March thirty-first, two thousand twenty-five to April second, two thousand twenty-five

I. Foundation 

resistance to change and hence greater dependability for the results shown in the past.

A non-bailout version of QE: Operation Twist 2.0

Debt refinancing will begin to take place in earnest in concentrated waves this year, exerting an increasingly heavy drag on asset prices. There are still 10 trillion dollars of U.S. government debt coming due, As I keep saying, competition for capital between the public and private sectors will be extremely intense this year.

Further reading: Notes 250227 “The Fed QT and the Impact of the Debt Ceiling on Market Liquidity”

Notes 250327 “Locating America (II): Signs of Recession”

The Fed’s current actions are already moving back toward some form of quantitative easing (QE), but they would never directly say, “This is QE.” The Fed would never call it that.

That is why, before writing today’s Notes, we first need to clarify the logic of QE...

Further reading: Notes 250328 “Four Different Forms of QE: An Introduction to the Concept of Monetary Financing”

In fact, even if there is no so-called recession or market crash this time, the Fed may still initiate a form of “asset purchases outside a bailout context,” whose Its possible form is a distortion of the balance-sheet structure, and its true aim is to find a way to push down the long end of the yield curve:

At least from Bessent’s perspective, the Treasury very clearly wants to finance the fiscal deficit by issuing short-term Treasury bills (T-bills). This is sustainable only if there is sufficient demand while the supply of long-term Treasuries increases.

Even if it is not voluntary, under the central goal of maintaining stability, the Fed will probably intervene through some form of “balance-sheet twist” and play a stabilizing role in the long end—whatever label it uses for the move.

So the process of this operation is:

1) Use T-bills instead of long-duration Treasuries to finance borrowing, lowering long-term rates;

2) The Fed’s balance sheet conducts a duration swap, selling short-term assets and buying long-term assets;

3) Externally, it is not called QE; internally, it structurally becomes a kind of QE operation;

This lets them avoid using the word “QE” directly, because as soon as they say it, the market will immediately question the credibility of monetary policy or even panic.

This approach is more like a lightweight version of Japan’s YCC (yield curve control). Its purpose is to control long-term rates through a “non-QE” approach, thereby creating fiscal financing room. The Treasury wants to continue financing itself with short-term debt in a high-rate environment to keep the apparent interest burden down—which means there will be more long-term bonds in the market, and new buyers will have to step forward to absorb them.

Simply put, even without a recession, the Fed may return to expanding its balance sheet under the label of “non-QE” and actively intervene in long-term rates to address fiscal deficit pressure and debt rollover issues.

2025.04.02

II. Insights 

Our Viewpoints and ideas on market.

Locating America (III): The Fragile Symbiosis Between Private Credit and Pensions

Moral hazard never really left..

If this cycle most resembles 2008, it is not because of the banks or MBS, but because of Private Credit. This time, it is not only larger but also more hidden.With policy encouragement and institutional exemptions, this system has become a highly leveraged, lightly regulated, interconnected black box, and Its downstream exposure is the U.S. pension system.

In other words, the housing market of course has problems too, but from the perspective of systemic risk, today’s housing market is no longer the systemic threat it was back then, whereas the The problems in the corporate credit market are more urgent because its transmission effects through the financial system are stronger.

If market liquidity runs into trouble, the Fed is more likely to intervene in corporate credit than in MBS—for example, by establishing some kind of long-term liquidity facility to channel support to parts of the corporate sector—and is less likely to return to the housing market.

The problem in the corporate market is that private credit is expanding very rapidly and has very low transparency, yet it is highly interconnected with traditional financial institutions. This combination could create real risks—and the Fed currently has little visibility into this area, which is what makes it complicated.

U.S. Treasury Secretary Scott Bessent has recently praised Private Credit, and the reason is clear: tighter regulation has left banks seriously short on lending capacity, while Private Credit is “more flexible and willing to take risks,” able to fill the credit gap and promote job creation and business expansion.

Or, put another way, it is precisely because private credit is unregulated that it fills the gap left by bank lending.

One of the new administration’s priorities is financial deregulation. Bessent has also taken a fairly positive stance when discussing Private Credit, because they want to ease regulation of banks.

The issue with private lending is not whether to oppose an unregulated lending system. Private Credit can provide financing to businesses that banks are unwilling to lend to because of regulatory constraints, and that is reasonable. The key risk here is that they cannot be allowed to expand freely while also being rapidly bailed out when something goes wrong.

This is a classic moral hazard dilemma. Once the market comes to expect that someone will bail out high-risk investments, the systemic problem will not stem from loans going bad, but from there being no cost when they do.there being no cost when things go wrong.

More importantly, private credit is actually a “hidden access system,” not a “truly independent system.” It depends heavily on the banking system for liquidity and leverage; it is connected to the banking system itself, while its asset side is directly exposed to pension funds, insurers, and institutional clients.

Many Private Credit funds obtain financing from banks through various channels, while pension funds keep investing in Private Equity and Private Credit; the latter, in particular, also provides leverage for the former’s projects, This middle layer of the structure looks “market-based,” but both ends are public-sensitive systems.

The key point is that pension funds have become overly dependent on Private Credit.It is not that Private Credit is too greedy; pension funds are too hungry. With interest rates near zero for a prolonged period, traditional assets struggled to meet benefit obligations, and pension funds began chasing “unmarked risk,” treating illiquid assets that cannot be valued for long periods as a “source of stable returns.”

And this time, they have bet too much.

On the other hand, pension funds essentially come with a huge “policy put option” built in, for example, the California Public Employees’ Retirement System (CalPERS)—even if its investments fail, would it really be allowed to go bankrupt? Impossible: if these pension funds get into trouble, they will ultimately be rescued through tax increases.

When U.S. public pension funds buy heavily into Private Equity and Private Credit, the issue can no longer be “market-neutral”:Once the problem ultimately erupts in public pension funds, the government simply cannot refuse to bail them out.

The implicit assumption that the system will provide a backstop is the greatest source of risk.If the leverage chain behind Private Credit breaks, the consequences will involve not just hedge funds or Family Offices, but the pensions of tens of millions of civil servants, teachers, and firefighters—the voters.This pattern of turning “systemic risk” into a hostage held over policymakers could very well be repeated by PE/Private Credit: “If you don’t bail me out, you’ll have to bail out CalPERS, so you might as well bail me out directly.”

So The key going forward is to watch closely where the regulators overseeing Trump’s financial deregulation agenda plan to build the “firewall”:Will they make Private Credit bear the consequences while intervening only to contain spillovers? Or will they say, “To keep the situation from spiraling completely out of control, we have no choice but to grit our teeth, accept some cost, and directly bail out these private lenders to protect the whole system..”

In the end, they will most likely choose the “bail out Private Credit first” path.

Although the circumstances are different, the market has already seen a similar move in the case of Silicon Valley Bank (SVB). SVB was hardly a systemically important financial institution, and depositors should have borne the losses themselves. But to maintain confidence in the system, even “non-systemically important” Tech Bros were fully protected. If a credit fund really blows up in the future, the Treasury and the Fed are unlikely to stand by.

Private Equity + Private Credit + public pensions form a “hidden systemic-risk feedback loop.” When the risk materializes, the authorities are highly likely to use a “limited bailout of private actors” to avoid a “full-scale bailout of the public sector.”

Private Credit is not outside the system; it is the new front end of systemic risk.The deeper risk lies not in leverage and liquidity themselves, but in the fact that the market already believes someone will step in when things go wrong. Once that belief comes true, the market’s original logic comes to an end.

2025.03.31

Positioning the U.S. (Part Four): The K-Shaped Economy: Leverage, Illusion, and “Paper Prosperity”

GDP doesn’t care who’s spending. But markets should...

In the years since the pandemic, the term “K-shaped economy” has been used repeatedly, but few people truly understand the divergence in consumption patterns and the market feedback mechanism behind it.The essence of the K-shaped economy is simple: high-end consumption can still support the macroeconomic data because the stock market has not yet crashed; once the stock market catches up to the downside, consumer spending will suddenly lose momentum.

The biggest illusion in the market right now is that consumption looks reasonably healthy, so the economy must be doing fine. But in a K-shaped economy, this is actually the result of paper prosperity while the real economic foundation is already weakening.

Simply put: consumption currently looks acceptable on the surface, but its composition is sharply divided (K-shaped). In the short term, GDP is still being supported by “high-net-worth individuals + the wealth effect from assets.” If the stock market catches up to the downside, high-end consumption will collapse and overall consumption data will lose momentum in tandem—the U.S. stock market has become the economy’s anchor of confidence and engine of consumption.

After the pandemic The current U.S. recovery is essentially a K-shaped recovery, and conditions at the lower end of the K—that is, among lower-income consumers—are indeed getting worse. But as long as people at the upper end of the K (higher-income groups) spend enough to keep overall consumer spending at a certain level, the system can still hold up.

However, as the opening line of today’s Notes says, I hope everyone keeps this sentence in mind:

GDP doesn’t care who spends it—but we should

One particularly representative optimistic view is that the United States does not currently meet the conditions for “falling into recession immediately,” unless the stock market first suffers a major correction. The data show that retail sales have not “fallen off a cliff”: performance is poor, but there has been no cliff-like collapse. Even though lower-end consumption is weak, spending by high-net-worth individuals is still providing a backstop.

The K-shaped economy is what underpins the bulls’ confidence in consumer data, Although conditions among lower-income groups are worsening, as long as higher-income groups keep spending actively, “aggregate spending holds,” and the GDP figures can still hold up, because in the statistics Spending is spending. GDP doesn’t really care where it comes from....

The biggest problem with this kind of economic or consumption structure is:Marginal consumption by high-income groups is based not on wages but on their stock market accounts. They are spending the “paper gains” in their stock portfolios, and if those gains shrink, consumer spending will immediately contract sharply.

GDP: Who spends the money does not matter; as long as someone spends it, the headline data can hold up.

But all of this depends on one condition: the stock market cannot crash...

If a macro shock really does begin to weigh on share prices—through earnings downgrades, a wave of corporate debt refinancing, and debt-servicing pressure under high interest rates—causing the stock market to resume its downward trend, the problem will become very serious.What people at the upper end of the K consume is their “paper wealth”—the psychological surplus generated by the stock market. If the market declines, the entire consumer side will be hit hard. A downturn in U.S. equities will unquestionably show up directly in the consumption data.

the stock market is the tail wagging the economic dog anymore...

A traditional, prominent feature of consumer indicators is that sentiment leads while the data lag. This is what makes consumer indicators somewhat different from other macroeconomic data. The University of Michigan Consumer Sentiment Index (especially its outlook for the labor market) shows extremely pessimistic sentiment, which is really not surprising; in other words, sentiment is a leading indicator of the data.

The first step is often a deterioration in consumer confidence, followed by a contraction in actual consumer behavior. At the same time, the CFO survey also shows businesses “sitting on their hands” on hiring and capex, Together, these two signals point to a contraction at both ends of the consumption chain; the data in between simply have not fully reflected it yet.

This is also the source of one of the core arguments in our Positioning the U.S. series: although macroeconomic uncertainty is certainly a factor in this round of valuation compression for U.S. companies, as repeatedly emphasized in the Planet Notes, micro-level performance is what ultimately determines everything in the U.S. stock market, and a contraction in the consumption chain is bound to lead to weaker company results, It is not that macroeconomics does not matter; it is that every narrative must ultimately be tested against financial statements.

In the Atlanta Fed’s nowcast forecast for Q1’s GDP, the consumer spending component is zero—a recession-level reading. If it materializes, it will be the weakest quarterly reading since the pandemic and the Great Recession. If housing and medical care, these “essential expenses,” are excluded, the remaining “discretionary spending” is already clearly in recession territory.

The K-shaped economy is fragile another reason is the structure of the U.S. stock market, where reactions are amplified by excessive leverage, There are too many extreme, leveraged speculative instruments in the market right now. These instruments are not the problem in themselves, but they play a key role in amplifying “sentiment shocks”; once prices fall, they can create a negative spiral in the K-shaped economy.

In previous U.S. bear markets, the stock market decline amounted only to a linear shift toward bearish sentiment. But now, with widespread use of 0DTE (zero-days-to-expiration options) and the presence of leveraged ETF retail investors and institutions, marginal investors are actually experiencing swings in net asset value far greater than 5-6%, and even losses that are multiples of that.Once this “tail-end liquidation sentiment” starts pushing in the opposite direction, it will amplify the market’s average decline and quickly spill over into psychological expectations on the consumer side.

At the lower end of the K, one particularly clear current signal is BNPL (Buy Now Pay Later), the so-called buy-now-pay-later model. BNPL has reached the consumer at the very end of the chain: DoorDash allows users to pay for fast-food delivery in high-interest installments, This behavior essentially reflects an extremely loose credit environment + users taking their “last available line of credit” and using it for consumption + a “last-line sentinel” for systemic consumer health—paying 37% interest to eat on an installment plan.

BNPL’s expansion in food delivery and low-ticket consumption is one of the red flags for the consumer system.Meanwhile, credit-card delinquencies and serious auto-loan delinquency rates are both rising, yet borrowing shows no signs of slowing and credit expansion continues. At the limit, this is increasingly no longer about “confidence,” but about “having to borrow.”

Excessive valuations + macro shock = stock market decline = sharp drop in consumption + earnings downgrades + further declines + recession

2025.04.01

Positioning the U.S. (Part Five): Path Dependence: QE Is Not Called QE, and Liquidity Injections Are Not Called Liquidity Injections

They won’t call it QE—but the balance sheet will tell the truth...

When discussing monetary policy, what has always mattered is not what they say, but what they do——and this time, the Fed chose “QE that is not called QE,” as well as “liquidity injection that is not called liquidity injection.”

If we carefully break down the Fed’s recent actions, it is actually quite clear—The balance-sheet runoff is the most important change right now.From slowing balance-sheet runoff to asset purchases that are highly likely to come in the future, the Fed has already embarked on a path of “effectively restarting QE.”The only difference is that they will no longer call it QE.

Previous discussion:https://mp.weixin.qq.com/s/kjaoUDQk85Xbr3ji0IZ78g

1. Is balance-sheet runoff a “technical adjustment”? No, it is the activation of a liquidity response mechanism..

First, note that at its latest meeting, the Fed announced that it would reduce the pace of balance-sheet runoff from $60B per month to $25B per month, and explicitly said it would slow the pace further to $5B per month in the future.

Powell called this move a “technical adjustment,” but in reality it is a prelude to injecting liquidity again.

It is actually quite clear... If everything is going so well, why change?

Powell publicly claims that it is merely a “technical adjustment,” as if expanding the balance sheet were also a technical adjustment... But honestly, how can slowing balance-sheet runoff not be a policy action?This is clearly a response to some real-world pressure. If everything were truly “normal,” there would be no need to change the pace.

Bear in mind that Stopping balance-sheet runoff effectively means the return of the largest “passive buyer” in the supply-and-demand structure. This is not a technical adjustment, but a genuine change in direction—a shift in monetary-policy action.

Powell’s wording essentially downplays the true meaning of the decision made by FOMC

What the market needs least right now is for the Fed to keep selling assets into it—that is, to continue balance-sheet runoff. The United States cannot force overseas buyers to purchase Treasuries, and the Fed at least needs to avoid making things worse.

The path they are following is to first reduce the pace of balance-sheet runoff from 250 per month to 50, then gradually stop the runoff completely, and after that, the Fed will most likely expand its balance sheet again (QE) to absorb the excess supply of U.S. Treasuries in the market.

Behind this shift in behavior is the Fed’s need to make room for government financing.As the volume of maturing U.S. Treasuries reaches a peak (about $7T+ in 2025, $1.2T in 2026), the Treasury Department is facing immense refinancing pressure. More importantly, overseas buyers are leaving: the latest data show that foreign investors were net sellers of $500 billion in Treasuries that month.

Further reading: Notes250116The U.S. Treasury’s hidden game: neither about inflation nor debt

Given the need for government financing, the only thing the Fed can do to stabilize market liquidity is to avoid making things worse—first stop balance-sheet runoff, then engage in de facto repurchases, and perhaps ultimately expand the balance sheet again.

2. Another balance-sheet expansion is only a matter of time: the inevitability of coordination between fiscal financing pressure and the central bank’s balance sheet

Further reading: Notes250402A non-bailout version of QE: Operation Twist 2.0

This is a highly path-dependent chain of operations: balance-sheet runoff → slower runoff → pause → balance-sheet expansion again.

A crisis does not need to come first—even if “everything looks normal,” another balance-sheet expansion is only a matter of time.And if credit problems really do emerge in the market this time, the Fed’s response will most likely be even less constrained by the type of asset, For more on this, see Notes250331Positioning the U.S. (Part Three): Private Credit and the Fragile Symbiosis with Pension Funds。

In essence, what the Fed is doing is:

1) abandoning its previous tightening path;

2) gradually slowing balance-sheet runoff, making structural adjustments, and reassuring the market;

3) make room for fiscal financing pressures and stabilize the long end;

4) pave the way for another balance-sheet expansion in the future, avoiding market resistance and sentiment risks under the “QE” label;

This is not a simple technical adjustment; it is another turn in monetary policy’s shift into a fiscally service-oriented phase.

Markets will ultimately be forced to accept another round of “normalization of unconventional policy”.

2025.04.02

III. Market Pulse 

Our latest Comments on the economic and market environment

Note: All content in this article is for reference only, does not constitute investment advice, and is not a basis for any laws, regulations, or regulatory policies. Investors should not use or rely on this information as a basis for making decisions.