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 his willingness to openly tear apart the trade order he established. What gives Trump the confidence to do this? Does he have any vulnerabilities? How should we view the upcoming trade war?

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

One major reason Trump dares to challenge the world on his own 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 debts 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, beginning 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 is not without its costs. The price of America's post-pandemic prosperity is the massive federal budget deficit and the rising pressure of interest payments.

After a large amount of money was distributed, although the Federal Reserve has been withdrawing currency (Tapering), when calculating M2 divided by the real GDP of the United States, as of last year's fourth quarter, the "money supply" in the U.S. GDP was still above historical trend values, and the current Federal Reserve has already removed Tapering.

Post-pandemic, the leverage ratio of American businesses and residents has 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 U.S. increased by a full 20 percentage points by last year's fourth quarter.

(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 an interest rate of 3.5-4% on borrowing, the current 10-year Treasury bond remains above 4.5%, forcing Treasury Secretary Yellen during the Democratic administration to use short-term borrowing to cover funding gaps.

The newly appointed Republican Treasury Secretary Basant 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 run.

II. Trump's Achilles' Heel

So in this round, while Trump appears aggressive and is attacking from all sides, his Achilles' heel is also quite obvious in Dolphin Research's view:

a) Rising 10-Year Treasury Yield

With Trump's more significant tax cuts approaching 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 Basant, 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% over the past week. Although there are rumors of a Japanese bank collapsing, leading to a sell-off of Treasury bonds to cover losses. When asked whether the drop in U.S. bonds was due to China, Treasury Secretary Basant stated that China has no choice because selling U.S. bonds means converting them into dollars, and converting to dollars creates demand for dollars, which conflicts with China's goal of devaluing the yuan to hedge tariffs.

Of course, in Dolphin Research's view, the logical flaws in this response are quite obvious. While the holdings of U.S. bonds by foreign official institutions continue to decline, the demand for gold reserves is steadily increasing. If we also consider the rising gold prices, the proportion of gold in global central bank reserves continues to rise.

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 early on rated as "uninvestable" by overseas major banks. The sharp rise in long-term U.S. Treasury yields is 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—wage deflation (unemployment, wage cuts) is 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, and even pensions are invested in financial assets. If stocks and bonds continue to decline sharply, it will significantly affect residents' current payment capabilities 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 reflection 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 further decline?

When <a——c> are put together, it is easy to see that Trump, in this tariff war, actually

First, lacks the ability to engage in a protracted tariff war—If tariff negotiations turn into a drawn-out battle, the uncertainty will cause the stock market to continue to decline, or the negotiating parties will continue to play games with 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 globally 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.

However, it can be confirmed that, just as the trade war in 2018 brought the two parties in the U.S. together in a consensus against China, this time it may gradually form a consensus on global trade unfairness, leading the U.S. to increasingly lean towards conservatism and mercantilism, causing whichever party governs next to accelerate the return of manufacturing.

In this process, is China, as a special asset class, continuously being targeted? To address this potential risk, Dolphin Research will recently 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.

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

Because the worst-case scenario of Trump's global "war" has not materialized, and 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 beginning of the year to now, but after the tariff war in 2025, major banks have generally lowered the EPS for 2025 by about 10%, which means that the decline in stock prices so far has not actually killed valuations.

We know that in the triple kill of stock prices—killing business, killing valuation, killing logic—killing performance is actually not scary; what is scary is killing valuation, and the most terrifying is killing logic. Although there have been continuous 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 growth 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 data 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 their ad spending due to uncertainty, listed companies abandon providing performance guidance, and at the same time, 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 easing, but if the time is extended a bit, the risks have not been eliminated. Investing in US stocks still requires leaving enough safety margins.

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 even potential delisting became the hardest hit area, with stock prices continuously adjusting. However, due to the US's uniform 10% tariff on other countries, 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 Portfolio 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 out.

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; more attention will be on how companies project their upcoming performance amid tariff uncertainties and how they respond to potential tariff risks, as well as how these guidelines affect the risk appetite of funds.