How to understand the recent downtrend: the first wave of 'Trump Shock' strikes

Trump’s threat to permanently eliminate the debt ceiling, which casts a shadow over the traditional US dollar credit system, has prompted market participants to engage in safe-haven trades.

Author: @Web3_Mario

Summary: Last week, the cryptocurrency market experienced a significant pullback, which was widely attributed to the so-called ‘hawkish rate cut’ by Fed Chairman Powell, triggering market concerns about inflation and economic recession. However, according to my analysis, this is probably only a secondary factor causing capital panic. The real impact lies in the strong pressure exerted by Trump and Musk last Wednesday on the short-term spending bill in Congress, and even the uncertainty sparked by the threat to cancel the debt ceiling rule, igniting a risk-averse sentiment among investors.

Powell is afraid of being scapegoated, and macro data is not enough to trigger market panic over monetary policy risks

Last Thursday’s FOMC interest rate decision in the early hours met market expectations, ending with a 25BP reduction. The market generally attributed the decline in the risk market to two factors. Firstly, the dot plot showed no unanimous consensus among the seats at this session, with Cleveland Fed President Hamaek tending to keep rates unchanged. Secondly, the median target interest rate for 25 years was raised to 3.75%-4.00%, compared to the 3.25%-3.5% in the previous September dot plot, reducing the expected rate cut from 4 times to 2. Here, let me briefly explain that the so-called dot plot refers to a chart tool used by the Fed to express the expected future interest rate path of monetary policy makers. It is part of the Summary of Economic Projections (SEP) released at Federal Open Market Committee (FOMC) meetings, usually published four times a year, mainly used to observe the policy consensus within the Fed.

In addition, in the subsequent Q&A session, some of Powell’s remarks were interpreted by the market as hawkish guidance, mainly including two aspects: first, showing concerns about the inflation outlook for the next year, and second, the attitude of the Federal Reserve towards establishing a bitcoin reserve. Powell did not give a positive response, but after reading the full text, it feels like Powell’s concerns about inflation risk do not come from changes in certain macro indicators, but more from the uncertainty of Trump’s policies. At the same time, his outlook on the future economic prospects also reveals enough confidence.

So next, let’s take a look at why this is said. First, let’s look at the changes in the US Treasury yield curve before and after the release of the Fed’s decision and related content. It can be seen that the long-term interest rates have indeed risen, but the impact on the 1-year yield is not significant. This indicates that the market does have more concerns about the future economic outlook, but at least the risk is not imminent.

From the 30-day federal funds futures contract expiring in December 25th, it can be seen that the market has already anticipated the prospects of two future interest rate cuts as early as November. Therefore, attributing the pullback mainly to the risk of future interest rate decisions by the Federal Reserve seems to be insufficient. Here is an additional point, the calculation of implied interest rate is obtained by subtracting the current futures price from 100.

Next, let’s take a look at several sets of macro data, PCE index, non-farm and unemployment rate, and GDP growth details. It can be seen that the US PCE index has not shown a significant increase in the past period, both in terms of PCE year-on-year and core PCE year-on-year growth rates are below 2.5, and the expected inflation rate also remains stable. The unemployment rate has not shown a significant increase, and the non-farm in November has also shown growth compared to before, indicating a strong side of the job market. Considering the tax cuts by Trump later, the GDP growth has also tended to be stable, and there has been no significant decline in any particular item. Therefore, from the perspective of macro data, there is no data to support the judgment of rekindling inflation or economic recession in the next year. This also means that Powell’s concerns still come from the uncertain policy effects of Trump.

Here, let me explain a little bit more. The Dow Jones Industrial Average has been continuously falling to a record low. Some friends believe that this reflects the market’s pessimism about the future prospects of US industrial development. However, upon further investigation, the main cause of this impact does not appear to be systemic risk, but rather a significant downward revision in UnitedHealth Group’s (UNH) stock. First of all, the Dow Jones Industrial Average (DJIA) is a price-weighted index, which means that the impact of each component’s price on the index depends on the absolute value of its stock price, not its market value. This means that stocks with higher prices will have a higher weight in the Dow. As of November 2, 2024, UnitedHealth Group has the highest weight in the Dow, accounting for 8.88% of the index. However, in the latest individual stock weightings, UNH’s weight has dropped to 7.08%. Its stock price has fallen from 613 on December 4 to the current 500, a decrease of 18%. Other high-weight stocks have not seen such a decline. Therefore, the main reason for the Dow’s decline is the single-point risk of the high-weight stock UNH, not systemic risk. So, what happened to UNH? The main cause is the CEO of UNH, Brian Thompson, who was shot multiple times by a gunman outside the Hilton Hotel in Manhattan, New York, on December 5. The gunman, Luigi Mangione, comes from a good social background. The interrogation process shows that his behavior is more related to the exploitation of the American people by UNH in terms of health insurance. This has triggered widespread sympathy in society and ignited the long-standing contradiction of expensive medical costs in the United States. This also aligns with President Trump’s direction of healthcare reform, hence the resonance and the sharp drop in stock price. I won’t go into further details here.

Of course, as for the little episode about Bitcoin reserves, the author believes that Powell’s attitude is actually not very important. As he himself said, the decision-making power to advance this proposal lies with the members of Congress, not the Federal Reserve. At the same time, referring to the establishment and management framework of the U.S. oil and gold reserves, the management authority of the former belongs to the Department of Energy, while the latter belongs to the Treasury Department. Of course, other departments will be involved in the management process, such as SEC, CFTC, and the policy influence of the FED. However, in this process, these departments play more of a collaborative role.

So why did the market react so violently? The author believes that the main reason is Trump’s strong pressure on the short-term spending bill proposed by Congress last Wednesday, jointly initiated with Musk, and even threatened to cancel the debt ceiling rule, which triggered uncertainty and ignited the safe-haven sentiment of funds.

Trump’s unprecedented power threatens to permanently eliminate the debt ceiling, casting a shadow over the traditional US dollar credit system, and the market is starting to trade in safe havens.

I don’t know how many friends have noticed the game of short-term spending in the U.S. Congress last week. On Tuesday, December 17, Speaker of the House Mike Johnson and the Democrats reached a short-term agreement on government spending, extending government funding until March next year to avoid a government shutdown. At the same time, in order to pass the bill, Johnson also made some concessions to the Democrats and attached several bills supported by both parties. However, on December 18, Musk began to fiercely attack the proposal in X, believing that it seriously infringed on the rights of taxpayers, leading to the rapid rejection of the proposal.

At the same time, the entire process also received support from Trump. Trump claimed in True Social that Congress needs to abolish the absurd debt ceiling rule before Trump officially takes office on January 20th, as he believes that these debt issues were caused by the Biden Democratic government and should be resolved by him. Subsequently, the Republicans quickly revised the new spending bill, not only removing some compromise expenditures, but also adding proposals to abolish or suspend the debt ceiling. However, the proposal failed to pass the House on Thursday (December 19th) with 174 votes in favor and 235 votes against. This also raised the risk of a government shutdown. Ultimately, on December 20th, the House finally passed a new temporary spending bill, just a few hours before the deadline, removing the amendment proposal for the debt ceiling in the bill.

Although the new spending bill has been passed, avoiding a partial government shutdown, I believe that Trump’s attitude towards the abolition of the debt ceiling has clearly raised concerns in the market. We know that Trump’s power is the greatest among all the former U.S. presidents, especially with absolute dominance in the House of Representatives. The new members of the House will be sworn in and take office on January 3, and the likelihood of the abolition of the debt ceiling being passed will greatly increase. Therefore, let’s analyze the impact that this may bring.

The debt ceiling in the United States refers to the maximum statutory limit on the amount of borrowing that the federal government can undertake, first established in 1917. This limit, set by Congress, is meant to restrict the growth of government debt. The purpose of the debt ceiling is to prevent the government from excessive borrowing, but it is not actually an effective means of controlling the level of debt; rather, it is the legal limit on government borrowing. In addition to establishing fiscal discipline, the debt ceiling is also a crucial weapon in the game between the two parties, often used by the opposition party to gain more bargaining power by attacking the spending bills of the ruling party, leading to the risk of government shutdown.

Of course, the US debt ceiling has been suspended several times, usually through legislation, with Congress passing a bill to suspend the application of the debt ceiling. Suspending the debt ceiling means that the government can continue to borrow without being limited by the set ceiling, until the deadline specified in the bill or the debt reaches a new level. A typical example is as follows:

• 2011-2013: In 2011, the United States faced a serious debt ceiling crisis. At that time, Congress and President Obama had intense negotiations on how to raise the debt ceiling, and eventually reached an agreement to temporarily raise the debt ceiling and take some budget-cutting measures. In addition, to avoid government defaults, in October 2013, the US Congress passed a bill to suspend the debt ceiling and allow the government to borrow until February 2014. At that time, the US debt level was close to the limit, and the suspension of the debt ceiling avoided the risk of government default.
• 2017 -2019: In 2017, the U.S. Congress once again passed a bill to suspend the debt ceiling, allowing the government to continue borrowing until March 2019. The bill also included other fiscal matters and was tied to agreements on the budget and government spending. This suspension allowed the U.S. government to avoid potential default.
• 2019 -2021: In August 2019, the U.S. Congress passed the “Two-Year Budget Agreement”, which not only increased the government’s spending limit, but also suspended the debt ceiling, allowing the government to borrow more money until July 31, 2021. This suspension enabled the government to continue borrowing without being constrained by the debt ceiling, ensuring the normal operation of the government and avoiding government shutdowns and debt defaults.
• 2021: In December 2021, in order to avoid a U.S. government default, Congress passed a temporary debt ceiling adjustment bill, raising the debt ceiling to $28.9 trillion and allowing the government to borrow until 2023. This adjustment was made at the last minute before the expiration in October 2021, avoiding the risk of default.

It can be seen that each time the debt ceiling is temporarily raised to deal with certain special events, such as the financial crisis in 2008 and the epidemic in 2021. However, why raising the debt ceiling again at this time will have such an impact is because of the current scale of debt in the United States. Currently, the ratio of US public debt to GDP has reached a historical high, exceeding 120%. If the debt ceiling is abolished at this time, it means that the United States will not be subject to any fiscal discipline for a considerable period of time in the future. The impact on the US credit system is in fact unpredictable.

So why does Trump need to do this? The reason is simple. In order to overcome the short-term risk of a debt crisis, we already know that reducing taxes and lowering public debt are two of the most important goals in Trump’s administration. However, although tax cuts can stimulate economic vitality, they will inevitably lead to a decrease in government revenue in the short term. Of course, the resulting fiscal gap can be filled by increasing tariffs, but considering that manufacturing countries can respond by lowering their exchange rates, this is why the US dollar index has remained strong during the recent interest rate cut cycle. The key is that countries are preparing in advance for possible trade wars. At the same time, the potential decline in domestic enterprise profits caused by cutting fiscal expenditures has cast a shadow over economic growth potential. Therefore, in order to overcome the pain period of implementing this policy, Trump naturally hopes to permanently solve this problem by abolishing the shackles of the debt ceiling, and it is very appropriate to rely on continued borrowing to overcome the financial crisis in the short term.

Finally, let’s take a look at why it would have an impact on cryptocurrency. I think the core is still the blow to the narrative of Bitcoin reserves. We know that in the recent core narrative of cryptocurrency, the establishment of Bitcoin reserves by the United States to solve the debt crisis is one of the more important aspects. However, if Trump directly abolishes the debt ceiling rule, it is equivalent to indirectly undermining the value of this narrative. In previous analyses, we have already concluded that the current cryptocurrency is in the stage of seeking new value support. This has led to an easy understanding of profit-taking and risk aversion. Therefore, I believe that in the coming period, the priority of observing the Trump team’s governance is significantly higher than other factors and needs to be continuously monitored.