Macroeconomic Report: How Trump, the Fed, and Trade Triggered the Largest Market Fluctuation in History

Author: Capital Flows

Compiled by: Deep Tide TechFlow

Macro Report: A Storm is Coming

“What important truths do very few people agree with you on?”

This is a question I ask myself every day when researching the market.

I have models regarding growth, inflation, liquidity, market positions, and prices, but the ultimate core of macro analysis is the quality of creativity. Quantitative funds and emerging AI tools are eliminating every statistical inefficiency in the market, compressing the advantages that once existed. What remains is the macro volatility expressed over longer time periods.

The truth

Let me share a truth that few people agree with:

I believe that in the next 12 months, we will see a significant increase in macro volatility, the scale of which will surpass that of 2022, the COVID-19 pandemic, and may even exceed the 2008 financial crisis.

But this time the source of the volatility will be the planned depreciation of the US dollar against major currencies. Most people believe that the decline of the dollar or “dollar depreciation” will drive up risk assets, but the reality is just the opposite. I believe this is precisely the biggest risk in today's market.

In the past, most investors believed that mortgages were too safe to trigger systemic panic, while also overlooking that credit default swaps (CDS) were too complex and irrelevant. Now, the complacency in the market regarding the potential depreciation of the dollar still exists. Hardly anyone has delved into this depreciation mechanism, which could shift from being a barometer to a real risk for asset prices. You can uncover this blind spot by discussing the issue with others. They insist that a weaker dollar always benefits risk assets and assume that the Federal Reserve will intervene whenever serious problems arise. It is this mindset that makes a deliberately designed depreciation of the dollar more likely to lead to a decline in risk assets rather than an increase.

The Road to the Future

In this article, I will elaborate on how this mechanism works, how to identify the signals of when this risk manifests, and which assets will be most affected (including both positive and negative impacts).

All of this comes down to the intersection of three major factors, which are accelerating as we approach 2026:

The liquidity imbalance caused by global cross-border capital flows has led to systemic vulnerabilities.

The Trump administration's stance on currency, geopolitics, and trade;

The new appointment of the Federal Reserve Chairman will coordinate its monetary policy with Trump's negotiation strategy.

The Root Cause of Imbalance

For many years, unbalanced cross-border capital flows have led to a structural liquidity imbalance. The key issue is not the scale of global debt, but how these capital flows shape balance sheets, making them inherently fragile. This dynamic is similar to the situation with adjustable-rate mortgages before the global financial crisis (GFC). Once this imbalance begins to reverse, the structure of the system itself accelerates the correction, liquidity rapidly dries up, and the entire process becomes difficult to control. This is a mechanical fragility embedded in the system.

It all started with the United States playing the role of the world's only “buyer.” Due to the strong position of the dollar as a reserve currency, the U.S. can import goods at prices far below domestic production costs. Whenever the U.S. purchases goods from elsewhere in the world, it pays in dollars. In most cases, these dollars are reinvested by foreign holders into U.S. assets to maintain trade relations, simply because the U.S. market is almost the only choice. After all, where else can you bet on the AI revolution, robotics, or people like Elon Musk, besides the U.S.?

This cycle repeats itself continuously: the United States purchases goods → pays dollars to foreigners → foreigners use these dollars to buy American assets → the United States can therefore continue to purchase more cheap goods, as foreigners continue to hold dollars and American assets.

This cycle has led to severe imbalances, with the U.S. current account (the difference between imports and exports, shown by the white line) being in an extreme state. On the other hand, foreign investment in U.S. assets (shown by the blue line) has also reached a historical high.

This is precisely why we have seen the valuation of the S&P 500 index (price-to-sales ratio) reach a historic high when foreign investors indiscriminately purchase American assets in order to continue exporting goods and services to the United States:

The traditional stock valuation framework originates from the value investment philosophy advocated by Warren Buffett. This approach performs well during periods of limited global trade and lower liquidity within the system. However, what is often overlooked is that global trade itself can expand liquidity. From the perspective of economic accounts, one end of the current account corresponds to the other end of the capital account.

In practice, when two countries engage in trade, their balance sheets guarantee each other, and these cross-border capital flows exert a strong influence on asset prices.

For the United States, as the world's largest importer of goods, a large amount of capital flows into the country, which is also why the ratio of the total market value to GDP in the U.S. is significantly higher than in the 1980s—an era defined by the value investing framework established by Benjamin Graham and David Dodd in “Security Analysis.” This is not to say that valuation is not important, but from the perspective of total market value, this change is driven more by changes in macro liquidity rather than the so-called “Mr. Market's irrational behavior.”

One of the main sources that drove the fragile capital structure of the mortgage market before the outbreak of the Global Financial Crisis (GFC) was foreign investors purchasing debt from the US private sector.

Michael Burry's bet during the global financial crisis, known as the “Big Short on Subprime Mortgages,” was based on insights into fragile capital structures, while liquidity is a key factor that is repriced with changes in domestic and cross-border capital flows. This is also why I believe there is a very interesting connection between Michael Burry's current analysis and the cross-border liquidity analysis I am conducting.

Foreign investors are injecting more and more capital into the United States, with both foreign capital inflows and passive investment inflows increasingly concentrated in the top seven stocks of the S&P 500 index.

It is important to note the type of imbalance here. Brad Setser provided an excellent analysis of this, explaining the dynamics of arbitrage trading (carry trade) in cross-border capital flows and how it has structurally triggered extreme complacency in the market.

Why is all of this so important? Because many financial models (which I believe are incorrect) assume that in the event of future financial instability—such as a sell-off in the US stock or credit markets—the dollar will appreciate. This assumption makes it easier for investors to continue holding unhedged dollar assets.

This logic can be simply summarized as: Yes, my fund currently has a very high weight in U.S. products, because the “dominance” of the U.S. in the global stock indices is indisputable, but this risk is partially offset by the natural hedge provided by the dollar. This is because the dollar usually rises when bad news emerges. During significant stock market corrections (such as in 2008 or 2020, although for different reasons), the dollar may strengthen, and hedging dollar risk effectively cancels out this natural hedge.

Moreover, based on past correlations, the expectation that the US dollar serves as a hedging tool for the stock (or credit) market has also increased current returns. This provides justification for not hedging exposure to the US market during periods of high hedging costs.

However, the problem is that past correlations may not persist.

If the rise of the US dollar in 2008 was not due to its status as a reserve currency, but rather because financing currencies typically appreciate when carry trades are unwound (while the destination currencies usually depreciate), then investors should not assume that the US dollar will continue to rise during future periods of instability.

One thing is for sure: the United States is currently the recipient of most arbitrage trades.

Foreign capital did not flow out of the United States during the global financial crisis

This is the key difference between today's world and the past: the returns for foreign investors in the S&P 500 depend not only on the returns of the index but also on the returns of the currency. If the S&P 500 rises by 10% in a year, but the dollar depreciates against the investor's local currency by the same magnitude, this does not mean a positive return for foreign investors.

The following is a comparison chart between the S&P 500 Index (blue line) and the hedged S&P 500 Index. It can be seen that considering currency changes significantly alters the investment returns over the years. Now, imagine what would happen if the changes over these years were compressed into a short time period. This enormous risk driven by cross-border capital flows could be magnified.

This leads us to a catalyst that is accelerating towards us - it is putting global arbitrage trading at risk: the Trump administration's stance on currency, geopolitics, and trade.

Trump, Forex and Economic War

At the beginning of this year, two very specific macro changes have emerged, accelerating the accumulation of potential risks in the global balance of payments system.

We see that the depreciation of the dollar occurs simultaneously with the decline of the U.S. stock market, and this phenomenon is driven by tariff policies and cross-border capital flows, rather than domestic default issues. This is precisely the kind of risk stemming from the imbalances I mentioned earlier. The real issue is that if the dollar depreciates while the U.S. stock market is declining, any interventions by the Federal Reserve will further depress the dollar, which will almost inevitably amplify the downward pressure on the U.S. stock market (contrary to the traditional view of the “Fed Put”).

When the source of the sell-off is external and currency-based, the Fed's position will become even more difficult. This phenomenon indicates that we have entered the “macro end game,” in which currency is becoming the asymmetric key pivot of everything.

Trump and Bessent are openly pushing for a weaker dollar and using tariffs as leverage to gain the upper hand in the economic conflict with China. If you haven't yet followed my previous research on China and its economic war against the United States, you can watch my recorded YouTube video titled “The Geopolitical End Game.”

The core idea is that China is deliberately weakening the industrial base of other countries, thereby creating dependence on China and generating leverage to achieve its broader strategic goals.

From the moment Trump took office (red arrow), the US Dollar Index (DXY) began to decline, and this was just the beginning.

It is noted that short-end real rates are one of the main factors driving the US dollar index (DXY), which means that monetary policy and Trump's tariff policy are key driving factors of this trend.

Trump needs the Federal Reserve to adopt a more accommodative stance on monetary policy, not only to stimulate the economy but also to weaken the dollar. This is one of the reasons he appointed Steven Miran to the Federal Reserve Board, as Miran has an in-depth understanding of the workings of global trade.

What was the first thing Milan did after taking office? He placed his dot plot projections a full 100 basis points below the forecasts of other Federal Open Market Committee (FOMC) members. This is a clear signal: he is extremely inclined towards a dovish stance and is trying to guide other members towards a more accommodative direction.

Core viewpoint:

There is a core dilemma here: the United States is in a real economic conflict with China and must respond proactively, or it risks losing its strategic dominance. However, the weak dollar policy achieved through extremely loose monetary policy and aggressive trade negotiations is a double-edged sword. In the short term, it can boost domestic liquidity, but it also suppresses cross-border capital flows.

A weak dollar may lead foreign investors to reduce their exposure to U.S. stocks while the dollar depreciates, as they need to adjust to new trade conditions and the changing foreign exchange environment. This puts the U.S. on the edge of a cliff: one path is to confront China's economic aggression head-on, while the other path risks a significant repricing of the U.S. stock market due to the dollar's depreciation against major currencies.

The new Federal Reserve Chairman, the midterm elections, and Trump's “Great Game”

We are witnessing the formation of a global imbalance that is directly related to cross-border capital flows and currency pegs. Since Trump took office, this imbalance has accelerated, as he began to confront the largest structural distortions in the system, including the economic conflict with China. These dynamics are not theoretical assumptions, but are already reshaping markets and global trade. All of this is laying the groundwork for next year's catalytic events: the new Federal Reserve Chair will take office during the midterm elections, while Trump will enter the last two years of his term, determined to leave a significant mark in American history.

I believe that Trump will push the Federal Reserve to adopt the most aggressive dovish monetary policy to achieve the goal of a weak dollar, until inflation risks force a reversal of policy. Most investors assume that a dovish Federal Reserve is always beneficial for the stock market, but this assumption only holds when the economy is resilient. Once dovish policies trigger adjustments in cross-border capital positions, this logic will collapse.

If you have followed my research, you would know that long-term interest rates always price in central bank policy mistakes. When the Federal Reserve cuts rates too aggressively, long-term yields rise, and the yield curve experiences bear steepening to counteract policy errors. The current advantage for the Federal Reserve is that inflation expectations (see chart: 2-year inflation swap) have been declining for a month in a row, which alters the risk balance and allows them to take a dovish stance in the short term without triggering significant inflationary pressures.

With the decline in inflation expectations, we have received news about the new chairman of the Federal Reserve, who will take office next year and may be more aligned with Miran's position rather than the views of other Fed governors:

If the Federal Reserve adjusts the terminal rate (currently reflected in the eighth SOFR contract) to better align with changes in inflation expectations, this will begin to lower real interest rates and further weaken the dollar: (because inflation risks have just decreased, the Federal Reserve has room to do this).

We have seen that the recent rise in real interest rates (white line) has slowed the downward trend of the dollar (blue line), but this is creating greater imbalances and paving the way for further rate cuts, which is likely to push the dollar lower.

If Trump wants to reverse the global trade imbalance and confront China in economic conflicts and artificial intelligence competition, he needs a significantly weaker dollar. Tariffs provide him with negotiating leverage to reach trade agreements that align with a weak dollar strategy while maintaining U.S. dominance.

The problem is that Trump and Bessent must find a balance amid multiple challenges: avoiding politically damaging outcomes before the midterm elections, managing a Federal Reserve that has several less dovish stances internally, while hoping that a weaker dollar strategy does not trigger foreign investors to sell off U.S. stocks, thereby widening credit spreads and impacting the fragile labor market. This combination easily pushes the economy to the brink of recession.

The biggest risk is that current market valuations are at historically extreme levels, making the stock market more sensitive to changes in liquidity than ever before. This is why I believe we are approaching a significant turning point within the next 12 months. Potential catalysts that could trigger a stock market sell-off are increasing sharply.

“What important truths do few people agree with you on?”

The market is entering a structurally risky environment with almost no pricing, in a state akin to sleepwalking: an artificially manipulated devaluation of the dollar, which will turn what investors consider tailwinds into the main source of volatility over the next year. The complacency surrounding a weak dollar is reminiscent of the complacency surrounding mortgages before 2008, which is why a deliberate devaluation of the dollar could have a greater impact on risk assets than investors expect.

I firmly believe that this is the most overlooked and misunderstood risk in the global market. I have been actively building models and strategies around this single tail event to massively short the market when a structural collapse actually occurs.

Grasp the timing of macro turning points

What I want to do now is to directly link these ideas with specific signals that can reveal when certain risks are rising, especially when cross-border capital flows begin to change the structure of macro liquidity.

Positioning unwinds frequently occur in the U.S. stock market, but understanding the driving factors behind them determines the severity of the selling pressure. If the adjustments are driven by cross-border capital flows, the market's vulnerability will be greater, and the awareness of risk needs to be significantly heightened.

The chart below shows the main time periods when cross-border funding positions began to exert greater selling pressure on the U.S. stock market. Monitoring this will be crucial:

Note that since the market sell-off in March, the rebound of the Euro against the Dollar (EURUSD) and the surge in call skew have led to a higher baseline level of bullish options skew in the market. This elevated baseline is almost certainly related to potential structural position risks in cross-border capital flows.

Whenever cross-border capital flows become a source of liquidity expansion or contraction, this is directly related to net flows through foreign exchange (FX). Understanding the specific positions of foreign investors' increasing and decreasing holdings in the U.S. stock market is crucial, as this will serve as a signal for the beginning of rising risks.

I suggest that everyone track this dynamic primarily through the factor models provided by https://www.liquidationnation.ai/. The fundamental performance of factors, industries, and themes is a key signal for understanding how capital flows operate within the system.

This is especially important for the topic of artificial intelligence (AI), as an increasing amount of capital is disproportionately concentrated in this area:

To further explain the connections of these fund flows, I will publish an interview with Jared Kubin for subscribers in the first week of December (you should follow him on Twitter: link). He is the founder of https://www.liquidationnation.ai/ and a valuable resource in my learning journey.

The main signals of cross-border sell-offs include ###

The US dollar depreciates against major currencies, while cross-asset implied volatility rises.

Observing the skew of major currency pairs will be key to confirming signals.

As the US dollar falls, the stock market is also experiencing sell-offs.

The downward pressure in the stock market may be led by high beta stocks or thematic sectors, while low-quality stocks will suffer a greater impact (which is also why you should pay attention to https://www.liquidationnation.ai/).

Cross-asset and cross-border correlations may approach 1.

Even a small adjustment in the world's largest imbalances could lead to a high degree of correlation between assets. Observing the stock markets and factor performance of other countries will be crucial.

Final signal: The Federal Reserve's injection of liquidity has led to a further decline in the US dollar and intensified the selling pressure in the stock market.

If the depreciation of the dollar caused by policy leads to domestic stagflation pressure, this situation will be more dangerous.

Although gold and silver saw a slight increase during the cross-border sell-off earlier this year, they still experienced sell-offs during the real market crash due to their cross-collateralization with the entire system. While holding gold and silver may have upside potential, they do not provide diversified returns when the VIX (Volatility Index) truly spikes. The only way to profit is through active trading, holding hedge positions, shorting the dollar, and going long on volatility.

The biggest problem is that we are currently in a phase of the economic cycle where the real return on cash holdings is becoming increasingly low. This situation systematically forces capital to move forward along the risk curve in order to establish net long positions before the liquidity shifts. Timing this transition is crucial, as the risk of not holding stocks during the credit cycle is as significant as the risk of not having a hedge or holding cash during a bear market.

The Macro End Game

The core message is simple: the global market is ignoring the most significant single risk in this cycle. The deliberate devaluation of the dollar, combined with extreme cross-border imbalances and excessive valuations, is brewing a volatility event, reminiscent of the complacency we saw before 2008. While you cannot predict the future, you can analyze the present correctly. Current signals have indicated that pressure is gradually building beneath the surface.

Understanding these mechanisms is crucial because it tells you which signals to pay attention to, and these signals will become more pronounced as risks approach. Awareness itself is an advantage. Most investors still assume that a weakening dollar will automatically benefit the market. This assumption is dangerous and incorrect today, just like the belief in 2007 that mortgages were “too safe.” This marks the silent beginning of the macro endgame, where global liquidity structures and monetary dynamics will become the decisive driving forces for every major asset class.

Currently, I am still bullish on stocks, gold, and silver. But a storm is brewing. When my models start to show a gradual increase in this risk, I will shift to a bearish outlook on stocks and immediately inform my subscribers of this change.

If 2008 taught us anything, it is that warning signals can always be found, as long as you know where to look. Monitor the right signals, understand the dynamics behind them, and when the tide turns, you will be ready.