The Algebris Bullet | The Myth of Exceptionalism

The sweeping Republican victory in US elections revived the American dream. President Trump would be a positive disruptive force for America. Active fiscal policy and tariffs would boost internal demand, and supply-side economics would provide funding and expand capacity. US macro would undoubtedly benefit, although perhaps at the cost of temporary higher inflation and interest rates. The rest of the world would bear the cost via weaker currency and US onshoring. America would be exceptional again.

The first two months of the new administration tell a different story. US macro policy is more focused on appeasing the electoral base than on generating growth. The lack of predictability generates uncertainty. The combination of the two subtracts from growth. Furthermore, midterm elections are still far away, and policy flexibility is limited. The bar for policy to support the economy is higher than the market thinks. We suspect an imminent growth scare is about to come that risk assets are not priced for.

US economic data are deteriorating meaningfully. Jobless claims are on the rise, pushing non-farm payrolls to six-months low, and the unemployment rate above 4%. Economic surprises have been trending down steadily since November (Chart 1).

Consumer confidence, the key driver of the 2023-24 expansion, has deteriorated in 2025-to-date (Chart 2), driven by the perceived impact on business and labor market conditions. Real time gauges of US GDP are dropping sharply (Chart 3), driven by import surges but also by more tepid consumer spending.

The first actual policy steps are not encouraging either. The administration is frontloading growth-unfriendly policies, such as job cuts in the public sector and trade restrictions (Table 1). The US tariff rate rose to 4% this year and may increase to 10-15% if and when fully implemented. Recent IMF research estimates the US growth drag from tariffs at 0.8% over one year. According to the plan, the bulk of growth expansion should be driven by tax cuts. These will take time to materialize as they have to go through Congress and funding remains a challenge.

The cost of a US downturn is high as the policy space to respond to it is limited. US debt is high and bound to increase on a growth shock (Chart 5). Interest costs are just shy of 3% of GDP, leaving little space for primary spending. US inflation runs above target and stopped slowing in late 2023 (Chart 6). A trade-induced slowdown is not obviously deflationary, leaving the Fed in a tough spot. Secretary Bessent has stressed that the administration’s measure of success is more likely to be the price of ten-year Treasuries than the price of equity. President Trump has strengthened this message. This rhetoric aligns with a lack of urgency regarding supportive policy.

US exceptionalism is fading in the data, but well alive in markets. The S&P 500 trades at 23x, 15% above the ten year average. The US Dollar real exchange rate is at forty year highs, despite the US having grown slower than most of Asia for the past twenty years. Both trends are reverting fast (Charts 7 and 8), but multi-year indigestion of US assets suggests room for further correction.

Risk assets have flourished recently, but large macro adjustments are in place in the United States. This may lead to a quick re-pricing of the winners of the past two years. We see US equities and the US Dollar most at risk. European assets are broadly under-owned, although enthusiasm about the new fiscal framework is boosting valuations. Credit is tight overall, but more attractive in selected sectors, particularly in Europe, as dispersion remains high. We see more value in US than European rates. EM credit is tight but value is emerging in local markets.

In the past three years, markets have come to terms with the idea of higher inflation and rates, but slowdowns have been forgotten. We see pre-conditions for one in 2025, with investors broadly unprepared. Volatility is on the rise, and active strategies are set to stand out.

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Davide Serra
Founder & CEO

Sebastiano Pirro
CIO & Financial Credit Portfolio Manager

Gabriele Foà
Global Credit Portfolio Manager

Silvia Merler
Head of ESG & Policy Research

Lennart Lengeling
Macro Analyst