Macroeconomic Framework
The United States is entering a fiscally-driven era. In the past, deficits were 2-3% of GDP, only surging during recessions or wartime. After the COVID-19 pandemic in 2020, the deficit soared to 10%, and has not significantly decreased since, with a projected 7.2% for fiscal year 2025. This high-deficit model is unsustainable, and reducing the deficit could trigger an economic recession, while traditional measures to counter recession (such as expanding the deficit) would worsen the fiscal situation. Policymakers have avoided collapse by manipulating policies (such as debt structure adjustment), with short-term countermeasures still available.
Fiscal Dominance and Policy Response
Deficit-Driven Expansion
Government spending accounts for 24% of GDP, expected to exceed $7.2 trillion in 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 towards front-end short-term T-bills, linked to the federal funds rate, rather than 10-year Treasury bonds. In April 2024, government interest payments decreased by $790 million compared to the previous year, despite debt increasing from $34.69 trillion to $36 trillion. The federal funds rate is expected to be reduced by 100 basis points in the next 12-18 months, lowering financing costs for the government, households, and businesses.
Policy Expectations
The Trump administration tends towards loose policies and may appoint a Federal Reserve chair supportive of rate cuts (after Powell's term ends on June 16, 2025). Rate cuts will lower Treasury note rates, release untapped capital held by households through home equity lines of credit (HELOCs), and reduce corporate financing costs through floating-rate debt.
Market Predictions and Investment Strategies
2025 Market Outlook
S&P 500 is expected to drop to 5000 points in the first half (already touched 5115 points low on April 10) due to market misinterpretation of Trump's policies' negative impacts. In the second half, it is expected to rebound to 7000 points through tax cuts, regulatory relaxation, and no tip taxes, rising over 15% by year-end. Emerging markets are expected to outperform the S&P 500 (currently up 10%, while S&P is down 1%).
Asset Bubble
High deficits drive asset bubbles, not collapse. Historically, budget surpluses (such as in 1929 and 2000) often accompany recessions, while deficits trigger bubbles. The current deficit pattern may lead to an asset boom similar to the late 1990s, with the S&P 500 potentially reaching 12000 points in the coming years.
Gold and Bitcoin
US dollar depreciation drives up alternative assets. Gold is expected to reach $3,500 (based on Fibonacci retracement analysis, with futures high precisely predicted at $3,509). Bitcoin is expected to reach $150,000 (based on monthly line analysis from 2021-2022, retracing from $106,000 to $83,000 before rebounding). Both are preferred assets for shorting the US dollar.
Interest Rate Concerns Exaggerated
Market fears of a collapse due to 10-year Treasury yield exceeding 5% are overblown. When the yield approached 5% in October 2023, it caused volatility, but the market has adapted to higher rates. The government, households, and businesses can borrow at floating rates (based on the federal funds rate), reducing dependence on 10-year Treasury bonds.
Trump Policies and Inflation Control
The Trump administration plans to control inflation through low oil prices, offsetting inflationary pressures from tariffs and stimulus measures. Oil prices are highly correlated with core CPI, and OPEC's increased production will push oil prices to $58 per barrel, weakening Russia and stabilizing domestic prices. CPI is expected to remain between 3-5%, avoiding hyperinflation while promoting economic prosperity.
Federal Reserve's Role
Economic Stimulus
$7 trillion money market funds (mostly held by baby boomers) generate a similar stimulative effect due to high federal funds rate (4.38%), actually exacerbating inflation. Rate cuts will stimulate the economy, releasing household and business capital.
Federal Reserve's Diminishing Role
Long-end rates are driven by nominal GDP expectations, while short-end rates (federal funds rate) are controlled by the Federal Reserve. Rate cuts will not significantly boost inflation; instead, they will suppress stimulative effects by lowering short-end rates. The traditional view (that rate hikes suppress 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 "buydown" mortgage program (such as subsidizing 2% rates for first-time homebuyers through a sovereign wealth fund), stimulating the housing market.
Long-Term Risks and Investment Advice
Currency Depreciation
Fiscal dominance and monetary easing will gradually devalue the US dollar, similar to the tech bubble of the 1990s, real estate bubble of the 2000s, and sovereign debt expansion after the COVID-19 pandemic. Currently entering a currency depreciation phase, potentially triggering an asset bubble peak.
Investment Strategy
Short-term (6-18 months) bullish on stocks, gold, Bitcoin, and emerging markets. Expected multiple 5-10% pullbacks within the year, but with an upward trend. Long-term (2027-2028) may face bubble burst, requiring reassessment.
Data-Driven
Recommended to follow the monthly Treasury Statement to understand government spending and deficit dynamics, superior to individual company reports. Break free from traditional market analysis (like CNBC) and conduct independent research on fiscal and financial history.
Conclusion
The US fiscal dominance model drives asset bubbles through deficit expansion and currency depreciation, not collapse. Policymakers maintain economic prosperity by manipulating short-end rates and oil prices, pushing stocks, gold, and Bitcoin higher in the short term. Investors should focus on fiscal data, invest contrarily, seize bubble opportunities, while remaining wary of long-term risks.
