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RESEARCH MAILING -- CHANGES / SIGNUP

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WHAT YOU NEED TO KNOW

GLOBAL DEBT / GLOBAL GDP = $324T /$110T = 295%

The renowned work of Rogoff & Reinhart suggests that when Debt surpasses 90% a country seldom (actually so far: NEVER) survives the ravages of debt destruction.

Rogoff & Reinhart's work was for a country's government debt on GDP. However, when we look at it globally a 295% level begs the question whether the world can actually sustain these debt levels?

Can Credit Growth secured by Unencumbered Collateral continue at these levels? Any slowing in the Wealth Effect (New "Apparent" Collateral) could bring this house of cards down very quickly through falling Fiat Currency values against Gold or a Crypto like Bitcoin!

RESEARCH - MARKET DRIVERS

1- WHAT IS FLAWED ABOUT THE CHINESE ECONOMIC MODEL?

• The Chinese manufacturing sector has followed a strategy that simply cannot subsist without an enormous trade surplus with the United States. Trump the businessman spotted this.
• Chinese manufacturing sector overcapacity is the norm and strategy. This means it must sell its excess production to avoid a massive problem of WORKING CAPITAL.
• Overcapacity in China was created by political design, with local and national authorities trying to boost GDP at any cost.
• The Chinese model is aimed at keeping full employment and economic growth, even with Economic returns below the cost of capital. It almost works if the excess capacity:
• Can be sold globally
• Receives Reserve Currency
• Maintains Low Costs by
• Passing the working capital cost to global consumers and
• Maintaining low production expenditure with currency controls and exchange rate fixing.
• China can only begin to address its enormous working capital problem through a quick and successful trade deal with the United States.

2- IS THERE SOMETHING NOW STRUCTURALLY WRONG WITH THE US DOLLAR?

• The easiest way to solve the US Debt burden is to pay it back in devalued dollars. Politicians ALWAYS take the easiest way! Expect a US currency devaluation before Trump's term is over!
• If you're holding US dollars and worried about weakening, there are a couple of options, (for educational purposes only, not financial advice):

1. Diversify your currency risk:  If you have significant cash, spread it across multiple currencies.
2. The Swiss franc is one attractive option. It doesn’t offer much yield, but it has a strong history of holding value vs. the US dollar. Switzerland has very low government debt, which supports long-term currency strength and investor confidence.
3. Buy assets:  A dollar devaluation would create major tailwinds for: i) Housing, ii) Stocks, iii) Gold, iv) Bitcoin, and v) Oil prices. These hard assets tend to preserve value during currency devaluations.

DEVELOPMENTS TO WATCH - POLICY DRIVERS

1- SOME INTERESTING OBSERVATIONS ON CHINA

• “China discovered that if you produce less advanced chips but use more of them, you can still produce pretty good results. You just need more power.  China is long power, while the US faces a shortage in 2026-27 based on forecasts for new data center demand." 
• "If China is able to establish Huawei hardware and a Huawei operating system on an AI datacenter stack running DeepSeek or Tencent or Alibaba at the LLM level, and if it works in SE Asia and Africa and Russia and other places, they become the defacto stack."
• "China discovered that if you produce less advanced chips but use more of them, you can still produce pretty good results. You just need more power.  China is long power, while the US faces a shortage in 2026-27 based on forecasts for new data center demand." 
• "If China is able to establish Huawei hardware and a Huawei operating system on an AI datacenter stack running DeepSeek or Tencent or Alibaba at the LLM level, and if it works in SE Asia and Africa and Russia and other places, they become the defacto stack.”
• "China's private financial markets have been replaced by the government, and they seed hundreds of companies in an industry and let them fight it out. 2-3 win. The others die. They did it in robotics, EVs, smartphones, etc. And DeepSeek may have even gotten into Xi Jinping’s head. To innovate well you need a lot of smart people throwing spaghetti at the wall.  DeepSeek showed him that a breakthrough might come from some obscure hedge fund. You never know.”

2- WHEN DOES NATIONAL DEBT BECOME TOO MUCH?

• Studies show every 1% rise in debt-to-GDP increases bond yields by 4 basis points.
• So with today’s debt-to-GDP ratio level, it suggests that yields could be 400 basis points (or 4%) higher.
•  If we apply that to today’s bond market, we could be looking at 10-year yields rising to 9%, without inflation even needing to move higher.
• That alone would obviously create extreme economic reactions and market volatility.

GLOBAL ECONOMIC REPORTING - 

ECONOMIC DRIVERS

CPI

• The fourth U.S. CPI release of this Jubilee Year rolled in with a modest +0.2% month-on-month rise — below the +0.3% forecast and a bounce from March’s miraculous -0.1% dip.
• Year-on-year, inflation clocked in at +2.3%, just shy of the +2.4% expectation and a tick down from March’s +2.4%. 
• Energy kept playing the deflation hero; goods stayed in their deflationary funk (just a little less gloomy); food prices took a breather, and services delivered their smallest monthly increase since the ancient times of December 2021.
• All in all, a Goldilocks report… if you squint hard enough.

PPI

• Following the cooler than expected CPI, US Producer Prices plunged in April, down 0.5% MoM (vs +0.2% MoM exp) - the biggest drop since April 2020.
• The headline print was dragged down to +2.4% YoY (the lowest since Sept 2024)

US WEEKLY JOBLESS CLAIMS

• The number of Americans filing for jobless benefits for the first time was flat from the prior week at 229k (the same level it was at in Jan 2022).
• Headline continuing claims remains below the Maginot Line of 1.9 million Americans.

RESEARCH - MARKET DRIVERS

1- WHAT IS FLAWED ABOUT THE CHINESE ECONOMIC MODEL?

WHAT TRUMP (THE BUSINESS MAN) SPOTTED

The Chinese manufacturing sector has followed a strategy that simply cannot subsist without an enormous trade surplus with the United States.

A CHINESE STRATEGY OF OVERCAPACITY BY DESIGN

Chinese manufacturing sector overcapacity is the norm.

• China produces 30% of the world’s manufacturing goods but consumes less than 18%, according to CKGSB.
• China’s industrial capacity utilization rate fell to 74.1% in the first quarter of 2025.
• China’s Keynesian central planning model aims to maximise employment and maintain strong economic growth, despite financial constraints and excessive indebtedness.
• This means it must sell its excess production to avoid a massive problem of WORKING CAPITAL.
• Even the government has recognised the problem noting that “involution”-style competition (wasteful competition) is a major focus for the 2025 economic policy, and steps are being taken to reduce unnecessary investments and control growth in some industries.
• Overcapacity in China was created by political design, with local and national authorities trying to boost GDP at any cost.

ECONOMIC RETURNS BELOW THE COST OF CAPITAL

The model is aimed at keeping full employment and economic growth even with Economic returns below the cost of capital. It almost works if the excess capacity:

• Can be sold globally
• Receives Reserve Currency
• Maintains Low Costs by
• Passing the working capital cost to global consumers and
• Maintaining low production expenditure with currency controls and exchange rate fixing.
• However, the combination of
• Rising debt
• A constantly weakening currency and
• The escalating bankruptcy and working capital issues

.... could potentially bring this model to a collapse, even in the absence of an official recession.

CHINA ALREADY IN TROUBLE

China has learnt that it cannot endure a trade war and cannot substitute the US consumer, the richest and largest market, with European or Latin American consumers. Therefore, it needs a trade deal quickly before the domino of bankruptcies that has plagued the Chinese economy since 2021 erupts into a full-blown financial crisis.

• China is officially in deflation for the third consecutive month in April. Business insolvencies are projected to increase by 7% in 2025 and by 10% in 2026, according to Allianz, even as the government implements additional fiscal stimulus.
• Small and medium-sized enterprises, particularly exporters, are facing mounting bankruptcies due to declining cash flow and the elimination of US tariff exemptions. Job losses are rising in export-dependent regions, and the urban unemployment rate is expected to average 5.7% in 2025, above the official target, according to CNBC.
• The official NBS Manufacturing PMI fell sharply to 49.0 in April 2025, the steepest decline since December 2023, reflecting a drop in output, new orders and employment, with foreign orders shrinking to their lowest in at least eleven months.
• The collapse of the real estate sector, which once accounted for up to 30% of GDP, has weakened banks, reduced household wealth, and led to a negative wealth effect, further depressing consumption and credit demand.

A BROKEN MODEL INCAPABLE OF SUSTAINING ITSELF

China’s economic strengths are well known, but the weaknesses are too important to ignore. The situation serves as a reminder that central planning never works. Everything that is weak in China comes from previous years of government policies aimed at boosting economic growth by building stuff and hoping it would sell at some point. Furthermore:

• Rising Bankruptcies
• An Imploding Property market and
• Mounting Local Government Debt.

All these strain the financial system just as non-performing loans from the Belt and Road Initiative (BRI) soar. Several BRI countries have defaulted on their debts or required IMF bailouts, including Sri Lanka, Zambia, Ghana and Pakistan, while the BRI generated $385 billion in off-the-books debt.

KEYNESIAN POLICIES IN A CENTRALLY CONTROLLED ECONOMY - A Witch's Brew!

Keynesian policies always lead to high debt and stagnation.

However, when combined with:

• Centralised planning system
• A closed financial system and
• Capital controls

...Keynesian policies create a dangerous mix of overcapacity, poverty and economic slack.

China can only begin to address its enormous working capital problem through a quick and successful trade deal with the United States. It will benefit China enormously if the government opens its economy, lifts capital controls and allows the private sector to breathe. An implosion of the overcapacity problem hidden from the media, offset by even more central planning and stimulus spending, is only going to weaken China in the long run.

2- IS THERE SOMETHING NOW STRUCTURALLY WRONG WITH THE US DOLLAR?

FROM OUR FRIENDS AT

BRAVOS RESEARCH

The US dollar index has witnessed its largest drop since COVID-19. It has now completely disconnected from its underlying fundamentals. This development could have massive implications for the economy and financial markets.

Since the dawn of civilization, every currency that has come into existence has eventually died out and disappeared into irrelevance. The people holding these currencies saw their wealth completely disappear. Take the British pound, for example.

BRITISH POUND

In the 1940s, 1 British pound could be exchanged for 5 US dollars. It was the dominant global currency at the time.

By the 1980s, the British pound was only worth 1 dollar, completely destroying the purchasing power of anybody holding pounds. This reshaped global trade, economic power and geopolitics.

US DOLLAR

Today, it's not the pound under attack, but the US dollar – the current dominant global currency. Many are projecting a similar fate to that of the British pound, possibly catalyzed by Donald Trump's new government policies.

The US dollar index (DXY) has faced strong selling pressure since Trump's tariff policy announcement on April 2nd.

While it hasn't been an outright collapse, something concerning has happened that suggests this decline could be more dangerous than it appears:

• The dollar has disconnected from US government bond yields.
• US government bond yields essentially show us the return on investment you get for owning US dollars.

Throughout the last few years, these yields and dollar strength have been very interconnected, and logically so.

As the return on investment of the US dollar increases, the foreign exchange value should increase as well.

The growing gap we're seeing now tells us that the dollar has been weakening despite return on investment staying elevated. This could signal that something in the currency is breaking.

It might mean interest rates need to rise significantly more to stabilize the dollar or that without such a rise, the dollar could face a complete collapse.

UNDERSTANDING THE CAUSES

Before making definitive conclusions, we need to understand exactly why this gap has formed:

1. Tariffs Slow Economic Growth

• Foreign exchange rates are heavily influenced by local economic growth.
• If investors believe Trump's tariffs will slow growth in the US, it makes sense the dollar would weaken.
• This could be temporary though, as the US economy remains strong and leads in key future industries.

2. Reduced Global Trade Volume

• Trump's tariff policies will reduce global trade volume.
• Since most global trade is conducted in US dollars, tariffs naturally reduce demand for dollars.
• If we're heading into a world of declining global trade, that could put the dollar on a sustained weakening path.

3. Deliberate Currency Weakening Policy

• Most concerning is the possibility that the current administration is deliberately seeking to weaken the dollar as part of its economic strategy.
• Trump has frequently expressed wanting a weaker dollar.
• A weak dollar makes American-produced goods more competitive, boosts exports and stimulates the manufacturing sector.
• All of these outcomes aligns with Trump’s "Make American Industry Great Again" objectives.

That’s exactly what happened with the British pound in the 1940s…

2 main factors drove the British pound's devaluation against the dollar.

• The British economy had a high trade deficit, meaning the UK wasn't manufacturing locally.
• Currency devaluation made British goods more competitive and stimulated the local economy.

Additionally, the UK faced a massive debt burden after World War II. Devaluing the pound made it easier to pay back debt accumulated when the currency was stronger. The UK government essentially sacrificed the pound's status to resolve domestic issues of high government debt and trade deficits.

AMERICA'S SIMILAR POSITION

The comparison between 1940s UK and today's US is not far-fetched.

1. The US has significantly increased its trade deficit over the last 30 years, with less goods being produced locally.
2. The US government also has an enormous debt burden, being one of the world's most indebted countries.

Government debt now surpasses the total size of the US economy, with severe debt accumulation following the financial crisis and pandemic.

This puts the government in a position where it should cut spending and raise taxes to control its budget. But, both measures are painful. The less painful alternative is currency devaluation. This stimulates the local economy and makes debt easier to repay.

In fact, we’re already seeing signs of the US dollar breaking down. Looking at the US dollar's exchange rate against the euro, (the main currency in the dollar index). We see it has broken below a long-term uptrend that began in 2008. That’s a serious breakdown!

We weren’t bullish on the dollar during the dips in 2023 and 2024. Today, we’re not convinced it can recover like before though.

That said, nothing is guaranteed. If you’re trading the dollar, it’s important to manage your risk carefully.

If you're holding US dollars and worried about weakening, there are a couple of options,.

(for educational purposes only, not financial advice):

1. Diversify your currency risk: If you have significant cash, spread it across multiple currencies.
2. The Swiss franc is one attractive option. It doesn’t offer much yield, but it has a strong history of holding value vs. the US dollar. Switzerland has very low government debt, which supports long-term currency strength and investor confidence
3. Buy assets: A dollar devaluation would create major tailwinds for i) Housing, ii) Stocks, iii) Gold, iv) Bitcoin and v) Oil prices. These hard assets tend to preserve value during currency devaluations. In fact, we just released a video on how Bitcoin fits into the current macro setup: https://youtu.be/PZsNLoHy-0I.

DEVELOPMENTS TO WATCH - POLICY DRIVERS

1- SOME INTERESTING OBSERVATIONS ON CHINA

Quotes by Eric Peters, CIO of One River Asset Management

“China went from being a really interesting market to being uninvestable after Xi’s crackdown in 2020. It’s been in the doghouse ever since.”

"We were scanning the world, looking for the next big theme. Then came DeepSeek and Trump’s trade war, and it helped us see that despite the trade controls, the tech restrictions, the various forms of sand thrown into the gears, Chinese tech companies have nevertheless gotten to being good enough.  And for many in the world, good enough works as long as it comes at the right price.”

“They’ve discovered that if you produce less advanced chips but use more of them, you can still produce pretty good results. You just need more power.  China is long power, while the US faces a shortage in 2026-27 based on forecasts for new data center demand.  If China is able to establish Huawei hardware and a Huawei operating system on an AI datacenter stack running DeepSeek or Tencent or Alibaba at the LLM level, and if it works in SE Asia and Africa and Russia and other places, they become the defacto stack.”

“Then they’re no longer hostage to American policy and innovation. The same applies to autonomous cars and robots that they deliver at the right price point for poor countries. China creates a new set of standards that dominate. Probably what we should do is open up and compete. I mean, the experience with China’s Belt and Road is that whenever a poor country experiences an economic stumble, the Chinese come in and enforce their rights brutally.  We don’t do that, or at least we haven’t, so we have an edge in any competition.”

“But Trump’s trade war is taking us in a different direction, based on some quasi-religious belief he developed in the 1980s, which may have made sense back then but makes little sense now. What this means is that the world is probably moving to two standards. America’s and China’s. This means that what was an uninvestable market as of last year may become investable again. The odds of this are rising fast. And it’s in part because countries around the world want to hedge against the risk of an overtly transactional US.”

“We would’ve thought Xi would’ve choked the innovative economy. But instead, the private financial markets have been replaced by the government, and they seed hundreds of companies in an industry and let them fight it out. 2-3 win. The others die. They did it in robotics, EVs, smartphones, etc. And DeepSeek may have even gotten into Xi Jinping’s head. To innovate well you need a lot of smart people throwing spaghetti at the wall.  DeepSeek showed him that a breakthrough might come from some obscure hedge fund. You never know.”

2- WHEN DOES NATIONAL DEBT BECOME TOO MUCH?

The fundamental reason the US Debt level is important is because the U.S. TAXES GDP to service its debt.

Consequently, a high debt-to-GDP ratio raises concerns about the sustainability of taxation policies and collections. If investors doubt U.S. Treasuries' abilities to this, they'll demand higher yields, thereby pushing rates even higher and the value of government bond portfolios down. The first one out before that happens wins.

REDUCE RATE OF RISE IN DEBT TO GDP

Studies show every 1% rise in debt-to-GDP increases bond yields by 4 basis points.

So with today’s debt-to-GDP ratio level, it suggests that yields could be 400 basis points (or 4%) higher.

If we apply that to today’s bond market, we could be looking at 10-year yields rising to 9%, without inflation even needing to move higher.

That alone would obviously create extreme economic reactions and market volatility.

ROGOFF AND REINHART

The renowned work of Rogoff & Reinhart suggests that when Government Debt surpasses 90% a country seldom survives the consequences. At 130 Debt to GDP the US is well into the "Land of no Return" - at least statistically.

This is why Trump must IMMEDIATELY:

1. Reduce the Rate of US Government Debt Growth to attract investors and maintain "rollover" Treasury funding, (i.e. DOGE)
2. Grow GDP via accelerated ONSHORING driven by the threat of TARIFFS
3. Reduce Regulations and Taxes as per the LAFFER CURVE to increase INVESTMENT
4. Reduce the exchange rate of the US Dollar to gain COMPETITIVE export ADVANTAGE.

GLOBAL ECONOMIC INDICATORS - ECONOMIC DRIVERS

US

CONSUMER PRICE INDEX (CPI)

The fourth U.S. CPI release of this Jubilee Year rolled in with a modest +0.2% month-on-month rise — below the +0.3% forecast and a bounce from March’s miraculous -0.1% dip. (CHART RIGHT TOP)

• Year-on-year, inflation clocked in at +2.3%, just shy of the +2.4% expectation and a tick down from March’s +2.4%. 
• Energy kept playing the deflation hero, goods stayed in their deflationary funk, (just a little less gloomy), food prices took a breather and services delivered their smallest monthly increase since the ancient times of December 2021.
• All in all, a Goldilocks report… if you squint hard enough.

CHART RIGHT BOTTOM: US Umbrella inflation Index (Average of CPI; Core CPI; PPI; Core PPI; Core PCE), 1-year consumer inflation expectations.

PRODUCER PRICE INDEX (PPI)

Following the cooler than expected CPI, US Producer Prices plunged in April, down 0.5% MoM (vs +0.2% MoM exp) - the biggest drop since April 2020. (But we note that last month's 0.4% MoM decline was revised up to unchanged).

The headline print was dragged down to +2.4% YoY, (the lowest since Sept 2024)...

Under the hood, Prices for final demand services moved down 0.7 percent in April, the largest decline since the index began in December 2009.

Core Producer Prices plunged by the most on record

(back to 2010).

Energy prices are set to drag CPI and PPI even lower in the next month or so.

US WEEKLY JOBLESS CLAIMS

The number of Americans filing for jobless benefits for the first time was flat from the prior week at 229k, (the same level it was at in Jan 2022).

Headline continuing claims remains below the Maginot Line of 1.9 million Americans.

CHART RIGHT: US labor market and Trump's terrible tariff trauma eventually have to match up??

THE US STRATEGIC IMPERATIVE

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