Today, I see negligence and delusion as the new real reality that we are living in. The soul driver of the U.S. markets is no longer fundamentals or reasoned speculation—it is sheer euphoric exuberance, moody and reactive to sentiment rather than sound policy or performance. Market highs are being celebrated as indicators of recovery and strength, but I believe we are witnessing the classic symptoms of a dead cat bounce—a temporary recovery in asset prices after a major decline, which is doomed to collapse again.
Let’s begin with what we are seeing from a political and policy standpoint. My assessment of Donald Trump is that he tends to be overreactive, often imposing rules and restrictions in a highly erratic manner. On several occasions, he has been seen scaling down severe measures to less-than-moderate levels soon after announcing them. A recent example is the imposition of massive tariffs on China, despite the fact that the two countries share a significant trade deficit. These measures, instead of being strategic, often seem performative—designed for domestic optics rather than long-term economic stability.
Given that the US dollar serves as the global reserve currency, such aggressive trade restrictions could have adverse global effects. Imposing barriers on international trade risks slowing down global commerce, which in turn could dampen demand for the US dollar and lead to its depreciation. The dollar's strength is not simply a function of U.S. domestic performance; it is also a reflection of trust in the U.S. financial system and governance. Investors and foreign governments are generally reluctant to hold assets that are losing value or are perceived to be volatile. The situation could have escalated significantly had it not been for the implementation of the 90-day pause, which helped de-escalate tensions and reassured global markets to some extent.
As seen in the recent chart, the U.S. dollar was losing global demand. The technical chart shows a strong four-year support breakdown. Post-breakdown, the retest was rejected from the 101.437 level, indicating a strong possibility of continued downside movement. In another chart, we observe how bond yields and the dollar index began to decouple. From January 2022 to July 2022, the dollar index rose alongside bond yields, driven by tightening policies. But since then, yields have remained elevated while the dollar has declined. That divergence has meaning—markets are telling us something.
- First, there is the basic negative relationship between bond prices and yields. When investors sell U.S. treasuries, prices fall, and yields rise. An oversupply of treasuries suggests investors are dumping U.S. debt. This sale reduces confidence in U.S. fiscal health, pushing yields up but ironically weakening the dollar—a shift from the usual pattern where rising yields signal confidence.
- Second, we see that the 10-year U.S. Treasury yield surged past 4.5%, its highest since 2007, while the dollar index dropped more than 13% from its 2022 peak of 114.8 to below 100. That’s not investor optimism—that’s fiscal stress. Over $400 billion in foreign holdings of U.S. debt have disappeared since 2022.
- Third, and perhaps most concerning, is the rising possibility that investors are starting to price in a U.S. default premium. If markets doubt the government’s willingness—or ability—to meet its obligations, yields rise not as a reward for investing, but as compensation for taking on perceived risk. That changes everything.
Supporting this, Moody’s has recently downgraded the U.S. economy from AAA to AA1. On the surface, it may seem like a minor downgrade, but context matters. This downgrade affects assets that are supposed to be the safest on the planet. It means that the third implication of the bond-yield divergence—default risk—is no longer theoretical. And if trust is eroded in these so-called “risk-free” assets, the consequences ripple across the global financial system. Inflation expectations will remain elevated because the government’s capacity to borrow cheaply is under pressure. A self-reinforcing loop of fiscal stress is brewing.
Some argue that U.S. corporate earnings are still rising and hence the markets are prospering. That would be reassuring if it told the full story. But when we overlay corporate earnings with the dollar index, we find that they often move inversely. Profits soar in economic booms and fiscal expansion, whereas the dollar strengthens during global crises or U.S. tightening. In 2021, for example, profits surged post-COVID due to massive stimulus packages. Meanwhile, the dollar remained flat. During the 2008 crisis and again in 2022, profits fell while the dollar rose. This is because corporate profits reflect domestic performance, but the dollar index is a mirror of global trust and capital flows. Therefore, using earnings growth to justify high stock valuations, in the face of dollar weakness and bond market distress, is misleading.
Global Treasury Selloff and Dollar Dominance
One of the most telling developments occurred between November 2024 and January 2025, when U.S. Treasuries worth $390 billion were offloaded in just a few months. What makes this especially troubling is that the sell-off wasn’t driven solely by adversaries. It was led by long-standing allies—Japan, the UK, Saudi Arabia, and Canada. Even more telling, Japan, one of America's closest partners, simultaneously ramped up its investments in China by 53%. This is no routine rebalancing. It looks increasingly like a coordinated, strategic shift—a subtle but deliberate signal of discontent. Washington's growing tendency to weaponize the U.S. financial system through sanctions, SWIFT restrictions, asset freezes, and unilateral trade barriers is causing discomfort even among friends. The dollar is no longer viewed merely as a reserve currency—it is being seen as a geopolitical lever. And the more it's used that way, the more incentive the world has to hedge against it. This isn't the dramatic, overnight collapse of dollar dominance; this is diversification by design, gradual and systematic, and far more dangerous because of how quietly and logically it’s unfolding.
The MAGA Manufacturing Dilemma
Then we come to the MAGA manufacturing vision—a central pillar of Trump’s economic agenda. It promises to bring back industrial jobs, reduce reliance on Chinese imports, and shift the U.S. to an export-led economy. The logic is emotionally appealing. But it ignores two hard constraints. First, the U.S. doesn’t have the labor surplus needed to drive such a transformation. The population is aging, and immigration restrictions undercut the skilled and seasonal workforce required for manufacturing. Second, even if supply chains are rebuilt domestically, American products will face a global cost disadvantage. Without massive subsidies or protectionist tariffs, U.S. exports cannot compete. And where tariffs are deployed, retaliation follows—further eroding trade competitiveness. Modern factories are also highly automated, limiting job creation. This makes the MAGA economic dream more symbolic than substantial.
Amid all this, U.S. equity markets continue to soar. It’s reminiscent of every historical catastrophe—irrational highs before the fall. We’ve seen this movie before. It never ends well. Fundamentals and leadership in the U.S. economy are completely haywire. Euphoria, not analysis, is in the driver’s seat. The question is not whether correction will happen—it’s how severe it will be.
“America is a big economy, not a strong economy” - Omkar Patil
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