoming tax reduction policies and increasing the debt ceiling, the future fiscal deficit rate will likely expand at least twice as much.
This is also the reason I used 'extend' twice earlier. Based on the current situation, Trump's policies are more short-term antibiotics for the dollar system (stimulating the economy and spending space), but they will significantly worsen long-term fiscal balance, especially if interest rates remain high. According to BI research (see Figure 3), the future U.S. debt ratio will continue to rise from about 100% today to 115% by 2030 (in the lowest scenario), and the U.S. debt problem will continue to drive de-dollarization. In the past, China and Japan were the two largest sellers of U.S. Treasuries.
U.S. Treasuries and the dollar are intertwined; logically, if the market weakens and investors seek to avoid risk, then U.S. dollars and Treasuries should be the best safe-haven assets. However, this week’s triple whammy of dollar assets, stocks, and bonds illustrates that the wave of de-dollarization may be accelerated by Trump's policies, indicating that a new shift in investment allocations has already occurred. Investors are rethinking more diversified allocations (rather than just betting on the dollar) to avoid the uncertainties and fiscal credit deterioration caused by U.S. policies. The sell-off of U.S. Treasuries (or deleveraging) may return to normal after the tariff measures conclude.
Recently, U.S. economic data has started to recover. In addition to the Atlanta Fed's projected GDP rebounding since the end of March (see Figure 4), March's CPI and PPI showed signs of cooling inflation. It is expected that this month's PCE will also reflect similar information. Overall, inflation is primarily influenced by the continuous decline in oil prices, and the highly predictive Truflation inflation index has fallen below the Fed's target inflation of 2% since March (currently at 1.49%). Historically, Turflation data has been a good leading indicator for inflation, reacting about 53 days ahead of the official inflation data. Therefore, next month’s (May 13) CPI may likely land below 2% (see Figure 5), and recent data performance may increase the likelihood of a rate cut in May. Additionally, several indices describing market inflation expectations have also shown a declining trend since the beginning of the year (as shown in Figure 6), suggesting that inflation data will support the Fed's potential rate cuts at least before Q3.
In summary, next week, in addition to Trump's potential announcement of a tariff plan on semiconductors, several Federal Reserve officials will speak. The market is expected to have more room for fluctuations. The only thing we can be more confident about is that the recent market liquidity has reached a new high again. I believe the market is currently in a liquidity bottom phase, and it could start to react upward at any time due to improved liquidity. Looking back, even if several of Trump's policies fail, it won't necessarily lead to an immediate recession this year. From the perspectives of liquidity, business cycles (see Figure 7), and political aspects, there are still positive factors supporting continued low-cost positioning.
Finally, here is an old saying from Buffett: "If you can keep your head when all around you are losing theirs... if you can wait and not be tired by waiting... if you can think – and not make thinking your aim... if you can trust yourself when all men doubt you... the earth and everything in it belongs to you."
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