January 7, 2025
Summary
The speaker defined 2025 as the “year of transformation, policy transformation,” with the base case being continued divergence between the US, China, and Europe. US economic resilience, deregulation, and the concentration of technology assets in US equities provide support; China and Europe are racing policy support against economic deterioration, while Japan is racing monetary-policy tightening against rising inflation expectations. He assigns roughly a 30% probability to tail risks triggered by policy shifts and positions accordingly with a large allocation to LEAP calls plus some cash, balancing caution with aggression.
The sharp US equity selloff from Christmas through New Year’s looked more like a low-liquidity position flush than a fundamental turn. Dealer gamma had reached roughly $12.3B before flipping from positive to about negative $300M by January 3 after year-end expiries; combined with thin trading, that produced “buy once and it explodes, sell once and it collapses.” Roughly $19B of equity selling nonetheless cleared some crowded positioning. “Price only means something with volume; there was no volume, so it was just a setup” （“价钱带上量才有意义，它没有量，所以它就是摆个盘”）.
The short-term view on US equities remains bullish, with the window likely extending until before Trump’s inauguration. CTAs have not breached key sell levels, and the early-January rebound could even prompt them to buy back in; the first two weeks of the new year are also typically a period of portfolio rebuilding and strong inflows. The real test is how tariffs, immigration, spending cuts, and deregulation are implemented—not the Republican majority itself.
The dollar has broken out of its long-standing ranges against the euro, yen, and renminbi, and the marginal driver is shifting from hedge funds to real money. Trade and investment flows in Europe, Japan, and elsewhere are beginning to reduce their dollar hedges, suggesting a strong dollar could become a year-long trend. EUR/USD at 1 is viewed as “a fairly fair price,” while three-month implied volatility has risen from roughly 6% to 8%, still below the roughly 10% seen during Trump’s previous trade-war period.
The renminbi may remain controlled around 7.2–7.3 in the near term, but the six- to 12-month direction points to 7.4–7.5. One-month implied volatility is around 5.8% and six-month volatility around 6.7%, indicating the market is pricing “controllable in the short term, uncontrollable over six months.” February could bring an initial hit from China-tariff headlines, followed by a potential recovery driven by Chinese policy. “An executive order and legislation are two different things”: measures targeting China may come first, but implementation still has room for negotiation.
The core Treasury trade is curve steepening: the front end can fall as rate-cut expectations are repriced back in, while supply constraints make a meaningful decline in the long end difficult. The speaker expects at least 2 rate cuts in 2025, most likely in June and at year-end. Gross issuance for 2025 is expected to be roughly $850B, equivalent to about $850M of DV01—below 2024’s roughly $1.1B, but still enough to keep pressure on the long end. “Long-end yields not coming down” also means current levels remain hostile to liquidity-sensitive assets.
A strong dollar and elevated long-end yields will continue to sort risk assets: profitable US equities should outperform, while gold and bitcoin remain under pressure and A-shares wait for policy to catch up with deflation. The speaker was blunt that this bitcoin rally was “basically all pulled up by Binance”; long-end yields were around 4% during the climb, whereas rates are higher now, making it harder to sustain elevated prices through continued “human-driven” support. A-shares could see relief when policy is genuinely deployed, but the outcome still depends on whether the scale of support can keep pace with the speed of deflation.
Deep dive
1. The 2025 investment theme is global divergence under policy transformation
The speaker used a three-year rotation to explain the market’s changing focus: 2023 was the “AI year” ignited by ChatGPT; 2024 centered on whether the US could achieve a soft landing, contain inflation, and navigate the Fed’s path; 2025 enters “policy transformation,” with policy shifts in both China and the US increasing uncertainty.
The US market remains the relative outperformer in the base case: economic fundamentals are stronger, Trump could advance energy policy through executive orders and support equities through deregulation, and “most technology or emerging-technology projects are in US equities,” making continued relative strength in US capital markets the most likely outcome.
China and Europe face the same question: whether policy support can race ahead of economic deterioration. Japan faces the inverse problem—whether monetary-policy tightening can catch up with rising inflation expectations.
He assigns roughly 30% to non-base-case outcomes, including tariffs, immigration, budget cuts, and European risks. The debt-ceiling episode has reduced some of his concern about spending cuts, but “the probability of a black-swan tail risk is larger than we think” （“黑天鹅的尾部风险发生概率比我们想象的要大”）.
His asset allocation combines caution with aggression: a relatively large allocation to LEAP calls, plus some cash.
2. Year-end US equity volatility looked more like a position flush than a fundamental turn
Dealer gamma had previously reached roughly $12.3B, meaning every one-point move in the index required massive hedging. After a large volume of options expired at year-end, gamma had flipped to about negative $300M by January 3, removing the market’s previous volatility dampener.
Trading was extremely thin over Christmas, magnifying the effect of positioning on prices. The speaker’s advice to investors at the time was “don’t look at it,” because “price only means something with volume”; a low-volume decline could still reverse quickly and should not be read directly as a fundamental signal.
Roughly $19B of equity selling that week reflected a mix of profit-taking, year-end repositioning, and gamma hedging. The result was a cleanup of previously oversized US equity positions, leaving the market structure “slightly healthier” than before Christmas.
CTAs did not trigger large-scale selling during the decline, and the following 2 days could instead prompt them to buy back in. Combined with fund repositioning during the first 2 weeks of the new year, the speaker’s tactical call was that markets “should still be reasonably good” before Trump’s inauguration, after which investors would wait for policy implementation.
3. After the dollar breaks out of its range, real money starts to take over
After Trump’s election victory, hedge funds had already bought large amounts of long-dollar options. When liquidity deteriorated at year-end, exchange rates repeatedly broke through option barriers and gamma walls, triggering procyclical hedging and pushing the dollar out of its previous ranges against the euro, yen, and renminbi simultaneously.
The initial rally was driven mainly by leveraged money; now real money has “stepped in to long dollar.” Trade and investment flows are beginning to reduce their dollar hedges, leading the speaker to conclude that the dollar is not close to an obvious peak and could continue trending higher over the next year.
Three-month EUR/USD implied volatility has risen from roughly 6% to 8%, showing that the market has finally begun pricing tariffs and currency volatility, though it remains below the roughly 10% reached during Trump’s previous trade war. If the Fed stops cutting around March while the ECB and Bank of England continue to cut, he considers EUR/USD at 1 reasonable; the yen depends on the pace of Japanese rate hikes.
One-month renminbi volatility is around 5.8% and six-month volatility around 6.7%, consistent with a near-term view of 7.2–7.3 and a six- to 12-month view of 7.4–7.5. February could bring an initial weakening on China-tariff headlines, followed by a potential recovery alongside Chinese policy. An executive order can be issued immediately, but actual implementation still leaves room for negotiation.
4. A Republican majority does not guarantee policy passage, and the Treasury curve should keep steepening
The speaker emphasized the deep divisions among congressional conservatives, the MAGA base, and the Silicon Valley faction represented by Musk and Peter Thiel. After the Twitter dispute, Trump sided with Musk, showing that a coalition capable of winning an election does not mean it can “pass every policy at will.”
The debt ceiling is merely one of the easier hurdles; tax cuts will be harder. Conservative Republicans may not fully support many tax-cut proposals, forcing Republicans to negotiate with Democrats in Congress. Democrats may in turn demand that some Obamacare provisions remain, making policy coordination vulnerable to last-minute delays.
The Treasury can draw on roughly $700B in the TGA, funding the government through around July. The issue will likely be resolved in March, while the real debt-ceiling pressure point comes in July. He does not expect a repeat of the 2023 or Obama-era shutdowns and market crashes, but sees recurring “glitches” and small bouts of volatility during implementation.
Treasury issuance in 2025 is expected to total roughly $850B in face value, equivalent to about $850M of DV01—below 2024’s roughly $1.1B but still substantial. His near-term estimates are around $73M of DV01 for Q1 and $90M for January. If the market reprices from today’s no-cut or few-cut expectations to 2 cuts in 2025—most likely one each in June and at year-end—the front end can rally, while supply keeps the long end elevated and the curve continues to steepen.
5. A strong dollar and high long-end yields will reorder the risk-asset landscape
The base case is not a synchronized selloff across all risk assets: a strong dollar can still benefit the US market, while equities with deregulation and earnings support should outperform. Gold and other assets highly dependent on liquidity face the dual pressure of a stronger dollar and higher rates.
On bitcoin, the speaker was direct: “This bitcoin rally was basically all pulled up by Binance” （“这一轮比特币基本上全是靠币安给拉起来的”）. Long-end yields were around 4% during the earlier climb; with rates higher now, it is difficult to keep prices elevated through continued “human-driven” support.
He compared the plight of A-shares to a patient suffering massive blood loss: the Politburo meeting is the doctor writing the prescription, while implementation after the Two Sessions is the trip to the pharmacy to fill it. The market expected the medicine to arrive immediately, but it did not; then, from the US side, A-shares could be “stabbed by someone” during a downturn, with Trump’s return and tariffs adding further pressure.
A-shares could enjoy a relief rally when support policies are actually implemented, but the year’s fundamental question remains whether “policy to contain deflation can catch up with the speed of deflation.” For now, the answer is “it still clearly cannot.” If the US economy ultimately enters a genuine recession, all of the above views on the dollar, rates, bonds, foreign exchange, and equities would have to change.