Did Thanos' snap raise the market's soft spot for Trump?

Hello everyone, I am Dolphin Research!

In last week's Strategy Weekly Report, Dolphin Research used a simplified story to help everyone understand Trump's aggressive tariff policies and the enemies he has made. What gives Trump the confidence to openly tear apart the trade order he established? Does he have any vulnerabilities? How should we view the upcoming trade war?

1. Low Leverage for Residents, AI to Drive the Next Decade

One major reason Trump dares to challenge the world alone is that the domestic economy (both businesses and residents) is relatively stable and confident.

Currently in the United States, from the perspective of household wealth, American household wealth has accelerated growth post-pandemic, and the ability to cover liabilities with savings has strengthened overall. The balance sheets of American residents are currently very healthy.

From the perspective of businesses, in the AI era, most American companies have entered a new capital expenditure cycle, starting to hire, acquire land for data factories, and there is hope for further productivity improvements.

However, the prosperity of the private sector in the United States does not come without cost; it is an American "exception." The price of post-pandemic prosperity is the enormous federal deficit and the rising pressure of interest payments.

After a massive injection of money, although the Federal Reserve has been withdrawing currency (Tapering), when we calculate the ratio of M2 to the real GDP of the United States, as of last year's fourth quarter, the “money supply” in relation to GDP was still above historical trend values, and the Federal Reserve has already ended the Tapering policy.

Post-pandemic, the leverage ratios of American businesses and residents have been continuously decreasing, but the leverage ratio of the federal government has been continuously increasing. Compared to the fourth quarter of 2019 before the pandemic, the federal fiscal leverage ratio in the fourth quarter of last year increased by a full 20 percentage points.

(PS, Trump, who has been calling for a reduction in the national debt burden, actually saw the federal debt balance accelerate during his first term (2017-2020) due to tax cuts, even without considering the impact of the pandemic.)

With nearly $30 trillion in debt and with an average borrowing interest rate in the range of 3.5% to 4%, the current 10-year Treasury bond yield remains above 4.5%, forcing Treasury Secretary Yellen, who serves during the Democratic administration, to use short-term borrowing to cover funding gaps.

The newly appointed Republican Treasury Secretary Besant is unwilling to do this and is striving to return Treasury financing to an era of long-term debt. However, with the 10-year Treasury bond currently operating in the 4.5%-5% range, directly increasing the proportion of long-term debt will structurally raise the interest cost of U.S. Treasury bonds in the long term.

II. Trump's Achilles' Heel

So, while it seems that Trump is aggressive and attacking everywhere, his Achilles' heel is also quite obvious in the eyes of Dolphin Research:

a) Rising 10-Year Treasury Yield

With Trump's more significant tax cuts coming in the second half of 2025, the fiscal gap will widen again, and the Treasury's TGA account currently has only $300 billion left (the reasonable level should be between $750 billion and $850 billion), meaning the U.S. Treasury is once again at the annual point of heavily selling bonds.

Under the debt duration structure of Trump and Besant, it is already quite uncomfortable for the 10-year Treasury yield to remain around 4%; if it rises to 4.5%-5%, if 10-year, 20-year, or 30-year ultra-long-term Treasury bonds are issued on a large scale at interest rates of 4-5%, it will undoubtedly structurally raise the interest costs for the U.S., which is unbearable.

However, the 10-year U.S. Treasury yield has risen from 4% to 4.5% in the past week. Although there are rumors of a Japanese bank going bankrupt, leading to a sell-off of Treasury bonds to fill the gap. When asked whether the drop in U.S. Treasury bonds was caused by China, Treasury Secretary Besant stated that China has no choice because selling U.S. Treasury bonds would mean converting them into dollars, and converting into dollars creates demand for dollars, which conflicts with China's goal of devaluing the yuan to hedge against tariffs.

Of course, in the eyes of Dolphin Research, the logical flaws in this response are very obvious. While the holdings of U.S. Treasury bonds by foreign official institutions continue to decline, the demand for gold reserves is rising, and if we add the continuously rising gold prices, the proportion of gold in global central bank reserves is continuously increasing.

In fact, regardless of who is selling U.S. Treasuries, the simultaneous decline of the U.S. dollar, U.S. Treasuries, and U.S. stocks naturally raises concerns. With the U.S. behaving in such a way, the market's confidence in U.S. assets may diminish. In contrast, when there was a major policy adjustment in China earlier, it was quickly rated as "uninvestable" by overseas major banks. The soaring long-term U.S. Treasury yields are a pain that the current U.S. government, which needs to finance through long-term debt, cannot bear.

b) The Destruction of American Household Wealth?

If the deflationary environment in the domestic market over the past two years has taught us anything—salary deflation (unemployment, wage cuts) is just as important as asset depreciation and will have a significant impact on residents' consumption expectations.

Similar to how most of China's household wealth is in real estate, most American household wealth is in financial assets such as stocks and bonds, with even pensions invested in financial assets. If stocks and bonds continue to decline significantly, it will have a major impact on residents' current payment capacity and consumption expectations, which is clearly detrimental to future economic expectations.

c) The Beneficiaries of Globalization in America—Finance and Technology Industries

In the U.S. Mag 7 covered by Dolphin Research, overseas revenue generally accounts for around 50%. They are the absolute beneficiaries of America's past free trade and are also a concrete manifestation of the trade surplus in service exports such as studying abroad, tourism, and intellectual property.

One can imagine that if relations deteriorate, will Japan and Europe adopt the same approach as the U.S. did with TikTok to deal with European Google, Meta, and Amazon, at least in terms of antitrust, digital taxes, or restricting the investments of American financial companies in Europe and Japan?

These companies contribute to the vast majority of the market value of U.S. stocks. When the game begins to extend to these American financial and technology assets, will U.S. stocks continue to decline further?

When we put <a——c> together, it becomes clear that Trump, in this tariff war, actually

First, lacks the ability to engage in a prolonged tariff battle—If tariff negotiations turn into a protracted tug-of-war, the uncertainty will cause the stock market to continue to decline, or the negotiating parties will continue to game U.S. Treasury yields, which would be quite painful for Trump.

If the goal is to bring manufacturing back and maintain high tariffs, it could lead to supply-side stagflation, with high inflation and high U.S. Treasury yields, resulting in a decline in residents' purchasing power, which would be counterproductive.

Second, lacks the ability to "go to war" with half of Americans and other countries around the world simultaneously.

From a rational perspective, it is difficult to reasonably explain things that are hard to happen, which is probably a key reason why Bessent has begun to lead trade negotiations in the United States, and why the consumer electronics supply chain, including Apple, has temporarily been exempted from high tariffs between China and the U.S.

What can be confirmed is that, just like the trade war in 2018, which united both parties in the U.S. around a consensus on China, this time there may also gradually emerge a consensus on global trade unfairness, leading the U.S. to increasingly lean towards conservatism and mercantilism, accelerating the return of manufacturing regardless of which party is in power next.

In this process, are Chinese assets, as a special asset class, continuously being targeted? To address this potential risk, Dolphin Research will soon study the delisting of Chinese assets listed in the U.S. stock market, the risks of being restricted from investment by U.S. capital, and possible countermeasures, so please stay tuned.

III. Should we buy or run from U.S. stocks?

Because the worst-case scenario of Trump's global "war" has not materialized, and considering that in the deeply integrated global supply chains of consumer electronics and semiconductors there has been a temporary exemption (of course, Trump has threatened, and there are still special tariffs targeting these industries in the future), the market has breathed a sigh of relief.

Currently, looking at market pricing, the S&P 500 index has fallen by 10% from the start of the year until now, but after the tariff war in 2025, major banks have generally lowered the 2025 EPS by about 10%, which means that the stock price decline so far has not actually killed valuations.

We know that in the triple kill of stock prices—killing earnings, killing valuations, and killing logic—killing performance is actually not scary; what is scary is killing valuations, and the most terrifying is killing logic. Although there have been constant calls for recession expectations, the pricing of the S&P 500 is very rational and has not killed valuations.

Of course, the core of this pricing is actually supported by fundamentals—U.S. non-farm employment increased by 230,000 in March, which can be considered very impressive, while the month-on-month increase was 0.25%, which is also a very healthy and acceptable growth state. In addition, the CPI has significantly declined, with an overall month-on-month change of -0.5%, and the core CPI only showing a positive growth of 0.06%.

In other words, the current U.S. stock market is only pricing in the short-term EPS changes brought about by tariffs, but has not considered the possibility that tariffs could lead to a real recession or stagflation, which would further result in a killing of valuations. This data actually needs to be evaluated based on the economic performance after the tariff policies are truly implemented in April and May. The worst-case scenario is that during the earnings season of US stocks in April and May, advertisers reduce ad spending due to uncertainty, and listed companies abandon providing performance guidance, while US macroeconomic data worsens.

Therefore, for US stocks, Dolphin Research believes that in the short term, there may be opportunities for trading due to Trump's softening stance, but if the time is extended a bit, the risks have not been eliminated. Investing in US stocks still requires leaving enough safety margin.

IV. Portfolio Adjustment and Returns

The Alpha Dolphin portfolio had no adjustments last week, with a portfolio return of 0.8%, outperforming the CSI 300 (-2.9%), MSCI China (-7.9%), and Hang Seng Tech (-7.9%), but underperforming the S&P 500 (+5.7%).

Since the portfolio began testing (March 25, 2022) until last weekend, the absolute return of the portfolio is 78%, with an excess return of 86% compared to MSCI China. From the perspective of net asset value, Dolphin Research's initial virtual asset of 100 million USD has exceeded 181 million USD as of last weekend.

V. Individual Stock Profit and Loss Contribution

Last week, in the Alpha Dolphin portfolio, overseas Chinese assets that were heavily impacted by the US's aggressive tariff increases and potential delisting became the hardest hit area, with stock prices continuing to decline. However, due to the US's uniform 10% tariff on other countries, the risks have decreased, and US stock assets have generally recovered.

The specific stocks with significant price fluctuations are explained by Dolphin Research as follows:

VI. Asset Allocation Distribution

The Alpha Dolphin virtual portfolio holds a total of 10 stocks and equity ETFs, with a standard allocation of 1 stock and the rest under-allocated. Assets outside of equities are mainly distributed in gold, US Treasury bonds, and USD cash. Currently, the overall portfolio is lightly positioned to cope with tariff uncertainties, while closely monitoring the safety margins that may arise from quality assets potentially dropping.

As of last weekend, the asset allocation and equity asset holding weights of Alpha Dolphin are as follows:

7. Key Points This Week:

After the holiday, Hong Kong and A-shares enter the first quarter earnings release period, while some U.S. stocks also enter the earnings season. The performance of the next quarter may not be as important; rather, it is more about how companies forecast their upcoming performance under tariff uncertainties and how they respond to potential tariff risks. Attention should be paid to how these guidelines affect the risk appetite of funds.