Understand the present to seize opportunities.
Written by: hoeem
Translated by: Saoirse, Foresight News
Wealth that is passed down through generations often arises during the transition from a tightening cycle to an easing phase. Therefore, clarifying one's position in the liquidity cycle is key to accurately allocating assets. Which stage are we currently in? Let me elaborate...
Why you must pay attention to the liquidity cycle (even if you dislike macroeconomics)
Central bank liquidity is like the lubricant for the global economic engine:
Injecting too much can make the market 'run too fast'; excessive withdrawal can lead to 'stuck pistons', just like your carefully groomed date suddenly leaving you. The key is: if you can keep up with the rhythm of liquidity, you can anticipate bubbles and crashes in advance.
Four Stages of Liquidity from 2020 to 2025:
1. Surge Stage (2020-2021)
The central bank is like a fire hose running at full throttle, pouring water crazily: zero interest rates established, quantitative easing (QE) at historic levels, and $16 trillion in fiscal relief flooding the market.
From the background, the growth rate of global money supply (M2) is faster than any period since World War II.
2. Exhaustion Stage (2021-2022)
Interest rates spike by 500 basis points, quantitative tightening (QT) starts, and crisis relief plans expire.
Intuitively, the bond market saw the largest drop in history in 2022 (about -17%).
3. Stable Stage (2022-2024)
Policy remains tight, with no new actions.
Decision makers maintain existing policies to fully leverage them to suppress inflation.
4. Preliminary Transition Stage (2024-2025)
The world has begun to lower interest rates and relax restrictions. Although rates are still relatively high, a downward trend has begun.
Mid-2025 Status: We still have one foot in the stable phase and the other tentatively stepping into the first phase of preliminary transition. Current rates are high, quantitative tightening continues, but unless a new shock pulls us back to surge mode, the next step will likely continue easing.
More details can be found in the 'Traffic Light Quick Reference Manual' below...
Indeed, I asked GPT to help me create a super cool table! The table below provides a clear view of the situations in the key years of 2017, 2021, and 2025:
Twelve Major Liquidity Lever Traffic Light Quick Reference Manual:
🔴 Not Activated 🟧 Mildly Activated 🟢 Strongly Activated
🔑 Which lever can activate the total switch for the other 11?
Gradual Breakdown:
Regarding interest rate cuts - in 2017 the Federal Reserve raised rates, with almost no easing policy globally; in 2021, global emergency rate cuts approached zero; by 2025, to maintain anti-inflation credibility, rates remain high, but the U.S. and core European countries plan for the first slight rate cuts by the end of 2025.
Quantitative Easing / Tightening (QE/QT) - In 2017, the Federal Reserve was reducing its balance sheet, while other major central banks were still buying bonds; from 2020 to 2021, record-breaking quantitative easing policies were launched globally; by 2025, the policy stance reverses, with the Federal Reserve continuing quantitative tightening, the Bank of Japan still unlimitedly purchasing bonds, and China selectively injecting liquidity.
In simple terms: quantitative easing is like 'blood transfusion' for the economy, while quantitative tightening is 'slowly drawing blood'.
You need to know when we will enter the quantitative tightening or quantitative easing phase, and which position we are currently in the liquidity cycle...
Mid-2025 Status Dashboard:
Regarding interest rate cuts: Policy rates remain high; if progress goes smoothly, the first rate cut may occur in the fourth quarter of 2025.
Quantitative Easing / Tightening (QE/QT): Quantitative tightening (QT) is still ongoing, and no new quantitative easing (QE) policies have been introduced yet, but early stimulus signals have emerged.
Key signals to focus on:
Signal 1: Inflation rate drops to 2% and policymakers announce risk balance
Observation Point: The Federal Reserve or ECB statement clearly shifts to neutral wording
Key Significance: Clears the last public opinion hurdle for interest rate cuts
Signal 2: Pause in Quantitative Tightening (QT) (with limits set at 0 or 100% reinvestment)
Observation Point: The Federal Reserve Open Market Committee (FOMC) or ECB announces full reinvestment of maturing bonds
Key Significance: Transitions the reduction of the balance sheet to a neutral state, increasing market liquidity reserves
Signal 3: The three-month forward rate agreement and overnight index swap spread (FRA-OIS) exceeds 25 basis points or repo rates suddenly spike
Observation Point: The three-month FRA-OIS spread (Note: The difference between the forward rate agreement (FRA) rate and the overnight index swap (OIS) rate is an important indicator of financial market credit risk and liquidity risk.) or general collateral (GC) repo rates spike to around 25 basis points
Key Significance: Indicates dollar funding pressure, which usually forces the central bank to provide liquidity support
Signal 4: The People's Bank of China (PBoC)全面降低存款准备金率 (RRR) by 25 basis points
Observation Point: National deposit reserve ratio falls below 6.35%
Key Significance: Injecting 400 billion yuan of base currency often becomes the first domino in easing policies for emerging markets.
In summary...
We are not yet at the surge stage.
Therefore, before a large amount of leverage turns green, the market will continue to experience fluctuations in risk appetite and will not truly enter a frenzy stage.
