Global Capital Flow Transformation: From "Biden's Great Circulation" to "Trump's Great Reset"

The recent global market can be described as "a storm brewing," which seems conservative. Various "once-in-decades" upheavals have unfolded, from Trump's shift in stance on Ukraine, to Musk's chaos in Washington, to Germany's "whatever it takes" determination, and the stock market's "rise in the East and fall in the West."

How do we understand all of this? Today, we will deeply analyze the core logic behind this major upheaval and attempt to make predictions: what will happen next?

From "Biden's Great Cycle" to "Trump's Great Reset"

Let's start with a recent insightful research report from China International Capital Corporation (CICC).

In the report titled "Trump's 'Great Reset': Debt Resolution, De-virtualization, and Dollar Depreciation," the CICC macro research team first explains the most important logic behind global capital flows in recent years—"Biden's Great Cycle":

After the pandemic in 2020, the Biden administration launched massive fiscal stimulus, coupled with a tech frenzy driven by AI and industrial policies, leading to high growth, high interest rates, and a booming stock market in the United States, attracting continuous inflows of overseas capital and supporting the upward trend of the dollar. In terms of pathways and effects, the Biden administration effectively replicated the "Reagan Great Cycle," raising the valuations of U.S. stocks and the dollar to historical highs.

However, "Biden's Great Cycle" has two fatal flaws:

One is the enormous risk in the financial market: high debt. This was already demonstrated in the "Reagan Great Cycle," where massive fiscal stimulus drove high economic growth and dollar appreciation, often leading to a worsening trade deficit, compounded by a fiscal deficit that is difficult to rein in in the short term. The dual deficit issue will eventually attract investor attention and even concern. When the U.S. dual deficit exceeds a certain threshold for a period of time, under certain catalysts, it often triggers a long-term depreciation of the dollar.

To some extent, this is what is currently happening in the U.S. market. But at least before last year's election, Biden successfully suppressed the risks in the U.S. financial market, and the economic situation appeared to be very good, with high economic growth and a booming stock market.

However, Biden and the Democrats lost.

The problem is the other fatal flaw of "Biden's Great Cycle": wealth disparity.

U.S. Treasury Secretary Janet Yellen made a pointed analysis of this issue this week.

She bluntly criticized the Biden administration's unchecked fiscal spending as actually harming the interests of the bottom 50% of the population. In the years when U.S. stocks soared, the wealth of the top 10% of the wealthy increased with asset appreciation, while ordinary people without assets faced skyrocketing prices and mounting debts.

What’s worse is that inflation impacts different classes unequally; the price increases for daily necessities (such as used cars, car insurance, rent, food, etc.) faced by lower-income individuals far exceed those of other goods and services. Yellen believes that this inequality exacerbates social instability and is undoubtedly a severe blow to the "American Dream."

In other words, "Biden's Great Cycle" has allowed a small number of wealthy Americans to earn more, while financial capital flourishes. Meanwhile, industrial capital continues to decline, and for most Americans, the "American Dream" is gone. As the saying goes, they are living in dire straitsBiden's loss is not unjust, while Trump's victory means he has "taken over the high position" of the "Biden cycle."

Trump clearly sees Biden's lessons from the past, so "Trump 2.0" must clean up the mess left by the "Biden cycle."

Trump's approach is a "Great Reset."

What are the strategies of Trump's "Great Reset"?

On the surface, "Trump 2.0" has already introduced three strategies, which Bessenet explained clearly.

The first strategy is to reduce debt by cutting government spending, aiming to bring debt and deficit levels down to long-term averages by 2028, which means a deficit of about 3.5% of GDP.

The second strategy is to relax financial regulations and encourage the private sector to re-leverage, meaning the government will deleverage while the private sector will leverage up, allowing those laid-off civil servants to be absorbed into more productive sectors.

The third strategy is to readjust the international trade system, bringing manufacturing jobs back to the U.S. through tariffs, thereby revitalizing the middle class.

CICC refers to this as the American version of "de-leveraging," aiming to reset the capital structure and adjust the relationship between industrial capital and financial capital, that is, heavy industry vs. light finance.

However, achieving these goals is extremely difficult because the "Trump Great Reset" has inherent flaws.

To reduce high debt, the U.S. must control new debt while resolving existing debt.

To control new debt, the U.S. must increase revenue and cut expenses.

On the revenue side, Trump spares no effort. He wields tariffs globally and even promotes the sale of U.S. gold cards.

It is worth mentioning that this is also what shocked Wall Street and the American business community: tariffs are not just a means, but truly a goal!

The more challenging task is to reduce federal government spending.

Trump's most direct tactic is Musk's DOGE. Musk acts like the "Nezha" released by Trump, creating chaos in Washington with significant and even brutal layoffs and spending cuts.

However, the problem is that reducing government fiscal spending can lead to economic recession. How to deal with public anger? The Trump administration must shift all the blame onto Biden while just taking over.

Thus, we have recently heard Bessenet's famous saying: America's "debt addiction" will lead to an economic withdrawal period.

Detoxing is certainly painful, and investors? Sorry, Trump can't afford to care.

But those who understand know that relying solely on DOGE is far from enough.

Under the iron law of "whoever touches social security benefits dies," the two areas Trump can touch are: the enormous military spending and the even larger debt interest payments.

Thus, we see Trump urgently wanting to end the Russia-Ukraine conflict while pressuring other NATO countries to increase military spending. This move has greatly changed the global geopolitical landscape, leading to a huge shift that even Wall Street did not anticipate: Germany declared "at all costs," ending decades of "fiscal prudence" and launching a "fiscal rocket."

It is important to note that since 2022, U.S. interest payments have already exceeded military spending.

The "Ferguson Rule" tells us: when a major power's interest payments exceed its military spending, it is no longer a major power.

Trump must address the debtAs the China Financial Futures Exchange stated, there are generally three ways to resolve debt: debt restructuring; inflation; and technological progress.

Debt restructuring in the United States, a concept that the market previously could not imagine, now seems less far-fetched.

The recently discussed "Mar-a-Lago Agreement" in the financial market is a form of debt resolution. One proposal is to convert part of the U.S. national debt into 100-year, non-tradable zero-coupon bonds. If these countries urgently need cash, the Federal Reserve can temporarily provide liquidity to them through special loan tools.

In addition to forcing other countries to comply, Trump also needs to find ways to lower debt interest rates, which requires the cooperation of an important institution: the Federal Reserve.

At this time, the Federal Reserve is in an exceptionally awkward position.

On one hand, "Trump's detox period" is causing the U.S. economy to slow down or even head towards recession, theoretically requiring the Federal Reserve to lower interest rates.

On the other hand, the "Biden big cycle" has already kept inflation at a high level, showing strong stickiness. The Federal Reserve's multiple interest rate hikes have failed to suppress inflation, which seems poised for a resurgence. Trump's tariffs could be the next spark to ignite a second round of inflation, and lowering interest rates now would be "adding fuel to the fire."

Powell is "in a dilemma" and can only maintain the status quo. At the press conference following the March decision, he used a significant term: "inertia." The implication is that even the Federal Reserve is uncertain about what will happen in the future.

Lowering interest rates is difficult, so the Federal Reserve needs to think of other methods, and a potential big move is being prepared: QE.

Finally, let's talk about the third method of debt resolution: productivity improvements brought about by technological progress.

CICC believes that the "AI narrative" in the U.S. over the past two years has not only supported the valuations of U.S. tech stocks but, more importantly, has bolstered investors' "fiscal faith" in the U.S. government: a tendency to believe that the U.S. is likely to drive real technological progress through AI, thereby enhancing total factor productivity to resolve debt.

In other words, the "American exceptionalism" formed in the financial market over the past few years has supported the high valuations of U.S. stocks.

However, the emergence of DeepSeek at the beginning of the year has severely impacted the U.S. AI narrative and shaken the "American exceptionalism."

The market has begun to question whether the massive, cost-ignoring investments made by the U.S. government and AI tech giants over the past two years can yield the expected returns. Can this round of AI technological revolution truly enhance the U.S.'s total factor productivity? Or is it even more likely to achieve total factor productivity improvements in China?

In other words, the market may gradually start to price in the U.S. debt risk within dollar assets.

Thus, saying that DeepSeek is a "national fortune-level innovation" may not be an exaggeration.

The above outlines the changes in U.S. policy thinking since Trump took office two months ago, which is the logic of the "Trump Great Reset."

Next, we need to discuss what this means for the financial market and the global capital flow pattern. What will happen next?

Global Capital Transformation

The keen capital market has already sensed that something is "off."

After Trump's victory in November last year, U.S. stocks and the dollar surged, and the market was jubilant, based on the logic that the market believed Trump would definitely promote growthSince Trump took office, everything has completely reversed, with both the US stock market and the US dollar experiencing a rare decline for two consecutive months. According to Goldman Sachs, this situation has only occurred five times in the past 33 years!

This is because the market has realized that Trump no longer considers the US stock market as a KPI; the KPI for "Trump 2.0" is US Treasury bonds. To achieve this, Trump is willing to let the US economy decline and undergo "detoxification."

Meanwhile, across the Atlantic, the notoriously frugal Germany, which is wealthy, suddenly begins to borrow and spend heavily! This brings an unexpected variable for Trump, as it not only gives a boost to the German and European stock markets but also significantly raises the yields on European government bonds, including German bonds.

The unexpected change results in a significant narrowing of the interest rate differential between the US and Europe, affecting the flow of "old European money" worth trillions, which in turn impacts the demand for US Treasury bonds, thereby pushing up their yields—something Trump may not have anticipated.

The real impact of the "Trump reset" lies in the restructuring of the dollar system.

CICC's research report states:

Since the US and Europe began global integration and financial liberalization in the 1980s, the circulation of the dollar has been based on the following key path: the US maintains a current account deficit, trade partners purchase dollar assets with trade surpluses, and the US maintains a financial account surplus. Since the pandemic, under the worsening dual deficit situation in the US, the dollar has strengthened significantly, largely due to the trend of overseas funds purchasing dollar assets in large quantities. According to the balance of payments identity, an improvement in the US trade deficit means a reduction in the financial capital account surplus, with portfolio investment being the first to be affected.

In simpler terms: the smaller the US trade deficit, the lower the demand for dollar assets, and the "sky-high valuations" that the US stock market has formed will face severe challenges, while other countries' assets may present opportunities; the notion of "the East rising and the West falling" is not unfounded.

Trump's tariffs will severely impact core US stock assets like the Magnificent Seven and US Treasury bonds.

Moreover, the dollar will no longer possess the safe-haven attributes it once had; when the US stock market declines, the dollar will fall alongside it.

Also losing its hedging and safe-haven attributes is US Treasury bonds. If the US economy does indeed enter a recession later this year, even if it forces the Federal Reserve to cut interest rates, the market may witness a repeat of last September, where the Fed cuts rates but Treasury yields rise instead.

What will happen next?

CICC has warned of the short-term risk of a "triple kill" in US stocks, bonds, and currencies:

From a technical perspective, since the Federal Reserve began tapering in 2022, US hedge funds (especially multi-strategy platform funds) have become the largest marginal buyers of US Treasury bonds. The continued large-scale purchases of Treasury bonds by hedge funds are not due to a bullish outlook on Treasury bonds, but rather due to Treasury basis arbitrage trading: going long on Treasury cash bonds with one hand while shorting Treasury futures with the other. When market volatility is low, holding futures to maturity can earn a low-risk yield spread basis. These hedge funds often leverage their positions in the repo market to buy Treasury cash bonds to enhance returns. The scale of this trading may have reached nearly twice the historical high point in the second half of 2019, and the trigger for the global financial market turmoil in March 2020 (selling all assets for cash) was the unexpected unwinding of the historically high scale of basis arbitrage trading at that timeThe transaction is essentially shorting volatility, so once volatility rises sharply, it can easily trigger the risk of forced liquidation and subsequent asset sell-off.

What factors could trigger a significant rise in financial market volatility? We believe the resolution of the debt ceiling is a key event. Once the debt ceiling is resolved, the U.S. Treasury will issue the bonds that were previously restricted due to the debt ceiling. In the absence of debt restructuring, the risk of a "triple kill" in U.S. stocks, bonds, and currency will increase.

What tricks will Trump pull next?

First, the "Mar-a-Lago" agreement or its variants may soon become a reality. Some countries, such as Japan, are likely to agree to restructure their holdings of U.S. bonds under the threat of tariffs. Other countries may also agree to purchase U.S. bonds in exchange for tariff exemptions.

In the case that interest rate cuts are ineffective or even counterproductive, the Federal Reserve may restart measures like QE or YCC, and the U.S. government will also relax banking regulations to encourage more banks to hold U.S. bonds.

We may even see the U.S. redefine the statistical methods and criteria for inflation and GDP.

At this point, I believe everyone understands that Trump is playing a high-stakes tightrope game, testing the fate of the United States.

If Trump succeeds, then as he claims, a new golden age for America will begin.

Even so, the enormous uncertainties during the process will turn the financial markets upside down.

If Trump "messes up," what will we see?

In a good scenario: the valuation of dollar assets declines, and the attractiveness of physical assets and cash flow assets increases.

In a bad scenario: internal reforms fail to solve the problems, and the U.S. can only shift the contradictions externally.

What does this mean? History has shown this too many times; those who understand, understand.