Author: hoeem

Translated by: Saoirse, Foresight News

Wealth that is passed down through generations often emerges during the transition from tightening to easing phases. Therefore, clarifying one's position in the liquidity cycle is key to accurately allocating assets. What stage are we in now? Let me explain in detail...

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 will make the market 'overdrive'; withdrawing excessively will cause 'pistons to jam', just like your carefully dressed date suddenly leaving you. The key is: if you can keep up with the rhythm of liquidity, you can predict bubbles and crashes in advance.

Four phases of liquidity from 2020 to 2025

1. Surge Phase (2020-2021)

Central banks are injecting liquidity like a fire hose at full throttle: zero interest rates established, quantitative easing (QE) at record highs, and $16 trillion in fiscal relief flooding the market.

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

2. Exhaustion Phase (2021-2022)

Interest rates surged by 500 basis points, quantitative tightening (QT) was initiated, and the crisis relief plan expired.

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

3. Stable Phase (2022-2024)

Policy remains tight, no new actions.

Policymakers maintain existing policies to let them fully exert their effect in suppressing inflation.

4. Preliminary Turning Phase (2024-2025)

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

Mid-2025 status: One foot still in the stable phase, the other foot 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 into a surge mode, the next step is likely to continue easing.

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

That's right, I got GPT to help me create a super cool table! The table below lets you see the situation in these three key years: 2017, 2021, and 2025 at a glance.

Quick Reference Manual for Twelve Major Liquidity Leverage Traffic Lights

? Not activated ? Mildly activated ? Strongly activated

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

Gradually dismantling

Regarding interest rate cuts - in 2017, the Federal Reserve raised rates with almost no easing policies worldwide; in 2021, global emergency interest rate cuts approached zero; in 2025, to maintain the credibility of anti-inflation measures, rates remain high, but the core countries of the US and Europe have planned for a slight rate cut 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, the policy stance reversed, with the Fed continuing to implement quantitative tightening, the Bank of Japan still purchasing bonds without restriction, and China selectively injecting liquidity.

In simple terms: Quantitative easing is like 'transfusing' the economy, while quantitative tightening is 'slowly drawing blood'.

You need to know when we will enter the quantitative tightening or easing phases and where we currently stand in the liquidity cycle...

Mid-2025 Status Dashboard

  • Regarding interest rate cuts: policy rates remain high; if progress is smooth, the first rate cut may occur in the fourth quarter of 2025.

  • Quantitative easing / tightening (QE/QT): Quantitative tightening (QT) is still ongoing, no new quantitative easing (QE) policies have been introduced, 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 statement clearly shifts to neutral wording

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

Signal 2: Quantitative tightening (QT) paused (with an upper limit set at 0 or 100% reinvestment)

  • Observation points: The Fed's 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: Three-month forward rate agreements and overnight index swap spreads (FRA-OIS) exceed 25 basis points or repo rates suddenly spike

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) fully lowers 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 see fluctuations in risk appetite and will not truly enter a frenzy phase.