The US economy is entering a fiscal-led model - long-term risks and investment recommendations.

Macroeconomic Framework

The United States is entering an era of fiscal dominance. In the past, the deficit accounted for 2-3% of GDP, only surging during recessions or wartime. After the COVID-19 pandemic in 2020, the deficit skyrocketed to 10% and has not significantly decreased since, with an expected 7.2% for fiscal year 2025. This high deficit model is unsustainable; reducing the deficit could trigger an economic recession, while traditional measures to combat a recession (such as expanding the deficit) would worsen the fiscal situation. Policymakers have avoided collapse through policy manipulation (such as adjusting debt structure) and still have means to respond in the short term.

Fiscal Leadership and Policy Response

• Deficit-Driven Expansion

Government spending accounts for 24% of GDP, expected to exceed $7.2 trillion by 2025, with an economic scale of $29.9 trillion. The monthly Treasury Statement shows that the deficit in March increased by 39% year-on-year, with no signs of reduction.

• Debt Management

The government is shifting debt to the front end with short-term Treasury bills (T-bills) linked to the federal funds rate, rather than the 10-year Treasury bond. In April 2024, the government paid $790 million less in interest than the previous year, despite debt increasing from $34.69 trillion to $36 trillion. It is expected that the federal funds rate will be lowered by 100 basis points over the next 12-18 months, reducing financing costs for the government, households, and businesses.

• Policy Expectations

The Trump administration tends to favor loose monetary policies and may appoint a Federal Reserve chairman who supports interest rate cuts (after Powell’s term ends on June 16, 2025). Lowering interest rates will reduce the yield on Treasury securities, release the untapped capital held by households through home equity lines of credit (HELOCs), and lower corporate financing costs through floating rate debt.

Market Forecast and Investment Strategies

• 2025 Market Outlook

The S&P 500 is expected to drop to 5000 points in the first half of the year (having already hit a low of 5115 points on April 10), due to the market misjudging the negative impacts of Trump’s policies (such as tariffs and antitrust tendencies). In the second half of the year, it is expected to rebound to 7000 points through policies like tax cuts, deregulation, and no tipping tax, with an increase of over 15% by the end of the year. Emerging markets are expected to outperform the S&P 500 (having already risen 10% so far, while the S&P has dropped 1%).

• Asset Bubble

High deficits drive asset bubbles, not crashes. History shows that budget surpluses (such as in 1929 and 2000) are often accompanied by recessions, while deficits trigger bubbles. The current deficit pattern could lead to an asset boom similar to the late 1990s, with the S&P 500 potentially reaching 12,000 points in the coming years.

• Gold and Bitcoin

The depreciation of the US dollar is driving up alternative assets. Gold is projected to reach $3,500 (based on Fibonacci retracement analysis, with the futures high precisely predicted at $3,509). Bitcoin is expected to reach $150,000 (based on monthly line analysis from 2021 to 2022, rebounding from a retracement of $106,000 to $83,000). Both are preferred assets for shorting the dollar.

• Interest rate concerns are exaggerated

The market’s concern over a potential collapse due to the 10-year Treasury yield exceeding 5% is excessive. The yield approaching 5% in October 2023 has caused volatility, but the market has adapted to higher interest rates. The government, households, and businesses can borrow at floating rates (based on the federal funds rate), reducing their reliance on the 10-year Treasury.

Trump’s Policies and Inflation Control

The Trump administration plans to control inflation through low oil prices, offsetting the inflationary pressures from tariffs and stimulus measures. Oil prices are highly correlated with core CPI, and OPEC’s increase in production will push oil prices down 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 Federal Reserve

• Economic Stimulus

7 trillion in money market funds (mostly held by the baby boomer generation) have a stimulative effect due to the high federal funds rate (4.38%), which actually exacerbates inflation. A rate cut will stimulate the economy and release capital for households and businesses.

• The Role of the Federal Reserve Weakens

Long-term interest rates are driven by nominal GDP expectations, while short-term interest rates (federal funds rate) are controlled by the Federal Reserve. Lowering interest rates will not significantly raise inflation; instead, it suppresses the stimulating effect by reducing short-term rates. The traditional view (raising rates suppresses inflation) is considered incorrect.

• Housing Market

High mortgage rates (based on 10-year Treasury bonds) limit home equity release. The Trump administration may introduce a “buyout” mortgage plan (such as subsidizing first-time homebuyers with a 2% interest rate through a sovereign wealth fund) to stimulate the housing market.

Long-term Risks and Investment Recommendations

• Currency Depreciation

Fiscal dominance and monetary easing will gradually depreciate the dollar, similar to the tech bubble of the 1990s, the real estate bubble of the 2000s, and the sovereign debt expansion after the COVID-19 pandemic. We are currently entering a phase of currency depreciation, which may trigger a peak in asset bubbles.

• Investment Strategy

Short-term (6-18 months) bullish on the stock market, gold, Bitcoin, and emerging markets. Expect several 5-10% corrections within the year, but the trend is upward. Long-term (2027-2028) may face a bubble burst, requiring reassessment.

• Data Driven

It is recommended to pay attention to the monthly Treasury Statement to understand government spending and deficit dynamics, which is superior to individual company financial reports. Break free from the constraints of traditional market analysis (such as CNBC) and conduct independent research on fiscal and financial history.

Conclusion

The U.S. Treasury-led model drives asset bubbles through deficit expansion and currency devaluation, rather than collapse. Policymakers maintain economic prosperity by manipulating short-term interest rates and oil prices, temporarily boosting stock markets, gold, and Bitcoin. Investors should pay attention to fiscal data, invest counter-cyclically, seize bubble opportunities, while remaining alert to long-term risks.