Written by: Hoeem

Translated by: Saoirse, Foresight News

Wealth that is passed down through generations often emerges during the transition from a tightening cycle to a loosening phase. Therefore, understanding your position in the liquidity cycle is key to accurately positioning your assets. Which stage are we currently in? Let me explain in detail...

Why you must pay attention to the liquidity cycle (even if you hate macroeconomics)

Central bank liquidity is like the lubricant for the global economic engine:

Too much injection can make the market 'overheat'; excessive withdrawal can lead to 'pistons seizing', just like when your well-dressed date suddenly leaves you. The key is: if you can keep up with the rhythm of liquidity, you can anticipate bubbles and crashes.

Four stages of liquidity from 2020 to 2025:

1. Surge phase (2020-2021)

Central banks are pouring money like a fire hose at full throttle: zero interest rates are in place, quantitative easing (QE) is at record levels, and $16 trillion in fiscal relief is being injected into the market.

From the background, global money supply (M2) growth is faster than at any time since World War II.

2. Exhaustion phase (2021-2022)

Interest rates soared by 500 basis points, quantitative tightening (QT) was initiated, and crisis relief plans expired.

Intuitively, the bond market saw its largest drop on record in 2022 (about -17%).

3. Stable phase (2022-2024)

Policy remains tight, with no new actions.

Decision-makers maintain existing policies to allow them to take full effect in suppressing inflation.

4. Preliminary turning phase (2024-2025)

The world is beginning to cut interest rates and ease restrictions; although interest rates remain relatively high, a downward trend has begun.

Mid-2025 situation: One foot is still in the stable phase, while the other is tentatively stepping into the first step of the preliminary turning phase. Current interest rates are high, quantitative tightening is still ongoing, but unless new shocks pull us back to the surge mode, the next step will likely continue to loosen.

More details can be found in the 'Traffic Light Quick Reference Manual' below...

Yes, I got GPT to help me make a super cool table! The table below lets you see the situations in the three key years of 2017, 2021, and 2025 at a glance:

Quick reference manual for twelve major liquidity levers:

🔴 Not Activated 🟧 Mildly Activated 🟢 Strongly Activated

🔑 Which lever can activate the total switch for the other 11 levers?

Gradual breakdown:

Regarding interest rate cuts - In 2017, the Fed raised interest rates, and there was almost no loosening policy globally; in 2021, emergency interest rate cuts were made globally to near-zero levels; in 2025, to maintain credibility against inflation, interest rates remained high, but core countries in the U.S. and Europe planned to make their first modest 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 worldwide; by 2025, policy stances reversed, with the Fed continuing quantitative tightening, the Bank of Japan still engaging in unlimited bond purchases, and China selectively injecting liquidity.

In simple terms: Quantitative easing is like 'blood transfusion' for the economy, while quantitative tightening is 'slow blood draw'.

You need to know when we will enter the quantitative tightening or quantitative easing phase, and which position we are currently in within the liquidity cycle...

Mid-2025 status dashboard:

  • Regarding interest rate cuts: Policy rates remain high; if progress goes smoothly, the first interest rate cut might 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.

Signals to focus on:

Signal 1: Inflation rate drops to 2% and policymakers announce a balanced risk.

  • Observation points: The Fed or ECB statements clearly indicate a shift to neutral language.

  • Key significance: Clears the last public opinion hurdle for interest rate cuts.

Signal 2: Pause in Quantitative Tightening (QT) (with an upper limit set at 0 or 100% reinvestment)

  • Observation points: The Fed's Open Market Committee (FOMC) or the ECB announces full reinvestment of maturing bonds.

  • Key significance: Transforms the balance sheet reduction into a neutral state, increasing market liquidity reserves.

Signal 3: The three-month forward rate agreement and the overnight index swap spread (FRA-OIS) exceed 25 basis points or the repo rate suddenly surges.

  • Observation points: 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 financing pressure, which usually forces central banks to provide liquidity support.

Signal 4: The People's Bank of China (PBoC) comprehensively reduced the reserve requirement ratio (RRR) by 25 basis points

  • Observation points: National reserve requirement ratio drops 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 have not yet reached the surge phase.

Therefore, before a large amount of leverage turns green, the market will continue to experience repeated fluctuations in risk appetite and will not truly enter a frenzy stage.