It's Dangerous Business Walking Out Your Front Door
A 4d chess move to bring long-term bond yields lower?
A bull market is like sex. It feels best just before it ends. – Warren Buffet
Anyone who assumed 2025 would simply mirror prior years clearly overlooked Donald Trump and his administration. With his official return to office in January, the landscape has shifted—I’ll leave it to you to judge whether for better or worse.
Before I delve into specific points that I believe warrant attention, here’s a brief market update. The DAX continues outperforming the S&P 500 year-to-date but fell short of a new all-time high this week. We remain approximately 200 points below the 23,000 threshold.
The S&P 500 has faced a challenging week. After briefly hitting 6,150 points, it began to sell off. As of Wednesday’s close, it rests at 5,956, near the 5,800–5,900 resistance zone—a level it must hold to regain momentum.
Bonds have enjoyed a sustained rise, climbing for several consecutive days. With his cabinet advancing tariffs and government spending reductions, Trump may have influenced this. While nothing is finalized, the market is growing noticeably uneasy.
US Treasuries lead the surge in government bonds, with European counterparts following closely. However, Europe’s rally has been restrained by concerns that if Trump withdraws support, the continent will need to increase spending to strengthen its military.
EUR/USD continues to hover around the 1.05 mark, yet to breach its resistance. It’s roughly where it stood a month ago. Whether it can break through remains uncertain—my perspective on that unfolds later.
Commodities have retreated from their January highs. Even gold, currently the favored geopolitical hedge, is wavering. It dipped this week, though the decline was modest, keeping it within reach of its previous peak.
As anticipated, oil (WTI) again struggled to surpass $72 per barrel. It pushed past $70 resistance this week but now trades just below $69. Copper has also pulled back, settling around $450, slightly above its new $440 resistance.
We must first examine the past and present to assess the market’s potential path forward. I’ll admit I was surprised the US economy remained resilient for so long. To me, the most compelling explanation lies in the uneven “K-shaped” recovery. Asset owners benefited from reduced fixed-income payments relative to their earnings, capitalizing on rising stock prices and higher short-term bond yields.
The Wall Street Journal noted this week:
The top 10% of earners—households making about $250,000 a year or more—are splurging on everything from vacations to designer handbags, buoyed by big gains in stocks, real estate and other assets....Those consumers now account for 49.7% of all spending, a record in data going back to 1989, according to an analysis by Moody’s Analytics. Three decades ago, they accounted for about 36%.
According to Moody’s Analytics, the US economy increasingly depends on the spending of affluent Americans. Chief economist Mark Zandi estimates that the top 10 percent drives one-third of the nation’s GDP.
There’s an old adage that the US economy thrives as long as the wealthy spend freely. Yet, entering 2025, the expectations of asset owners may have climbed too high to sustain. After 2023 and 2024 exceeded GDP forecasts, expectations for real GDP are now double what they were last year.
The enthusiasm surrounding Trump’s second term largely stems from his first, when tax cuts and increased spending propelled the stock market—his preferred measure of success—to new heights. In that term, he leveraged government resources to bolster the economy. This time, however, the approach has shifted, and the signs are stark. For the first time in years, an administration appears intent on addressing the corollary to tax cuts: reducing government expenditure.
That aligns with recent comments from Treasury Secretary Bessent, who noted the administration is monitoring 10-year yields and prefers them lower. Their strategy involves cutting spending. To Bloomberg, Bessent expressed confidence:
Bessent described President Donald Trump’s economic agenda as composed of deregulation, fiscal prudence, fair trade and energy dominance. As Trump’s policies are implemented, 10-year Treasury yields “should naturally come down” over time, he said. He also said that he and Trump were focused on “increasing the desirability” of US Treasuries.
Surprisingly, Bessent also suggested the private sector has been in recession, echoing bearish sentiments heard over the past two years.
It feels a bit like the administration’s playing four-dimensional chess. When Bessent speaks of re-privatizing the economy through spending cuts, I view it as an attempt to curtail the excesses of the Biden era. Reduced government funds flowing to businesses and households would weaken demand. Assuming other factors hold steady, this would slow economic activity and reduce employment in sectors previously sustained by federal support.
Such reductions mean less capital reaching the economy—fewer resources for businesses and individuals, further dampening demand. The outcome, all else equal, would be a decelerating economy and job losses in areas that once benefited from government largesse.
Fewer jobs translate to lower incomes, triggering layoffs and weighing on overall growth. Apollo Investment has warned that potential risks are emerging—losing one federal position could eliminate two additional contractor roles. It’s hardly surprising, then, that this week’s Conference Board survey revealed a growing expectation of job losses within six months, reaching its highest mark since 2012 when the Fed resumed quantitative easing.
To temper potential worries, one has to add that this indicator is far from flawless; it has produced numerous false positives over the years. It’s not a definitive predictor, but when considered alongside discussions of spending cuts and lower 10-year yields, it merits attention.
The most direct method to lower long-term bond yields is to suppress economic activity. Curtailing government demand following Biden’s substantial infusions represents a profound shift. Over the long term, reducing taxes and spending could invigorate the private sector, though that’s a gradual process, not an immediate solution. In the short term, it imposes a drag on growth.
One might argue that, over time, cutting taxes and government spending could genuinely revitalize the private sector. However, this is a long-term endeavor, not a swift adjustment. In the near term, this fiscal restraint would directly result in diminished growth.
Moreover, with the House recently extending the 2017 Tax Cuts and Jobs Act, the outcome could be doubly unfavorable: a fiscal drag on GDP without any improvement to the deficit.
TS Lombard’s Dario Perkins provided an alternative perspective, noting that while spending cuts remove liquidity, tax-cut stimulus often proves ineffective. That becomes evident when one considers that tax reductions don’t always spur economic activity—businesses have multiple options for deploying those funds.
He concludes the budget plan is “much less reflationary” than previously assumed, reinforcing the potential for a growth slowdown. Combined with money supply and demand trends, I believe fears of resurgent inflation may be significantly overstated.
Another development garnering attention, tied to the goal of reducing long-term bond yields, is the so-called “Mar-a-Lago Accords,” a phrase coined by Bianco Research's James Bianco.
The concept blends dollar devaluation with tariffs to encourage allies to exchange short-term US Treasuries for longer-term, zero-coupon bonds, aiming to ease the US debt burden while boosting export-driven growth. My ability to evaluate the viability of such a plan is limited.
My take is that it resembles an overly orchestrated strategy—one prone to backfiring, with numerous variables that could derail it. I’ll leave speculation on its merits to the reader.
To conclude, the Trump administration’s emphasis on tracking 10-year Treasury yields suggests that overly sanguine growth expectations may be inflated. Recent US economic surprises have declined, reflecting some disappointment with underperforming data.
GDP is now 1% below its initial baseline, a notable setback. Additionally, Trump has yet to enact policies concretely linked to slower growth, which hardly inspires confidence. That doesn't sound promising, either.
What can we infer about the markets’ future trajectories? For stocks, the outlook is uncertain if one anticipates a sustained rally. Recent earnings data remains robust, yet there’s concern they may fall short moving forward.
The stock market appears unsteady, though the odds of an upturn or downturn remain roughly even. Taking Trump’s statements at face value, value stocks could emerge as beneficiaries. Given the global nature of equity markets, this might influence European markets, potentially revitalizing German or broader European SME stocks. Generally, caution is prudent.
My suspicion of a government bond rally has so far proven accurate. With remarks from Trump and Bessent, ongoing focus on 10-year yields, and Elon Musk’s continued advocacy for DOGE, the signs point to declining yields. Chart patterns suggest US Treasuries might retest the 110 level. Broadly, I anticipate lower bond yields ahead.
German Bunds present a more nuanced scenario, with potential obstacles such as debt-brake reforms and a European defense spending initiative. Though I suspect Bunds will track Treasuries downward, intermittent sell-offs remain a potential risk.
My stance on EUR/USD is essentially unchanged. Absent a decisive break above 1.05, setbacks are plausible. Trump’s apparent preference for a weaker dollar suggests a stronger EUR/USD.
Gold retains its luster, with unresolved geopolitical tensions keeping new highs within reach. A growth slowdown sparking widespread sell-offs isn’t imminent in the short term.
Regarding commodities, I lack a firm stance beyond noting that oil (WTI) seems poised to trend lower while copper has retreated from its recent peak. Commodity expert Alexander Stahel anticipates a repeat of May 2024 price movements, arguing there’s no structural bull market for copper.
Overall, evidence of a potential economic slowdown is accumulating. Stocks may face headwinds, while bonds—despite possible dips—could see further gains. Volatility can be an investor’s friend, but remember that "it's dangerous business walking out your front door," especially regarding stocks in such an environment.
My knuckles have turned white
There's no turning back tonight
Kiss me one last time
Shut your eyesUnderoath – It's Dangerous Business Walking Out Your Front Door
Have a great weekend!
Fabian Wintersberger
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All my posts and opinions are purely personal and do not represent the views of any individuals, institutions, or organizations I may be or have been affiliated with, whether professionally or personally. They do not constitute investment advice, and my perspective may change over time in response to evolving facts. IT IS STRONGLY RECOMMENDED TO SEEK INDEPENDENT ADVICE AND CONDUCT YOUR OWN RESEARCH BEFORE MAKING INVESTMENT DECISIONS.
someone said that Trump is the avatar of volatility. I believe that is an excellent description. and that is what we have to look forward to