How to Understand the Recent Downtrend: The First Wave of 'Trump Shock' Hits

Author: @Web3_Mario

Summary: The cryptocurrency market experienced a significant pullback last week, which was generally attributed to Federal Reserve Chairman Powell’s so-called ‘hawkish rate cut’ and raised concerns in the risk market about inflation and economic recession. However, according to my analysis, this is likely only a secondary factor causing capital panic. The real impact lies in Trump’s strong pressure on the short-term spending bill in Congress initiated jointly with Musk last Wednesday, and even the uncertainty sparked by the threat to cancel the debt ceiling rules, which ignited the flight-to-safety sentiment of funds.

Powell is afraid of being scapegoated. Macro data alone is not enough to trigger market panic over monetary policy risks.

Last Thursday’s FOMC rate decision met market expectations, ending with a 25BP reduction. The market generally attributes the decline in the risk market to two factors. Firstly, according to the dot plot, this meeting did not achieve unanimous agreement. Cleveland Fed President Hamak tends to keep rates unchanged. Secondly, the median target rate for the next 25 years has been raised to 3.75% - 4.00%, compared to 3.25% - 3.5% in the previous September dot plot. Rate cut expectations have been reduced from 4 cuts to 2. Here, let me briefly introduce the dot plot, which refers to a chart tool used by the Fed to express policymakers’ expectations for future interest rate paths. It is part of the Summary of Economic Projections (SEP) released during the Federal Open Market Committee (FOMC) meeting, usually published four times a year, mainly for observing policy consensus within the Fed.

In addition, during the subsequent Q&A session, some of Powell’s remarks were interpreted by the market as hawkish guidance, mainly including two aspects: first, he seemed to show concerns about the inflation outlook for the next year, and second, he did not give a positive response to the establishment of Bitcoin reserves by the Fed. However, after reading the entire article, it seems that Powell’s concerns about inflation risks do not come from changes in certain macro indicators, but more from the uncertainty of Trump’s policies. At the same time, he also expressed enough confidence in the future economic outlook.

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 Fed’s decision and related content were released. It can be seen that the long-term interest rate did rise, but it did not have a significant impact on the 1-year yield, which indicates that the market is indeed more concerned about the long-term economic outlook, but at least the risk is not expected to happen in the short term.

The prices of 30-day federal funds futures contracts expiring in December 25th can indicate that the market has already anticipated the prospects of two rate cuts in the future as early as November, so it seems inadequate to attribute the pullback mainly to the risks of future rate decisions by the Federal Reserve. Here’s one more point to add, the calculation of implied rates is done 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, with both PCE year-on-year and core PCE year-on-year growth rates staying below 2.5. At the same time, the expected inflation rate is also stable, and the unemployment rate has not shown a significant increase. In addition, non-farm employment in November has also increased compared to before, which also indicates that the job market has shown a strong side. Considering Trump’s tax reduction in the future, the final GDP growth also tends to be stable, and there is no significant decline in any details. Therefore, from the perspective of macro data, there is no data to support the judgment of future inflation or economic recession in the next year. This also shows that Powell’s concerns still come from the uncertain policy effects of Trump.

Let me explain one point here. The Dow Jones Industrial Average has been continuously falling to record lows. Some friends think that this reflects the market’s pessimism about the future prospects of American industry. However, after further investigation, it seems that the main reason for this impact is not systemic risk, but rather a significant downward revision of UnitedHealth Group’s health insurance. First of all, the Dow Jones Industrial Average (DJIA) is a price-weighted index, which means that the impact of each component stock 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%. However, in the latest individual stock weightings, UnitedHealth Group’s weight has dropped to 7.08%. Its stock price has fallen from 613 on December 4th 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 UnitedHealth Group, not systemic risk. So what happened to UnitedHealth Group? The main cause is the shooting incident outside the Hilton Hotel in Manhattan, New York, on December 5th, involving UNH’s CEO Brian Thompson, who was shot multiple times and died after being taken to the hospital. The shooter’s name is Luigi Mangione, who has a good social background. The interrogation process showed that his actions were more driven by the exploitation of the American people by UNH in terms of health insurance, which triggered widespread sympathy in society and ignited the long-standing contradiction of expensive medical costs in the United States. This also aligns with Trump’s direction of healthcare reform. Therefore, the resonance of these two factors caused a significant drop in the stock price, which I won’t go into detail here.

Of course, regarding the little episode about Bitcoin reserves, I think Powell’s attitude is not actually very important, as he himself said, the decision on whether 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 former is managed by the U.S. Department of Energy, and the latter by the Treasury Department. Of course, the management process involves cooperation from other departments, such as the SEC, CFTC, and other regulatory bodies, as well as 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 main reason, in the author’s opinion, is 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, which ignited the flight-to-safety sentiment of funds.

Trump threatens to permanently cancel the debt ceiling, casting a shadow over the traditional US dollar credit system, and the market begins to engage in safe-haven trading.

I don’t know how many little friends paid attention to the game of short-term spending in the U.S. Congress last week. On Tuesday, December 17, Speaker of the House Mike Johnson reached a short-term agreement with the Democrats 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 criticize the proposal in X, believing that the proposal seriously infringed on taxpayers’ rights, leading to the rapid rejection of the proposal.

Meanwhile, the whole process also gained support from Trump, who 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 are caused by the Biden Democratic government and should be solved by him. Afterwards, the Republican Party quickly revised the new spending bill, not only removing some compromising expenditures, but also adding proposals to abolish or suspend the debt ceiling. However, the proposal failed to pass the House of Representatives on Thursday (December 19th), with 174 votes in favor and 235 votes against. This also raised the risk of a government shutdown. Of course, in the end, on December 20th, the House of Representatives finally passed a new temporary spending bill, just a few hours before the deadline, which removed the amendment proposal for the debt ceiling.

Although the new spending bill has been passed, avoiding a partial shutdown of government agencies, 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 largest among all US presidents, especially with absolute dominance in the House of Representatives. The newly elected members of the House will be sworn in and take office on January 3rd. At that time, the possibility of passing the abolition of the debt ceiling will greatly increase, so let’s analyze the impact it 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. It was first established in 1917. This limit is set by Congress to restrict the growth of government debt. The purpose of the debt ceiling is to prevent the government from borrowing excessively, but it is not an effective means of controlling the level of debt. It simply represents the upper limit of legal borrowing for the government. In addition to establishing fiscal discipline, the debt ceiling is also an important weapon in the political game between the two parties. The opposition party often uses the risk of government shutdown caused by attacking the ruling party’s spending bills to gain more bargaining power.

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

In 2011-2013: In 2011, the United States faced a serious debt ceiling crisis. At that time, the 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 default, in October 2013, the U.S. Congress passed a bill to suspend the debt ceiling and allow the government to borrow until February 2014. At that time, the U.S. debt level was close to the limit, and suspending the debt ceiling avoided the risk of government default.

In 2017-2019: In 2017, the US 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 linked to agreements on the budget and government spending. This suspension enabled the US government to avoid a potential default.

l 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.

In 2021: In December 2021, in order to avoid a US government default, Congress passed a temporary debt limit 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 October 2021 deadline, avoiding the risk of default.

It can be seen that every time the debt ceiling is suspended, it is to deal with certain special events, such as the financial crisis in 2008 and the epidemic in 2021. However, why raising the issue of canceling the debt ceiling at this time would have such an impact is mainly due to the current scale of the U.S. debt. Currently, the ratio of U.S. public debt to GDP has reached its historical peak, exceeding 120%. If the debt ceiling is abolished at this time, it means that the United States will be unconstrained by any fiscal discipline for a considerable period of time in the future, and the impact on the U.S. credit system is in fact unpredictable.

So why does Trump need to do this? The reason is simple: to get through the short-term risk of a debt crisis. We already know that reducing taxes and lowering public debt are the two most important goals in Trump’s governance focus. However, while tax cuts can increase economic vitality, they are bound to cause a short-term decrease in government revenue. Of course, the resulting fiscal gap may be offset by increasing tariffs. However, considering that manufacturing countries can respond by lowering their exchange rates, this is why the US dollar index still maintains a strong position during the interest rate reduction cycle recently. The core is still that various countries are preparing for possible trade wars. At the same time, the potential decline in profits of domestic enterprises caused by cutting fiscal expenditures has cast a shadow over economic growth potential. Therefore, in order to get through the painful period of implementing this policy, Trump of course hopes to solve this problem once and for all by abolishing the shackles of the debt limit and relying on continued borrowing to get through the fiscal crisis in the short term.

Finally, let’s take a look at why it will have an impact on cryptocurrencies. I think the core is the blow to the narrative of Bitcoin reserves. We know that in the recent core narrative of cryptocurrencies, the United States’ solution to the debt crisis through establishing Bitcoin reserves is an important part. However, if Trump directly abolishes the debt ceiling rule, it is equivalent to indirectly undermining the value of this narrative. In the previous analysis, we have already mentioned that the current cryptocurrency is in the stage of seeking new value support, so it is easy to understand the profit-taking and risk-avoidance triggered. Therefore, I believe that in the coming period of time, the priority of observing the Trump team’s policies is obviously higher than other factors and needs continuous attention.