Author: arndxt Compiled by: Tim, PANews My stance has changed significantly over the past few months: Extreme pessimism can actually lead to a bullish outlook (excessive pessimism often sets the stage for a market rebound). The pessimism has escalated to the point of concern that the macro-financial markets are becoming increasingly fragile. I believe that macroeconomic fluctuations are not caused by a single factor, but rather by five mutually reinforcing positive feedback loops: 1. The risk of policy missteps is rising as the Federal Reserve tightens financial conditions amid uncertainty in economic data and clear signs of a slowdown. 2. The AI industry and tech giants are shifting from "cash abundance" to "leveraged growth," which shifts the nature of risk from pure stock price fluctuations to the more familiar debt cycle dilemma. 3. Private credit and loan valuations are beginning to diverge. Potential signs of pressure based on model-driven valuations are emerging, a worrying early sign. 4. The K-shaped economy is becoming increasingly entrenched, gradually escalating into a political issue. For a growing number of people, social consensus is no longer credible, and this problem will ultimately be reflected in national policy. 5. Market concentration has become a systemic weakness. When approximately 40% of the index is actually controlled by a few geopolitically and leverage-sensitive monopolistic enterprises, it transcends the simple growth narrative and becomes a target of national security and policy regulation. The basic assumption is that policymakers will likely repeat the same mistakes: reinject liquidity into the financial system to support the economy by maintaining asset prices until the next political cycle. However, unlike standard support strategies, this policy path is more fraught with difficulties: it relies more on credit and is accompanied by more political instability. 1. Macroeconomic Stance For most of the current cycle, a cautiously bearish stance is reasonable. Inflation is high but has begun to slow. The policy remains generally accommodative. Risky assets are overvalued, but they are often supported by liquidity during pullbacks. Today, several factors have changed: US government shutdown: We experienced a prolonged government shutdown, which disrupted the release of key macroeconomic data and affected its confidence level. Statistical uncertainty: Senior officials themselves have acknowledged that the federal statistics agency is facing difficulties, meaning that positions involving trillions of dollars are affected. Hawkish Shift and Weak Economy: Against the backdrop of the current situation, the Federal Reserve has shifted to a more hawkish policy tone in terms of both interest rate expectations and balance sheet, while tightening financial conditions despite deteriorating forward indicators. In other words, the current macroeconomic environment is tightening amid ambiguity and new pressures, rather than moving away from these risks. This constitutes a very different risk profile. 2. Tightening of policies implemented amidst uncertainty The core issue is not merely the tightening of policies, but rather the specific areas and methods of this tightening: Data Fog: Following the government shutdown, the release of key data (inflation, employment) became delayed, distorted, or questionable. The Federal Reserve's official "dashboard" became unreliable precisely at the most critical moment. Interest Rate Expectations: Although forward-looking indicators suggest that inflation will continue to slow in early next year, market expectations for the probability of a near-term rate cut have been revised downward due to the recent hawkish comments from Federal Reserve officials. Balance Sheet: Even if policy rates remain unchanged, the Federal Reserve's continued balance sheet reduction during quantitative tightening and its tendency to shift more long-term bonds to the private sector will essentially have a contractionary effect on financial conditions. Historically, the Federal Reserve's policy mistakes have often stemmed from poor timing: whether tightening or loosening policy, it has often acted too slowly. We may repeat history: tightening policies when growth slows and data is unclear, rather than preemptively easing them. 3. AI and large-cap tech stocks have shifted to leverage-driven growth. The second structural shift lies in the fundamental changes of AI companies and large technology companies: Over the past decade, the core “Seven Sisters of US stocks” have essentially played the role of equity assets similar to bonds: they have dominant advantages, huge free cash flow, large-scale stock buyback programs, and controllable net leverage levels. Over the past two or three years, this free cash flow has been massively reinvested in AI capital expenditures: data centers, chips, and infrastructure. We are now entering a new phase where incremental capital expenditures for AI are increasingly being funded through debt issuance, rather than solely through internally generated cash flow. Influence: Credit spreads and credit default swaps (CDS) are beginning to fluctuate. Credit spreads for companies like Oracle are widening as leverage increases due to financing AI infrastructure. Stock volatility is no longer the only risk. In some sectors that were once considered "invincible," we are beginning to see signs of the classic credit cycle. Market structure amplifies this risk. These companies, which are overweighted in major indices, are shifting from "cash cows" to "leveraged growth" companies, altering the overall risk structure of the indices. This does not mean the AI "bubble" is over. If the returns are real and sustainable, then debt-financed capital expenditures are justified. But this does mean that the margin of error is smaller, especially in the context of rising interest rates and tightening policies. 4. Early fault lines appear in the credit and private equity markets. Beneath the calm surface of the public markets, private lending is already showing signs of pressure: The same loan was valued at significantly different rates by different management agencies (for example, one quoted 70 cents per dollar, while another quoted about 90 cents per dollar). This divergence is a classic precursor to the debate between model-based pricing and market-based pricing. This pattern is strikingly similar to the following: 2007: Non-performing assets continued to rise and credit spreads gradually widened, while the stock index remained relatively stable. 2008: Markets that were once considered cash equivalents (such as auction interest rate securities) suddenly failed. Also note: The Federal Reserve's reserves have begun to decline. There is a growing awareness within the government that some form of balance sheet expansion may be necessary to prevent liquidity mechanism problems. This does not necessarily lead to a crisis. But it is consistent with the current state of the system: credit is quietly tightening, and policy remains confined within a "data-dependent" framework rather than taking preemptive action. The signal that "reserve funds are no longer sufficient" first appeared in the repurchase market. In this radar chart, the "percentage of repurchase transactions that reach or exceed the IORB rate" is the clearest signal, indicating that we are quietly exiting a truly adequate reserve system. In the third quarter of 2018 and early 2019, this pressure was still manageable: ample reserves kept the interest rates on most secured financing transactions stable below the interest rate on reserves (IORB). By September 2019, just before the repo market crisis erupted, this yield curve had deviated significantly: more and more repo transactions were being executed at levels equal to or higher than the reserve balance rate, which was a typical sign of a shortage of collateral and reserves. Now let's compare June and October 2025: The light blue line (June) remains safely within the range, but the red line for October 2025 extends outward to near the 2019 trend, indicating that the proportion of repurchase transactions approaching the bottom of the policy rate is rising. In other words, dealers and banks are pushing up overnight funding quotes as banks' reserves become less abundant. Combined with other indicators (increased intraday overdrafts, increased Federal Reserve purchases of funds by US depository institutions, and a slight increase in deferred payments), these signs collectively convey a clear signal. 5. The K-shaped economy is becoming a political variable. In my view, the economic polarization we have been calling "K-shaped" has now become a political variable. Household expectations are polarized. Long-term financial outlooks (such as five-year projections) show a significant gap: some groups expect stability or improvement, while others expect a sharp deterioration. Real-world stress indicators are flashing red: Delinquency rates are rising among subprime auto loan borrowers. The timing of home purchases is being delayed, and the average age of first-time homebuyers is approaching retirement age. Youth unemployment rates are gradually rising in several markets. For a growing number of people, the current system is not only "unfair," but has also become dysfunctional. They have neither accumulated assets nor are they facing stagnant wage growth, making it virtually impossible for them to participate in the wealth distribution resulting from inflation. The widely accepted social consensus—"work hard, strive for progress, accumulate wealth and security"—is gradually crumbling. In this environment, political behavior began to change: Voters no longer choose the "best manager" in the current system. They are increasingly inclined to support extreme candidates on the left or right because the potential losses seem limited to them: "The situation can't get much worse." The formulation of future tax, wealth redistribution, regulatory, and monetary support policies will all unfold within this broader context. This is by no means a neutral event for the market. 6. High concentration becomes a systemic risk in the market and politics. The majority of the market capitalization in the US stock market is concentrated in the hands of a few companies. However, its systemic and political impact is rarely discussed. Currently, the top 10 companies account for approximately 40% of the major US stock indices. These companies have the following characteristics: • It is a core holding in pension funds, 401(k) retirement plans, and personal investment portfolios. • Reliance on artificial intelligence continues to increase • A de facto monopoly has been established in multiple digital sectors. This leads to a triple intertwined risk: Systemic market risk: When these leading companies are impacted by profitability, regulation or geopolitical factors, the risk will be rapidly transmitted to the entire market through household wealth systems. National security risks: When a nation’s wealth and productivity are excessively concentrated in a few companies that have external dependencies, these companies become a vulnerable link in the nation’s strategy. Political Risk: In an environment of K-shaped economic divergence and rising populism, these companies are highly susceptible to becoming the focus of social discontent, specifically manifested in... Facing higher tax rates, windfall profits tax, and restrictions on stock buybacks Pressure to break up driven by antitrust Subject to strict AI and data regulations In other words, these companies are not only growth engines, but also potential policy targets, and the likelihood of them becoming the latter is increasing day by day. 7. The Failure of the "Perfect Hedging" Theory Regarding Bitcoin, Gold, and the Market (So Far) Amidst a climate of intertwined risks of policy missteps, credit pressures, and political instability, one might expect Bitcoin to rise continuously as a macroeconomic hedging tool. However, the reality is quite different: Gold is exhibiting the characteristics of a traditional crisis hedging tool: steady strengthening and mild volatility, making it increasingly valuable for portfolio allocation. Bitcoin's trading logic is closer to that of beta risk assets: it is highly tied to liquidity fluctuations and is exceptionally sensitive to leverage and structured products. Experienced long-term holders are taking advantage of the current environment to sell and exit the market. The initial narratives of decentralization and monetary revolution remain theoretically compelling, but face challenges in practice: The dominant capital flows in the current market have become highly financialized: yield strategies, derivatives trading, and shorting volatility are very common. Bitcoin's actual performance is closer to the beta of tech stocks than to a neutral, stable hedging tool. I still believe there is a reasonable possibility that 2026 will be a major turning point for Bitcoin (the next policy cycle, the next round of stimulus, and a further decline in trust in traditional assets). However, investors should recognize that at this stage, Bitcoin does not offer the hedging properties that many people expect. It is also part of the liquidity system that we are concerned about. 8. Looking ahead to 2026: A feasible development framework A useful framework for thinking about the current environment is that this is a managed bubble release designed to make room for the next round of stimulus policies. The script might look like this: 2024-2025: A Period of Controlled Policy Tightening and Stress Government shutdowns and political dysfunction trigger cyclical drags. The Federal Reserve has adopted a hawkish stance in its rhetoric and balance sheet operations, thereby tightening financial conditions. Credit spreads widened moderately. Speculative sectors (artificial intelligence, long-cycle technologies, and some private lending) were the first to be impacted. Late 2025 to 2026: Liquidity recovery and the political cycle begin in tandem. With inflation expectations declining and markets adjusting, policymakers have regained room to ease policy. We expect a simultaneous rollout of interest rate cuts and fiscal measures aimed at supporting growth and the election. Given the time lag in policy implementation, the impact of inflation will only become apparent after key political events have occurred. After 2026: Financial markets face a comprehensive reassessment The specific outcome will depend on the size and form of the next round of stimulus policies, and we will face two possibilities: A new round of asset inflation will be accompanied by more political and regulatory intervention, or more intense confrontation with issues such as debt sustainability, market concentration, and social consensus. This framework is not inevitable, but it aligns with the current government's motivations: Politicians prioritize winning re-election over maintaining long-term stability. The most convenient policy tool is still to release liquidity, rather than structural reforms. To reactivate these tools, they first need to eliminate some of the current bubbles. in conclusion All signals and signs point to the same conclusion: the financial system is entering a more fragile and less forgiving phase of the cycle. In fact, history has shown that policymakers eventually resort to large-scale liquidity stimulus as a response. To move to the next stage, we need to go through a period characterized by the following: Financial conditions are tightening. Credit sensitivity has increased. Political turmoil intensified. And policy responses are becoming increasingly non-linear.Author: arndxt Compiled by: Tim, PANews My stance has changed significantly over the past few months: Extreme pessimism can actually lead to a bullish outlook (excessive pessimism often sets the stage for a market rebound). The pessimism has escalated to the point of concern that the macro-financial markets are becoming increasingly fragile. I believe that macroeconomic fluctuations are not caused by a single factor, but rather by five mutually reinforcing positive feedback loops: 1. The risk of policy missteps is rising as the Federal Reserve tightens financial conditions amid uncertainty in economic data and clear signs of a slowdown. 2. The AI industry and tech giants are shifting from "cash abundance" to "leveraged growth," which shifts the nature of risk from pure stock price fluctuations to the more familiar debt cycle dilemma. 3. Private credit and loan valuations are beginning to diverge. Potential signs of pressure based on model-driven valuations are emerging, a worrying early sign. 4. The K-shaped economy is becoming increasingly entrenched, gradually escalating into a political issue. For a growing number of people, social consensus is no longer credible, and this problem will ultimately be reflected in national policy. 5. Market concentration has become a systemic weakness. When approximately 40% of the index is actually controlled by a few geopolitically and leverage-sensitive monopolistic enterprises, it transcends the simple growth narrative and becomes a target of national security and policy regulation. The basic assumption is that policymakers will likely repeat the same mistakes: reinject liquidity into the financial system to support the economy by maintaining asset prices until the next political cycle. However, unlike standard support strategies, this policy path is more fraught with difficulties: it relies more on credit and is accompanied by more political instability. 1. Macroeconomic Stance For most of the current cycle, a cautiously bearish stance is reasonable. Inflation is high but has begun to slow. The policy remains generally accommodative. Risky assets are overvalued, but they are often supported by liquidity during pullbacks. Today, several factors have changed: US government shutdown: We experienced a prolonged government shutdown, which disrupted the release of key macroeconomic data and affected its confidence level. Statistical uncertainty: Senior officials themselves have acknowledged that the federal statistics agency is facing difficulties, meaning that positions involving trillions of dollars are affected. Hawkish Shift and Weak Economy: Against the backdrop of the current situation, the Federal Reserve has shifted to a more hawkish policy tone in terms of both interest rate expectations and balance sheet, while tightening financial conditions despite deteriorating forward indicators. In other words, the current macroeconomic environment is tightening amid ambiguity and new pressures, rather than moving away from these risks. This constitutes a very different risk profile. 2. Tightening of policies implemented amidst uncertainty The core issue is not merely the tightening of policies, but rather the specific areas and methods of this tightening: Data Fog: Following the government shutdown, the release of key data (inflation, employment) became delayed, distorted, or questionable. The Federal Reserve's official "dashboard" became unreliable precisely at the most critical moment. Interest Rate Expectations: Although forward-looking indicators suggest that inflation will continue to slow in early next year, market expectations for the probability of a near-term rate cut have been revised downward due to the recent hawkish comments from Federal Reserve officials. Balance Sheet: Even if policy rates remain unchanged, the Federal Reserve's continued balance sheet reduction during quantitative tightening and its tendency to shift more long-term bonds to the private sector will essentially have a contractionary effect on financial conditions. Historically, the Federal Reserve's policy mistakes have often stemmed from poor timing: whether tightening or loosening policy, it has often acted too slowly. We may repeat history: tightening policies when growth slows and data is unclear, rather than preemptively easing them. 3. AI and large-cap tech stocks have shifted to leverage-driven growth. The second structural shift lies in the fundamental changes of AI companies and large technology companies: Over the past decade, the core “Seven Sisters of US stocks” have essentially played the role of equity assets similar to bonds: they have dominant advantages, huge free cash flow, large-scale stock buyback programs, and controllable net leverage levels. Over the past two or three years, this free cash flow has been massively reinvested in AI capital expenditures: data centers, chips, and infrastructure. We are now entering a new phase where incremental capital expenditures for AI are increasingly being funded through debt issuance, rather than solely through internally generated cash flow. Influence: Credit spreads and credit default swaps (CDS) are beginning to fluctuate. Credit spreads for companies like Oracle are widening as leverage increases due to financing AI infrastructure. Stock volatility is no longer the only risk. In some sectors that were once considered "invincible," we are beginning to see signs of the classic credit cycle. Market structure amplifies this risk. These companies, which are overweighted in major indices, are shifting from "cash cows" to "leveraged growth" companies, altering the overall risk structure of the indices. This does not mean the AI "bubble" is over. If the returns are real and sustainable, then debt-financed capital expenditures are justified. But this does mean that the margin of error is smaller, especially in the context of rising interest rates and tightening policies. 4. Early fault lines appear in the credit and private equity markets. Beneath the calm surface of the public markets, private lending is already showing signs of pressure: The same loan was valued at significantly different rates by different management agencies (for example, one quoted 70 cents per dollar, while another quoted about 90 cents per dollar). This divergence is a classic precursor to the debate between model-based pricing and market-based pricing. This pattern is strikingly similar to the following: 2007: Non-performing assets continued to rise and credit spreads gradually widened, while the stock index remained relatively stable. 2008: Markets that were once considered cash equivalents (such as auction interest rate securities) suddenly failed. Also note: The Federal Reserve's reserves have begun to decline. There is a growing awareness within the government that some form of balance sheet expansion may be necessary to prevent liquidity mechanism problems. This does not necessarily lead to a crisis. But it is consistent with the current state of the system: credit is quietly tightening, and policy remains confined within a "data-dependent" framework rather than taking preemptive action. The signal that "reserve funds are no longer sufficient" first appeared in the repurchase market. In this radar chart, the "percentage of repurchase transactions that reach or exceed the IORB rate" is the clearest signal, indicating that we are quietly exiting a truly adequate reserve system. In the third quarter of 2018 and early 2019, this pressure was still manageable: ample reserves kept the interest rates on most secured financing transactions stable below the interest rate on reserves (IORB). By September 2019, just before the repo market crisis erupted, this yield curve had deviated significantly: more and more repo transactions were being executed at levels equal to or higher than the reserve balance rate, which was a typical sign of a shortage of collateral and reserves. Now let's compare June and October 2025: The light blue line (June) remains safely within the range, but the red line for October 2025 extends outward to near the 2019 trend, indicating that the proportion of repurchase transactions approaching the bottom of the policy rate is rising. In other words, dealers and banks are pushing up overnight funding quotes as banks' reserves become less abundant. Combined with other indicators (increased intraday overdrafts, increased Federal Reserve purchases of funds by US depository institutions, and a slight increase in deferred payments), these signs collectively convey a clear signal. 5. The K-shaped economy is becoming a political variable. In my view, the economic polarization we have been calling "K-shaped" has now become a political variable. Household expectations are polarized. Long-term financial outlooks (such as five-year projections) show a significant gap: some groups expect stability or improvement, while others expect a sharp deterioration. Real-world stress indicators are flashing red: Delinquency rates are rising among subprime auto loan borrowers. The timing of home purchases is being delayed, and the average age of first-time homebuyers is approaching retirement age. Youth unemployment rates are gradually rising in several markets. For a growing number of people, the current system is not only "unfair," but has also become dysfunctional. They have neither accumulated assets nor are they facing stagnant wage growth, making it virtually impossible for them to participate in the wealth distribution resulting from inflation. The widely accepted social consensus—"work hard, strive for progress, accumulate wealth and security"—is gradually crumbling. In this environment, political behavior began to change: Voters no longer choose the "best manager" in the current system. They are increasingly inclined to support extreme candidates on the left or right because the potential losses seem limited to them: "The situation can't get much worse." The formulation of future tax, wealth redistribution, regulatory, and monetary support policies will all unfold within this broader context. This is by no means a neutral event for the market. 6. High concentration becomes a systemic risk in the market and politics. The majority of the market capitalization in the US stock market is concentrated in the hands of a few companies. However, its systemic and political impact is rarely discussed. Currently, the top 10 companies account for approximately 40% of the major US stock indices. These companies have the following characteristics: • It is a core holding in pension funds, 401(k) retirement plans, and personal investment portfolios. • Reliance on artificial intelligence continues to increase • A de facto monopoly has been established in multiple digital sectors. This leads to a triple intertwined risk: Systemic market risk: When these leading companies are impacted by profitability, regulation or geopolitical factors, the risk will be rapidly transmitted to the entire market through household wealth systems. National security risks: When a nation’s wealth and productivity are excessively concentrated in a few companies that have external dependencies, these companies become a vulnerable link in the nation’s strategy. Political Risk: In an environment of K-shaped economic divergence and rising populism, these companies are highly susceptible to becoming the focus of social discontent, specifically manifested in... Facing higher tax rates, windfall profits tax, and restrictions on stock buybacks Pressure to break up driven by antitrust Subject to strict AI and data regulations In other words, these companies are not only growth engines, but also potential policy targets, and the likelihood of them becoming the latter is increasing day by day. 7. The Failure of the "Perfect Hedging" Theory Regarding Bitcoin, Gold, and the Market (So Far) Amidst a climate of intertwined risks of policy missteps, credit pressures, and political instability, one might expect Bitcoin to rise continuously as a macroeconomic hedging tool. However, the reality is quite different: Gold is exhibiting the characteristics of a traditional crisis hedging tool: steady strengthening and mild volatility, making it increasingly valuable for portfolio allocation. Bitcoin's trading logic is closer to that of beta risk assets: it is highly tied to liquidity fluctuations and is exceptionally sensitive to leverage and structured products. Experienced long-term holders are taking advantage of the current environment to sell and exit the market. The initial narratives of decentralization and monetary revolution remain theoretically compelling, but face challenges in practice: The dominant capital flows in the current market have become highly financialized: yield strategies, derivatives trading, and shorting volatility are very common. Bitcoin's actual performance is closer to the beta of tech stocks than to a neutral, stable hedging tool. I still believe there is a reasonable possibility that 2026 will be a major turning point for Bitcoin (the next policy cycle, the next round of stimulus, and a further decline in trust in traditional assets). However, investors should recognize that at this stage, Bitcoin does not offer the hedging properties that many people expect. It is also part of the liquidity system that we are concerned about. 8. Looking ahead to 2026: A feasible development framework A useful framework for thinking about the current environment is that this is a managed bubble release designed to make room for the next round of stimulus policies. The script might look like this: 2024-2025: A Period of Controlled Policy Tightening and Stress Government shutdowns and political dysfunction trigger cyclical drags. The Federal Reserve has adopted a hawkish stance in its rhetoric and balance sheet operations, thereby tightening financial conditions. Credit spreads widened moderately. Speculative sectors (artificial intelligence, long-cycle technologies, and some private lending) were the first to be impacted. Late 2025 to 2026: Liquidity recovery and the political cycle begin in tandem. With inflation expectations declining and markets adjusting, policymakers have regained room to ease policy. We expect a simultaneous rollout of interest rate cuts and fiscal measures aimed at supporting growth and the election. Given the time lag in policy implementation, the impact of inflation will only become apparent after key political events have occurred. After 2026: Financial markets face a comprehensive reassessment The specific outcome will depend on the size and form of the next round of stimulus policies, and we will face two possibilities: A new round of asset inflation will be accompanied by more political and regulatory intervention, or more intense confrontation with issues such as debt sustainability, market concentration, and social consensus. This framework is not inevitable, but it aligns with the current government's motivations: Politicians prioritize winning re-election over maintaining long-term stability. The most convenient policy tool is still to release liquidity, rather than structural reforms. To reactivate these tools, they first need to eliminate some of the current bubbles. in conclusion All signals and signs point to the same conclusion: the financial system is entering a more fragile and less forgiving phase of the cycle. In fact, history has shown that policymakers eventually resort to large-scale liquidity stimulus as a response. To move to the next stage, we need to go through a period characterized by the following: Financial conditions are tightening. Credit sensitivity has increased. Political turmoil intensified. And policy responses are becoming increasingly non-linear.