Macroeconomic Framework
The United States is entering an era of fiscal dominance. In the past, the deficit was 2-3% of GDP, and only surged during recessions or wartime. After the COVID-19 pandemic in 2020, the deficit soared to 10% and has not declined significantly since then, with an estimated 7.2% in fiscal 2025. This high deficit model is unsustainable, and deficit reduction may trigger a recession, while traditional measures to deal with a recession (such as expanding the deficit) will worsen the fiscal situation. Policymakers have avoided a collapse by manipulating policies (such as debt restructuring) and still have means to deal with it in the short term.
Fiscal leadership and policy response
Deficit-driven expansion
Government spending accounts for 24% of GDP and is expected to exceed $7.2 trillion in 2025, with an economic size of $29.9 trillion. The monthly Treasury Statement showed that the deficit increased by 39% year-on-year in March, with no signs of reduction.
Debt Management
The government moved its debt to front-end short-term Treasury bills (T-bills), which are tied to the federal funds rate, rather than 10-year Treasury bonds. In April 2024, the government paid $7.9 billion less in interest than the previous year, even though debt increased from $34.69 trillion to $36 trillion. The federal funds rate is expected to be lowered by 100 basis points in the next 12-18 months, reducing financing costs for the government, households and businesses.
Policy Expectations
The Trump administration prefers accommodative policies and may appoint a Fed chairman who supports rate cuts (after Powell's term ends on June 16, 2025). The rate cut will reduce Treasury bill rates, free up untapped capital held by households through home equity loans (HELOCs), and reduce corporate financing costs through floating rate debt.
Market Forecast and Investment Strategy
Market Outlook for 2025
The S&P 500 is expected to fall to 5,000 points in the first half of the year (it hit a low of 5,115 points on April 10) as the market misjudged the negative impact of Trump's policies (such as tariffs and antitrust tendencies). In the second half of the year, it is expected to rebound to 7,000 points through policies such as tax cuts, deregulation, and no tip tax, and rise by more than 15% by the end of the year. Emerging markets are expected to outperform the S&P 500 (up 10% so far, S&P down 1%).
Asset bubbles
High deficits drive asset bubbles, not crashes. History shows that budget surpluses (such as 1929, 2000) are often accompanied by recessions, while deficits cause bubbles. The current deficit pattern may lead to an asset boom similar to the late 1990s, and the S&P 500 may reach 12,000 points in the next few years.
Gold and Bitcoin
The depreciation of the US dollar pushes up alternative assets. Gold is expected to reach $3,500 (based on Fibonacci retracement analysis, the futures high is accurately predicted to be $3,509). Bitcoin is expected to reach $150,000 (based on the monthly line analysis of 2021-2022, $106,000 retracement to $83,000 and then rebound). Both are the preferred assets for shorting the US dollar.
Interest rate concerns are exaggerated
Markets are overly concerned about a collapse caused by 10-year Treasury yields exceeding 5%. The yield of nearly 5% in October 2023 caused shocks, but the market has adjusted to higher interest rates. Governments, households and businesses can borrow at floating rates (based on the federal funds rate) and reduce their reliance on 10-year Treasury bonds.
Trump Policies and Inflation Control
The Trump administration plans to control inflation through low oil prices to offset the inflationary pressures of tariffs and stimulus measures. Oil prices are highly correlated with core CPI. OPEC's production increase will push oil prices to $58 per barrel, weakening Russia and stabilizing domestic prices. CPI is expected to remain at 3-5%, avoiding hyperinflation while promoting economic prosperity.
Role of the Fed
Economic stimulus
The $7 trillion in money market funds (mostly held by baby boomers) has a stimulus-like effect due to the high federal funds rate (4.38%), which actually exacerbates inflation. Lowering interest rates will stimulate the economy and free up capital for households and businesses.
Weakened role of the Fed
Long-term interest rates are driven by nominal GDP expectations, while short-term interest rates (federal funds rate) are controlled by the Fed. Lowering interest rates will not significantly push up inflation, but will dampen the stimulus effect by lowering short-term interest rates. The traditional view (raising interest rates to dampen inflation) is considered wrong.
Housing Market
High mortgage rates (based on 10-year Treasury bonds) limit the release of home equity. The Trump administration may launch a "buyout" mortgage program (such as subsidizing first-time homebuyers with a 2% interest rate through sovereign wealth funds) to stimulate the housing market.
Long-term risks and investment advice
Currency depreciation
Fiscal dominance and monetary easing will gradually depreciate the US dollar, similar to the technology bubble in the 1990s, the real estate bubble in the 2000s, and the expansion of sovereign debt after the COVID-19 pandemic. We are currently entering a stage of currency depreciation, which may trigger a climax in asset bubbles.
Investment strategy
In the short term (6-18 months), we are bullish on stocks, gold, Bitcoin and emerging markets. It is expected that there will be multiple 5-10% corrections this year, but the trend is upward. In the long term (2027-2028), the bubble may burst and needs to be re-evaluated.
Data-driven
It is recommended to pay attention to the monthly Treasury Statement to understand the dynamics of government spending and deficits, which is better than a single company's financial report. Get rid of the constraints of traditional market analysis (such as CNBC) and independently study fiscal and financial history.
Conclusion
The US fiscal-led model drives asset bubbles through deficit expansion and currency depreciation, rather than collapse. Policymakers maintain economic prosperity by manipulating short-term interest rates and oil prices, pushing up the stock market, gold and Bitcoin in the short term. Investors should pay attention to fiscal data, invest in reverse, seize bubble opportunities, and be wary of long-term risks.
Anais
Weiliang
Miyuki
Joy
Alex
Brian