As Trump's second term approaches its hundredth day, the geopolitical landscape has undergone a dramatic transformation compared to a few months ago. The question is no longer whether the United States will decouple from the world, but "how" it will decouple; and the United States' "exorbitant privilege" as the global reserve currency is beginning to face substantial challenges.
The correlation between assets is breaking down, capital flows are reversing, and Bitcoin (finally) is showing a clear divergence from stocks. The president even threatens to treat the Federal Reserve chairman like a contestant on "The Apprentice," while major U.S. endowment funds are massively selling illiquid private equity assets during the industry's most challenging times. Have we truly reached a critical turning point in financial history?
Dollar Safe-Haven Asset
One of the most market-focused questions now is whether the dollar and U.S. Treasury bonds have lost their long-standing safe-haven asset status? Has Trump caused irreparable structural damage to the post-war global security and financial system?
Investors are significantly withdrawing from dollar assets, moving towards euros and yen, while also selling U.S. stocks and allocating to Chinese stocks. Market uncertainty about the end of "American exceptionalism" has pushed the dollar index to a three-year low, and the University of Michigan Consumer Confidence Index has dropped to near its historical low due to intensifying inflation concerns.
Foreign investors' allocation to U.S. stocks has also significantly slowed, with ETF fund inflows nearly zeroing out over the past three months.
Meanwhile, macro asset correlations are breaking down. The yen has significantly appreciated (USD/JPY ~ 140), yet the Nikkei index is rising instead of falling, indicating that this yen appreciation is driven by dollar weakness rather than typical carry trade unwinding.
The most important "known unknown" remains U.S. Treasury bonds. The 10-year Treasury yield is rising against the backdrop of a weakening dollar, stock market, and underlying economy, resembling emerging market trends. While we disagree with this view, it's undeniable that the current U.S. financial situation is tightening, and bonds are not fulfilling their risk-hedging function. The market may struggle to find a clear solution before the Trump administration's tariff negotiations cool down.
Over the past six months, foreign investors have continued to reduce U.S. bond holdings, and central banks may be selling dollar assets to defend their currency's trajectory.
Despite recent significant U.S. stock pullbacks, they still maintain a significant premium compared to emerging markets and other international stocks, which have made almost no progress since the global financial crisis in terms of valuation multiples. Given that the trade war is unlikely to benefit any country completely, we do not believe foreign markets can narrow the valuation gap through their own performance. In such a scenario, if U.S. stocks ultimately "correct downward" to close the valuation gap, it would mean wealth destruction, which is not a positive development the market welcomes. The market should be cautious, as wishes coming true is not necessarily a good thing.
From some indicators, the current economic policy uncertainty has reached an all-time high, even exceeding the early stages of the pandemic. This uncertainty has led to a significant decline in corporate prospects, with the New York Fed's manufacturing survey showing that business activity expectations have dropped to their lowest level in over a decade.
Sub-indicators show a similar situation. Forward-looking shipment and capital expenditure indicators have sharply declined, while payment prices have notably increased. Meanwhile, corporate profits continue to be revised downward, with profit growth being compressed, casting a shadow over the stock market.
Poison Pill
Although the market is accustomed to listening to officials, the so-called "Trump 2.0 trade" has been a disaster so far, with most policy narratives ultimately leading to significant losses. A picture is worth a thousand words:
Once bitten, twice shy. The market will likely be cautious about Trump's statements for some time to come.
Hero or Cannon Fodder?
While hedge funds are busy deleveraging and reducing risks due to major losses in 2025, retail investors are doing the opposite, with record capital inflows into leveraged Nasdaq ETFs over the past two weeks.
There is ample evidence that retail and passive funds have far outperformed active funds and professional fund managers in the past 5 years. Will history repeat itself, though it seems doubtful at the moment?
As retail investors add positions, a significant number of companies have lowered profit expectations, and the SPX index's market depth (liquidity) is near historical lows
Gold Shines Again
This gold rally has almost made up for the past decade's lag, with spot prices rising about 150% since early 2024. As investors seek a capital safe haven in this upside-down world, gold has recently shown a vertical surge.
Ironically, Trump recently posted a meaningful comment on social media: "Those who own gold can make the rules," possibly referring to his negotiation strategy, potentially pushing gold spot prices to new highs above $3,400.
Additionally, data shows this gold price increase mainly occurred during Asian trading hours, indicating possible official or central bank funds moving away from the US dollar towards other safe-haven assets. Compared to the past, the decoupling from the US dollar seems more apparent.
BTC Narrative Restarts - No Longer Just Nasdaq, But Not Yet Gold
Decoupling from the US dollar may bring back market attention to BTC's long-term bullish narrative as a store of value. Although we criticized BTC as becoming increasingly like a high-leverage Nasdaq index over the past year, it has recently begun showing signs of decoupling from the stock market. While US stocks performed weakly last week, BTC price approached the $90,000 range.
Of course, we cannot be too optimistic. From the beginning of the year to now, BTC's performance still significantly lags behind spot gold. It can only be said that it is gradually evolving into a hybrid of gold and leveraged Nasdaq, which is still an improvement from being a "beautified TQQQ".
JPM data shows that gold futures positions have significantly increased, while BTC capital flows have stagnated. To truly realize BTC's potential as a safe-haven asset, the market still needs to observe whether funds will flow back.
Slight Impact on US Endowment Funds
Besides making international threats, the Trump administration has recently been wrestling with US endowment funds domestically, particularly targeting Harvard, which could negatively impact market liquidity.
Reports indicate that Yale University's endowment fund will sell about $6 billion in private equity positions, precisely when the private market liquidity is at a historical low point with weak investment returns.
Non-US observers might not realize the scale and importance of the US endowment fund system, which has historically been among the most influential "permanent" holders in capital markets. Will ongoing political struggles lead to investment slowdown or changes in capital allocation? Dealing with the Trump administration ensures life is never boring. Times are indeed changing...
Wishing everyone a successful trading week!
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