Gold surged on Trump’s tax cut plan and higher public debt

·      Wall Street Futures slip early Friday as Trump threatened 50% tariffs on the EU for not kneeling to Trump in trade deals

• Apart from lingering geopolitical tensions, USD hegemony, Gold is a major beneficiary of higher US fiscal deficit, debt, and currency (USD) devaluation
• Wall Street futures were almost flat Thursday on hopes of a revised Trump tax cut bill, which may ensure adequate economic growth with fiscal prudence
• Trump is also stressing disinvestments of PSUs like Fannie Mae and Freddie Mac to reduce the public deficit

On Monday, May 19, 2025, Wall Street Futures recovered from Moody’s US downgrade panic low as it was already discounted by the market, and the Trump administration also ignored it. Wall Street was also undercut briefly by China’s warning to the US about the Huawei Chip restriction. But eventually got some boost in hopes of the next trade deal with Japan and India after a report. Wall Street was also boosted by the progress of the Ukraine war ceasefire optimism after Trump-Putin’s 2 hr long telephonic conversations; Gold slips.

But on May 21, 2024, Wall Street Futures slipped after the fine print of Trump’s ‘big & beautiful’ tax cut extension bill showed it would cause a higher public deficit by around $1T/Year on average for the next 8-10 years at face value. Subsequently, the US30Y bond jumped over 5%, the most since Oct’2023 and before that 2007 GFC days. The 30-year U.S. Treasury bond yield recently surged past 5%, reaching multi-year high levels amid concerns over the U.S. fiscal outlook and proposed tax cuts that could add trillions to the federal deficit.

This spike in yields, which move inversely to bond prices, reflects investor unease about rising government debt and potential inflation from policies like tariffs. On May 21, 2025, the yield hit 5.09%, up 12 basis points, after a poorly received $16 billion 20-year bond auction signaled weak demand.

Wall Street reacted sharply to higher bond yields, i.e., higher borrowing costs for not only the Government but also the real economy and corporate America. On May 21, 2025, the Dow Jones Industrial Average dropped 816.80 points (1.91%) to 41,860.44, the S&P 500 fell 95.85 points (1.61%) to 5,844.61, and the Nasdaq Composite declined 270.07 points (1.41%) to 18,872.64. The sell-off was attributed to rising Treasury yields and fears of swelling U.S. debt, potentially exacerbated by a Republican tax-cut bill estimated to add $3-5 trillion to the $36.2 trillion national debt.

The interplay between rising yields and equity markets underscores investor sensitivity to borrowing costs and debt sustainability. Higher yields increase corporate and government borrowing costs, potentially slowing economic growth, while also signaling market skepticism about fiscal policy. However, on May 22, 2025, stocks rebounded initially as 30-year yields eased to 5.0521%, and tech-related shares gained. The market was expecting Trump’s tax bill even pass by the US Congress by July, it may be modified significantly for a lower deficit as Trump needs the support of some Republicans and also Democrats for the ultimate passage.

The market is expecting a revised version of Trump’s tax cut bill.

The U.S. House of Representatives passed President Trump's sweeping tax and spending bill, dubbed the "One Big Beautiful Bill," on May 22, 2025, by a narrow 215-214 vote. The legislation, which advances much of Trump's domestic agenda, extends his 2017 tax cuts, introduces new tax breaks like no taxes on tips, overtime, or car loan interest for U.S.-made vehicles, and raises the state and local tax (SALT) deduction cap to $40,000. It also increases the debt ceiling by $4 trillion and allocates significant funding for border security and military spending, while imposing cuts and work requirements on Medicaid and SNAP, potentially reducing coverage for millions.

The bill faced intense Republican infighting, with House Speaker Johnson negotiating last-minute amendments to win over both fiscal conservatives and moderates. Key changes included accelerating Medicaid work requirements to 2026 and phasing out clean energy tax credits by 2028. But two Republicans, Reps. Thomas Massie and Warren Davidson voted against it, citing deficit concerns, while Rep. Andy Harris voted "present." Two others missed the vote, one reportedly due to falling asleep. Democrats unanimously opposed the bill, calling it a giveaway to the wealthy that could add $2.3-$3.8 trillion to the $36.2 trillion national debt over a decade, per Congressional Budget Office (CBO) estimates. House Republican leaders released a new version of Trump’s massive tax and spending bill with a higher limit on the deduction for state and local taxes and other changes in a bid to win over warring GOP factions to support the legislation.

The legislation now faces a challenging path in the Senate, where Republicans hold a 53-47 majority and several Republican Senators demand significant revisions. The narrow vote and market reactions reflect deep concerns about fiscal sustainability, amid the bond market "meltdown" due to the bill's potential to exacerbate deficits. The Senate's debate, expected to span weeks, will likely reshape the bill further under budget reconciliation rules, which allow passage with a simple majority.

Disappointing Corporate Earnings and Guidance amid Trump policy uncertainty:

Weak earnings reports and guidance from major companies, such as Target’s soft outlook, added downward pressure on stocks. On May 20, 2025, Target’s disappointing results contributed to early market declines. Almost 54% of S&P 500 companies providing second-quarter guidance undercut expectations, partly due to concerns about tariff-related margin pressures. Despite some negative guidance, S&P 500 earnings per share (EPS) growth for the first quarter of 2025 was robust at 13.6%, according to FactSet. Strong earnings from the "Magnificent Seven" (major tech stocks) and other firms supported market gains, particularly in the Nasdaq, which advanced 7.15% for the week ending May 16.

Tech Sector Resilience and AI Optimism: Continued investment in artificial intelligence (AI) infrastructure by hyper-scalers like Meta, Microsoft, Google, and Amazon has bolstered tech stocks. For instance, Meta’s $13.7 billion Q1 2025 capex and Microsoft’s $21.4 billion spending on AI and cloud infrastructure signal long-term growth potential, supporting Nasdaq gains.

Geopolitical Tensions: Reports of potential Israeli strikes on Iran’s nuclear facilities increased market unease, contributing to volatility. Geopolitical risks, combined with ongoing trade policy uncertainties, have kept investors cautious, particularly as these events could disrupt global markets and commodity prices like oil.

Tariff-Related Uncertainty: Despite a 90-day tariff pause announced earlier, lingering uncertainty about trade policies, particularly with China, continued to weigh on markets. The initial tariff announcements in April caused significant volatility, and while recent de-escalations have helped, the potential for renewed trade tensions remains a concern.

But Progress in U.S.-China trade negotiations, including a reduction in tariffs from 125% to 10% for 90 days, boosted markets earlier in the last week. On May 12, 2025, the Nasdaq rose 3.1% following these talks, reflecting optimism about reduced trade tensions. This contributed to a strong weekly gain, with the S&P 500 up 5.0% for the week ending May 16.

The U.S. stock market in late May 2025 has been a battleground of competing forces. Negative pressures include rising Treasury yields, concerns over the federal deficit and credit downgrade, disappointing corporate guidance, and geopolitical risks. On the positive side, de-escalating trade tensions, softer inflation data, strong earnings, and tech sector resilience have driven recoveries, particularly in tech-heavy indexes like the Nasdaq. The passage of Trump’s tax bill, while initially contributing to the yield spike and sell-off, has also sparked optimism about potential economic growth, though its long-term impact remains uncertain as it awaits Senate approval.

On May 22, 2025, Trump posted on his Truth handle:

“THE ONE, BIG, BEAUTIFUL BILL” has PASSED the House of Representatives! This is arguably the most significant piece of Legislation that will ever be signed in the History of our Country! The Bill includes MASSIVE Tax CUTS, No Tax on Tips, No Tax on Overtime, and Tax Deductions when you purchase an American Made Vehicle, along with strong Border Security measures, Pay Raises for our ICE and Border Patrol Agents, Funding for the Golden Dome, “TRUMP Savings Accounts” for newborn babies, and much more! Great job by Speaker Mike Johnson, and the House Leadership, and thank you to every Republican who voted YES on this Historic Bill!

Now, it’s time for our friends in the United States Senate to get to work, and send this Bill to my desk AS SOON AS POSSIBLE! There is no time to waste. The Democrats have lost control of themselves and are aimlessly wandering around, showing no confidence, grit, or determination. They have forgotten their landslide loss in the Presidential Election, and are warped in the past, hoping someday to revive Open Borders for the World’s criminals to be able to pour into our Country, men to be able to play in women’s sports, and transgender individuals for everybody. They don’t realize that these things, and so many more like them, will NEVER AGAIN happen!

Kevin Hassett, a key economic advisor to President Trump, made several comments on May 22, 2025, regarding the recently passed House reconciliation bill, dubbed the "One Big Beautiful Bill Act," and other economic issues. On May 22, 2025, Kevin Hassett celebrated the House passage of Trump’s tax bill as a historic achievement that avoided a massive tax hike, while downplaying the impact of its spending cuts on public services. He expressed optimism about achieving over 3% economic growth to offset the bill’s $3.8 trillion deficit increase and emphasized future spending reductions through OMB and DOGE. Hassett also indicated his role in Senate negotiations, signaling flexibility to refine the bill. His comments align with Trump’s broader economic agenda, including potential privatization of Fannie Mae and Freddie Mac.

Trump may list Fannie Mae and Freddie Mac in a push to divestments:

Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) are government-sponsored enterprises (GSEs) created to support the U.S. housing market by providing liquidity, stability, and affordability. They do this by purchasing mortgages from lenders, packaging them into mortgage-backed securities (MBS), and selling these to investors, with an implicit government guarantee that ensures investor confidence.

During the 2007-08 subprime housing financial crisis and the GFC, both entities faced severe losses due to the housing market collapse. The U.S. government placed them under conservatorship by the Federal Housing Finance Agency (FHFA), injecting over $190 billion in bailout funds to stabilize them. In return, the government received senior preferred stock and a claim on their profits through a "net worth sweep," where most earnings are paid to the Treasury. In other words, both Fannie Mae and Freddie Mac were nationalized virtually and were in de facto control of the US Government.

Since the 2008 financial crisis, Fannie and Freddie have returned to profitability, repaying the bailout funds (~$301 billion) and generating significant revenue for the government. However, they remain under conservatorship, a status many view as unsustainable long-term due to its restrictions on private capital and market operations.

President Trump posted on Truth on May 21, 2025

“I am giving very serious consideration to bringing Fannie Mae and Freddie Mac public. I will be speaking with Treasury Secretary Scott Bessent, Secretary of Commerce Howard Lutnick, and the Director of the Federal Housing Finance Agency, William Pulte, among others, and will be deciding on the near future. Fannie Mae and Freddie Mac are doing very well, throwing off a lot of CASH, and the time would seem to be right. Stay tuned!”

Trump’s comments signal a push toward privatization, aligning with Trump’s broader economic philosophy of reducing government involvement in markets and leveraging private sector efficiency. Privatization would involve ending the conservatorship, recapitalizing the GSEs, and potentially selling the government’s stake, which could yield significant revenue (estimated at $250 billion), which would help to lower the public deficit.

Economic and Political Climate:

Trump’s comments came shortly after his inauguration for a second term (January 20, 2025), during a period of economic optimism tempered by concerns over trade policies and tariffs. His administration has prioritized deregulation, tax cuts, and reducing government expenditure, making privatization of Fannie and Freddie a logical policy goal.

The G7 Finance Ministers’ meeting in Banff, Canada (May 20-22, 2025), where Treasury Secretary Bessent emphasized private sector-led growth, provides additional context. Bessent’s focus on addressing global economic imbalances and non-market practices aligns with domestic efforts to reduce government control over institutions like Fannie and Freddie.

The housing market in 2025 remains a critical issue, with affordability challenges due to high interest rates and home prices. Privatizing the GSEs could impact mortgage rates, as the implicit government guarantee might weaken, potentially increasing borrowing costs for consumers. The Fed is also gradually removing MBS from its balance sheet to provide stability in housing borrowing costs.

During Trump’s first term (2017–2021), his administration, led by then-Treasury Secretary Steven Mnuchin, pushed to end the conservatorship and privatize Fannie and Freddie. A 2019 Treasury plan outlined recapitalizing the GSEs and releasing them from government control, but progress stalled due to legal complexities, shareholder lawsuits, and a lack of congressional consensus. The conservatorship’s net worth sweep has been controversial, with shareholders arguing it unfairly deprives them of profits. Trump’s recent comments may reflect renewed momentum to resolve this issue, especially with a new FHFA director (William Pulte) and a supportive Treasury Secretary.

Key Players Involved:

·       Scott Bessent: As Treasury Secretary, Bessent’s market-oriented approach supports privatization. His comments at the G7 meeting about private sector growth suggest he views Fannie and Freddie’s current status as misaligned with free-market principles.

·       Howard Lutnick: As Commerce Secretary and a Wall Street veteran (CEO of Cantor Fitzgerald), Lutnick likely brings financial expertise to the discussion, advocating for a market-driven solution.

·       William Pulte: The new FHFA director, appointed by Trump, is a vocal critic of the conservatorship and has pushed for privatization, arguing it would restore shareholder value and market discipline.

Privatization could generate significant revenue for the Treasury by selling the government’s stake, aligning with Trump’s fiscal goals (e.g., reducing deficits or funding tax cuts). However, removing the government guarantee could increase mortgage rates, as investors may demand higher yields for MBS without federal backing. Estimates suggest a potential 0.5–1% rise in mortgage rates, impacting affordability.

Meanwhile, the G7 Finance Ministers and Central Bank Governors met in Banff, Alberta (Canada), from May 20-22, 2025, hosted by Canada’s Finance Minister Champagne and Bank of Canada (BOC) Governor Macklem. The meeting focused on global economic challenges, including trade tensions, support for Ukraine, and addressing non-market economic practices, particularly from China. Discussions aimed to restore stability and promote private sector-led growth, with a joint communiqué addressing non-tariff issues like Ukraine support, financial crimes, and AI cooperation.

U.S. Treasury Secretary Bessent emphasized addressing global economic imbalances and non-market practices in both G7 and non-G7 countries, advocating for private sector-driven growth. He warned of potential steep U.S. tariffs returning if trade negotiations faltered, dismissing a recent Moody’s downgrade of the U.S. credit rating. Bessent held bilateral meetings, including with Japan’s Kato, agreeing that dollar-yen exchange rates reflected fundamentals and with Germany’s Klingbeil, described as constructive. He also expressed U.S. support for the IMF and World Bank, urging them to focus on their core missions. Tensions over U.S. tariffs, imposed by President Trump, were a backdrop, with G7 nations seeking consensus despite U.S. insistence on aligning statements with Trump administration priorities.

On late Thursday, May 22, 2025, Trump said that the drug cost reduction will be "up to 89% in some cases," stressing his administration's effort to reduce prices and fight big pharmaceutical companies. "It's gonna be massive numbers, it's gonna be incredible for Medicaid," Trump said. Trump now often criticizes the pharmaceutical lobby for high drug costs in the US against much lower prices in the EU or any other country on the pretext of R&D costs. Trump threatened that drug companies from foreign countries would not be able to sell certain products in the US unless they went along with his proposal to cut costs.

On May 22, 2025, President Trump spoke at the Make America Healthy Again (MAHA) Commission event in the White House’s East Room, focusing on the chronic disease epidemic, particularly among children. He emphasized the MAHA movement’s growing momentum, describing it as an “unstoppable coalition of moms and dads, doctors, young people, and citizens” dedicated to removing dangerous chemicals from food supplies and toxic substances from the environment.

Trump highlighted the commission’s report, which attributes the rise in chronic illnesses to ultra-processed foods, chemical exposures, unhealthy lifestyles, and excessive use of prescription drugs. He vowed to continue efforts to defeat the chronic disease epidemic, stating, “We will not stop until we defeat the chronic disease epidemic!” Additionally, Trump discussed his recent executive order aimed at reducing prescription drug prices, though he noted this could increase access to medications, which some see as conflicting with MAHA’s concerns about overmedication. The event underscored the administration’s commitment to addressing environmental and dietary factors contributing to health issues, with the report setting the stage for policy development over the next 100 days.

Conclusions:

Higher fiscal deficits and higher public debt, i.e., higher M2, cause a higher devaluation of local currency like USD, and precious metals Gold, are a major beneficiary due to their limited supply. The US Federal interest on public debt is steadily rising from around 9% in FY18 to almost 18% now in FY24. But it was not a big issue for most of the US policymakers, including former US Treasury Secretary Yellen in the Biden administration. Yellen was of the view that the nominal US interest on public debt is only around 2% of US nominal GDP.

But the real issue is not here about debt to GDP or debt interest to GDP ratio; it’s all about the theoretical debt interest to revenue ratio, and if such a trend continues, the US has to take debt to pay the interest alone, which is a symbol of bankruptcy and a red flag.

Another issue is that the USD is being steadily devalued due to rising M2 (money supply) at an alarming rate after COVID to fund helicopter money (fiscal and monetary stimulus), most of which was utilized as direct grants rather than infrastructure spending. China and even India spend most of the fiscal stimulus on infrastructure. China invests heavily in transport and industrial infrastructure development rather than too much dole money for vote banks. Trump should take a lesson from China’s development model and try to compete reasonably rather than creating an environment of cold war, tech & trade war. China is in a better position of strength to win this long war of attrition on trade; the US has to reset completely to compete with mighty China, irrespective of any Trump narrative.

M2-Money Supply adjusted Gold Price: Fair Value

Gold Fair Value: 2024:

USD-Gold Price= (US AVGM2Dec’2024/Dec’2010)* Base Year-2010 Avg Gold Price= (20.8/8.6)*1225=$2963

Gold Fair Value: 2025:

Assuming a projected average M2 for 2025 of around $23 trillion (10.5% growth)

USD-Gold Price= (US AVGM2Dec’2025/Dec’2010)* Base Year-2010 Avg Gold Price= (23.0/8.6)*1225=$3276

Gold Fair Value: 2026:

Assuming the projected average M2 for 2025 is around $25.50 trillion (10.5% growth)

USD-Gold Price= (US AVGM2Dec’2025/Dec’2010)* Base Year-2010 Avg Gold Price= (25.5/8.6)*1225=$3630

Bottom line

As the financial market usually discounts 1Y in advance, Gold may scale 3650-3700 in 2025 under the best-case scenario) and may also fall to 3250-3200 as the base-case scenario and 3050-2950 as the worst-case scenario.

Market wrap:

On Thursday, May 22, 2025, Wall Street closed almost flat on hopes & hypes of fiscal prudence by the Trump administration in the coming days. Wall Street Futures were boosted by Trump’s disinvestment plan of PSUs like Freddie, while undercut by the narrow passage of Trump’s tax cut bill by only one vote in the House. Later, Trump’s comments on pharma tariffs of up to 90% affected the US stock futures. The S&P 500 and the Dow finished marginally lower, while the Nasdaq added 0.3%. Wall Street remained cautious, with the bill — featuring tax cuts and increased defense spending — now headed to the Senate and potentially adding trillions to the $36 trillion national debt. The Congressional Budget Office pegs the cost at nearly $4 trillion, stoking fears of fiscal instability. Bond markets reflected that anxiety, as the 30-year Treasury yield briefly touched 5.14%, its highest since 2023; gold surged.

On Thursday, Wall Street was boosted by consumer discretionary, communication services, and techs, while dragged by utilities, healthcare, energy, consumer staples, real estate, financials, and materials. Dow Jones (DJ-30) was boosted by Nike, Merck, Amazon, Goldman Sachs, Honeywell, NVIDIA, Caterpillar, Walt Disney, Microsoft and American Express, while dragged by United Health (Medicare scam allegation), Verizon, Home Depot, Coca-Cola, IBM, McDonald’s, Walmart, J&J, Apple, and P&G.

Weekly-Technical trading levels: DJ-30, NQ-100, and Gold

Looking ahead, whatever the fundamental narrative, technically Dow Future (CMP: 41400) now has to sustain over 41800 for a further rally towards 42000/42500-43000/43300* and 43500*, and even 44600-45200 in the coming days; otherwise sustaining below 41700, DJ-30 may again fall to 41000/40600-4010039900 and 39700/38600-38000/37700-37300/37000 in the coming days.

Similarly, NQ-100 Future (20200) has to sustain over 20800 for a further rally to 21100/21400-21700*/22000* and 22400-22600 in the coming days; otherwise, sustaining below 20750/20600-20500/20400, NQ-100 may again fall to 20000/19600-19400/19200 and 19100/18800-18600/18000-17600/16400 and 16200-15800 in the coming days.

Also, technically Gold (CMP: 3240) has to sustain over 3275-3300 for any recovery to 3325/3375* and 3400/3425-3450/3505*, and even 3525/3555 in the coming days; otherwise sustaining below 3290-3275, Gold may again fall to 3255/3225-3200/3165* and further to 3130/3115*-3075/3015-2990/2975-2960*/2900* and 2800/2750 in the coming days.