SignalPlus Macro Analysis Special Edition: The Art of the Deal

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Is it "Liberation Day" or "Liquidation Day"?

Macro assets are plummeting across the board, with the Nasdaq index down nearly 25% from its peak, U.S. stocks falling 4%, and the Hong Kong and Chinese stock markets plunging 9% this morning, showing signs of a modern-day "Black Monday." The recent wave of sell-offs was triggered by China's retaliatory measures against the U.S. (such as restrictions on rare earth exports), but no domestic stimulus measures were introduced to offset the impact. China announced a 34% tariff on all U.S. imports starting April 10 and included 11 U.S. companies on 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 over-leveraged and cannot easily exit?

U.S. stocks are heading toward the largest market value loss in history, having evaporated over $5 trillion in the past few days, with losses exceeding $10 trillion since the president's inauguration. This turmoil offers little refuge, as concerns over the depreciation of the yuan are rising, with the USD/CNH sharply increasing; Japanese government bond yields have dropped significantly by 20 basis points, marking a historic rebound; the U.S. bond market is pricing in 4.5 rate cuts by the end of this year (despite Chairman Powell's rebuttal of market expectations); and the market is also anticipating consecutive rate cuts from the European Central Bank.

Investor reactions are as expected, with many selling off their long positions. Reports from Wall Street indicate that hedge funds are experiencing the most aggressive selling pressure and risk reduction in history. According to JPMorgan data, U.S. retail investors net sold over $1.5 billion in stocks just last Friday. From a market sentiment perspective, we may be transitioning from denial and anger to acceptance of reality.

Funding pressures are also beginning to spread, with Citigroup's "Keyrate" indicator nearing pre-SVB crisis highs, and credit spreads starting to widen, as Japanese and European bank stocks plunged over 10% in a single day last Friday.

So what should we focus on during this wave of sell-offs? Our fundamental stance is that this administration is one of the most coordinated executive teams in history, and they have made it clear from the beginning that they intend to "reset" the globalization landscape. We believe Wall Street has been reluctant to truly face and understand the determination of the Trump administration (just as they misjudged the Fed's rate hike magnitude back in the day), but now they are finally beginning 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 crypto space might think this is the first time the U.S. government has acted so "irrationally," attempting to intervene in the global order for its own advantage, but the reality is far from it. History repeatedly shows that the U.S. is willing to disrupt traditional allies to expand its hegemonic position or endure short-term fiscal pain for long-term economic strength.

"An orderly disintegration of the global economy was a legitimate goal in the 1980s."

-- Paul Volcker, Chairman of the Federal Reserve during the 1982 'Volcker Shock,' when aggressive rate hikes led to a recession. Quote source: Yanis Varoufakis.

Do you remember how the Fed aggressively raised interest rates, dragging the world into recession, indirectly causing Japan to fall 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 definitely going to happen in the next few years because you can't keep losing $200 billion (the U.S. trade deficit at the time)."

In April 1988, Donald Trump stated on The Oprah Winfrey Show.

We firmly believe that the Trump administration is very serious about this reset, and the so-called "Trump put" has never been aimed at the stock market but rather at the U.S. bond market. The primary task is to lower long-term yields through economic slowdown and reduced DOGE spending to alleviate the U.S. government's debt refinancing burden. Even before the Fed has clearly turned dovish, the 10-year U.S. Treasury yield has already fallen by over 80 basis points. So far, everything is going according to script.

As the U.S. financing situation stabilizes, 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 size of the trade deficit but on forcing countries back to the negotiating table through tariffs. We have already seen Vietnam, South Korea, and Japan seeking new bilateral trade arrangements with the Trump administration, and Trump is 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 U.S. cannot complete the return of industries tomorrow (or perhaps ever), but the real core of all this is to negotiate more favorable terms under the new global order.

Meanwhile, the economic impact on trading partner countries will force their central banks to devalue their currencies or implement easing policies to support their economies, thereby alleviating inflationary pressures from U.S. import prices. As a condition for lifting tariffs, we expect the U.S. may require that key components must be manufactured in the U.S., allies must purchase U.S. military exports, or increase allocations to long-term U.S. Treasuries as bargaining chips in negotiations.

For those unfriendly trading partners, these tariffs can create additional revenue for the U.S. Treasury, further providing the U.S. with greater fiscal flexibility to maintain its tough negotiating stance.

Of course, none of this is without risk. The current administration is essentially betting that they can devalue the dollar while lowering financing costs, achieving some balance with economic slowdown and controllable stagflation, without losing the dollar's global dominance. Economic pain is inevitable, but this is a gamble with an 18 to 24-month time horizon, hoping to bring structural advantages to the U.S. The unpredictable retaliatory actions from trading partners will also pose additional risks to this strategic framework.

This uncertainty is extremely challenging for the market.

Considering the aforementioned risk factors, the Fed is unlikely to implement aggressive rate cuts or a new round of quantitative easing unless these policies align with the strategic initiatives and timing of the administration, and this interdependence of policies is the reality we are in. Therefore, all signs indicate that the macro market has currently entered a "bear market" mode, selling on rallies, and investors will be forced to accept a long-term layout under this new framework and policy direction. This is actually similar to the strategies of other countries advocating short-term pain for long-term gain; the road ahead 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 critical level of $81k last Friday despite the global stock market crash, but this "decoupling" was short-lived.

Cryptocurrency prices ultimately "caught up" with the stock market's trajectory. BTC fell below the $80k support level, down about 9% for the week, closing at $75k, while ETH plummeted by 18%. A wave of liquidations was triggered on Sunday during low market liquidity, temporarily shelving any hopes for BTC as a "store of value."

From a long-term perspective, technical charts may indicate that BTC has broken out relative to the global stock market, even having the potential to catch up with the performance of spot gold, but the market currently lacks clear catalysts, and risk management (i.e., further price declines) may continue to dominate the market until the global market stops crashing, though it is uncertain when that will be.

Currently, the negotiating positions of world leaders have gone too far, leaving almost no room for possible easing, so the market must strive for survival amid uncertainty and pain, which also means that the market is likely to continue disrupting and shaking investor confidence for some time.

If things continue to spiral out of control, with world leaders escalating trade conflicts, leading asset prices to become innocent casualties, what should we do? If the situation worsens, who in the market can provide enough liquidity to save the day? Interestingly, the legend seems not to have exited yet…

This week looks like it will be very tough. Wishing all readers smooth operations, take care of your capital, and weather the volatility!