So as Trump wins, the market is moving accordingly – the obvious narratives are, more spending, more debt, and higher inflation.

Therefore, long term interest rate spiked up, and the DXY spiked up as well, from the expectation of higher inflation and the Fed raising rates.

But something kind of doesn’t add up. I will try to summarize in this post.

Bigger deficit = higher inflation

So I think there is no doubt here this relationship is true.

With the extra spending and increase in income / GDP not catching up, the only way to pay for it is borrowing.

And you can’t just borrow without driving interest rates to the roof, so you print.

And printing will lead to inflation.

Bigger deficit = stronger USD??

So higher inflation means the USD purchasing power is decreasing.

But the DXY actually went up.

So that’s the part that doesn’t quite add up here.

Inflation should lead to a weaker USD.

But because inflation is back, the Fed will raise rate. And if the Fed raise rate, USD will become stronger.

So people expect the “raise rate -> stronger USD” narrative, and money is pouring into the US recently and especially after Trump’s victory.

Even gold dropped against the USD by something like 3%.

Bigger deficit = higher interest rate?????

And here is the kicker.

The whole “inflation = rate hikes” narrative seems reasonable, BUT a big part is not adding up here.

Which is the interest payment on the deficit.

If the deficit goes up, there is already more interest payments to be made.

And more printing will need to be done to make up the payments which is ballooning the bad situation.

So the US will not want high rates, at least from my understanding, maybe not in the near future until they make a big refinancing cycle for longer term debt at a lower rate.

Therefore, my guess is, the higher rates will probably come. And the market already priced that into the 10-year rate.

But in the short term, rates will drop. Maybe significantly as well, depending on how much “excuse” they can come up with.

(conspiracy theory – they will manufacture a crisis or a downturn just so they will get the excuse they need to cut to near zero again before hiking rates again)

The yield curve will probably normalize, big time.

My conclusions and prediction

Maybe there will be a crash. Maybe there won’t be – in other words a soft-landing.

I am not sure.

But there should be a crazy bull market coming then in that case. Inflation will come back like crazy.

Then another tightening cycle, probably starting in 2026-27 (the 4-year cycle).

Using this post to keep track of my insights and wild prediction, let’s see how things really turn out.