From May nineteenth, two thousand twenty-five to May twenty-second, two thousand twenty-five

I. Foundation

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

Lag effects and the broad domestic-demand growth model: cycles and trends

One of the key insights of Endogenous Growth Models is that the business cycle cannot be separated from long-term trend growth—the cycle itself affects productivity and, in turn, the direction of the economy’s potential growth path...

Another concept related to endogenous growth is the “hysteresis effect”, which means that if the economy experiences a period of weak demand or subdued overall activity, workers have less incentive to build their skills, and businesses also reduce investment, particularly investment in innovation. These factors harm future productive capacity and long-term growth potential.In other words, a period of weak demand can cast a long shadow into the future, causing a permanent decline in potential output...

The reason for discussing this is that many friends in our community are very interested in Powell’s recent moves,

but what matters more to us, in fact, is that many signs suggest that, in its upcoming policy review, the Federal Reserve may abandon the idea of “compensatory easing” within FATE (Flexible Average Inflation Targeting)the idea of “compensatory easing,” which is one of the important mechanisms for addressing the hysteresis effect.

In 12 of last year, Draghi delivered a keynote speech on the theme “Responding to the EU’s future direction.” In the speech, in addition to saying that “low productivity growth is one of the major problems facing the EU,” he also emphasized a central point: namely, Weak domestic demand is an important cause of low productivity growth.

His reasoning is as follows: since the global financial crisis of 2008, Europe has pursued austerity fiscal policies continuously. This has led to prolonged weakness in domestic demand. In an environment of insufficient domestic demand, businesses lack the incentive to invest in future productive capacity.This is the “weak domestic demand → lower investment → declining productivity” pathway, and it is precisely how the hysteresis effect manifests itself in reality.

And this can also be seen very clearly in the recovery after the coronavirus pandemic: compared with the United States, Europe’s fiscal stimulus was markedly smaller. In addition, Europe experienced a severe energy supply shock caused by the war in Ukraine (a surge in natural gas prices), which dampened both investment and trend productivity growth. So, for Europe,the relationship between the “hysteresis effect,” “insufficient domestic demand,” and “low growth” is particularly close and evident.

Mainstream macroeconomics often treats the study of “business cycles/aggregate demand management” as separate from that of “long-term productivity growth.” Standard macroeconomics usually divides the economy into “short term” and “long term.” In theory, over the long term, nominal variables do not affect real economic variables.

So markets often say that business-cycle fluctuations are on one side and the potential long-term growth trend on the other, and that the two are separate. But what endogenous growth models really emphasize is that you cannot divide them so neatly: the business cycle does affect trend growth. We cannot simply say that “growth has a cyclical component and a trend component”; the two are actually intertwined.

Between the short and long term, there is a more important medium term, where the two intertwine. The medium term is essentially a long enough period for businesses to adjust their capacity, technology, or organizational methods—roughly 5 to 10 years. This period is precisely a blind spot in traditional macroeconomics; at this stage, the interactions among the business cycle, macroeconomic policy, and productivity growth are critical.

From an empirical standpoint, truly studying the “long term” is very difficult because real-world data series do not extend that far. So, in terms of research focus, it is more important to describe what will happen over the next 5 to 10 years.

Therefore, if a recession or a short-term monetary action can affect productivity over 5 to 10 years, that is enough to warrant close attention as a turning point in the underlying trend.

It would be particularly interesting to combine these two parts, because they form a feedback loop:

1) On the one hand, as Draghi pointed out, weak aggregate demand → less investment → slower productivity growth

2) On the other hand, low productivity growth → pessimistic expectations for future income → weaker current aggregate demand

In other words, weak demand leads to low growth, and low growth in turn suppresses demand, creating a self-reinforcing mechanism. If this feedback is strong enough, the economy may fall into a “stagnation trap”: a persistent state in which low growth and weak demand reinforce each other.

More importantly, even if the “fundamentals are not bad,” “animal spirits”-style pessimistic expectations—for example, households and businesses losing confidence in future growth—could still self-fulfill and trigger this stagnation trap. Supply-side shocks could also trigger effects on the demand side.

Weak demand + a feeble fiscal response = a combination highly prone to falling into a stagnation trap.

This is another reason deficit expansion will not stop; the United States understands this, and Europe has come to understand it too.

2025.05.19

Capital management in an environment of extraordinary uncertainty

In the current market environment, the most important thing to recognize is the extraordinary uncertainty—which also means that any particular view held by market participants could be replaced overnight.

An uncertain environment can be understood through a simple causal relationship in economics:

People always seek to infer and assess the probability of outcome B from the presence of A, and when the causal chain is clear, capital shifts from low-risk, highly liquid assets to higher-risk, less liquid assets, compressing risk premiums and flattening average returns. This brings low expected returns and low volatility, leaving many investors in an environment of low alpha returns.

Once A becomes unknown and unpredictable (even the reliability of other known As is affected by the unknown A), creating unknown unknowns in the market, the corresponding systematic investment process also needs to change.

In this kind of environment, three factors become exceptionally important:

1) Diversification: losses caused by inherently random events need to be reduced as much as possible:Diversification also means paying attention to multiple asset classes across the market. Under the same narrative, assets following similar trading paths can have different risk-return profiles. Choosing which horse to back can sometimes matter more than correctly judging the direction.

2) Maintain liquidity so you can change your mind:The risk of taking profits early is that you may miss part of a move, but the benefit is greater flexibility in managing positions. For us, that flexibility is much more valuable than staying invested during a risky period.

3) Understand correlations: what might follow when new information shifts from unknown to known?For what comes next, causal links across asset classes will tell you everything. Why does cross-asset logic matter? Because within a single market you have no pricing anchor: value has a different answer in everyone’s mind, while price spreads are plain to see. That is the final piece of advice Graham left the world in Security Analysis.

2025.05.22

II. Insights

Our Viewpoints and ideas on market...

The bond market’s bimodal trading

In today’s macroeconomic environment, putting on bond trades is quite challenging, because the market is constantly being pulled back and forth by two forces, switching between the narratives of “economic weakening” and “fiscal risk”:Student loan policies and the low oil price narrative—these factors strengthen deflationary expectations and are favorable for the bond market; a major fiscal spending spree, on the other hand, is bearish for bonds...

Chart: The idea of suppressing oil prices has never gone away

The economy may be soft, not necessarily collapsing, but unlikely to show much strength; the fiscal side, however, is typically under pressure...

Within this framework, on different trading days the market shifts quite smoothly between the two modes, for example, on NFP everyone focuses only on employment; but if the Senate votes on a fiscal bill, fiscal policy becomes the main theme, making the current bond market is basically running on two sets of logic in parallel, switching between them very frequently, which makes it difficult to trade.

Our usual approach to this situation is:

Stay away, because there are always clearer trading opportunities.

As mentioned in “Notes250520The dollar’s weakness remains the core trend: hedging, real-money demand, and time-zone trading arbitrage”:

“...compared with the repeated reversals in bond selling, the pain of selling equities, shorting the dollar is currently the clearest trade direction...”

Until one side clearly gains the upper hand, it is better treated as a signal to watch rather than something to trade directly.

2025.05.20

Potential platinum catch-up trades (on the catch-up logic for precious metals)

The platinum narrative is gaining traction. One of the most striking recent rallies has clearly brought this metal back to the market’s attention—a metal long favored in China’s jewelry market but forgotten for years.

When gold broke above three thousand, we wrote the following:

“The longer gold stays above 3000 dollars, the stronger investors’ fear of missing out on FOMO becomes. This could increase investor interest in white precious metals, especially silver and platinum, because the capital that did not enter in time will look for other ways to express a bullish view on gold, and chase the rally”

Everyone can also go and reread the rye and wheat section of Livermore’s memoir.

There are several key points to trading platinum:

1) Gold trading as the leading example, the longer gold remains in the upper range, the higher the floor of platinum’s trading range will move

2) Tariff pressure, The less attention the tariff narrative receives, the less resistance platinum will face in breaking out.

To add to this, platinum is in fact an asset that is significantly positively correlated with the automotive sector in the market, so,

This can actually be replaced with the automotive sector in the stock market, which is relatively more amenable to quantitative monitoring than the “tariff narrative.”

3) Jewelry accounts for 20% of total platinum demand and will most likely be the“catalyst” the market is looking for to break out

Tariff pressure has a substantial effect on platinum’s price trajectory, so it is important to watch the market details after 4.2:

Chart: Positioning in platinum

On the one hand, the tariff News Pivot has been breached; on the other, trading volume has reached its highest level since the 4.7 low.

Structurally, the platinum/gold ratio remains near historical lows, while speculative funds’ net positions in the platinum futures market, as disclosed in the CFTC report as of 5.13, remained negative, far below the levels of the past two years. Real-money investors have not yet allocated fully to this asset.

There has been a notable increase in long positions in the futures market, while the options market also shows a chase for upside: demand for bullish exposure has increased, and implied volatility has risen overall.

Chart: Platinum / Gold Cross (Source: Bloomberg as of May 21)

Chart: Platinum Aggregate Open Interest vs Price (Source: Bloomberg as of May 20)

Overall, with the platinum/gold ratio still low and speculative funds’ net positioning still bearish, the market still has reason to be bullish on platinum, and we will continue to watch.

The top of the range is 1100; a breakout would be a viable entry point.

The News Pivot is actually at 1007. However, given platinum’s typically thin trading and extreme volatility, a wider level at the market’s common round-number stop-loss point (considering the other side of the trade) could be 1005. If the rise is healthy and the gold-substitution effect thesis holds, the price theoretically should not return to this level.

The ideal scenario is for the price to hold at a high level and trigger trend-following buying from CTA. That is where the money is to be made. As always, it is important to know whose money you intend to make before placing a trade.

2025.05.21

Why we choose to remain short oil: stable turbulence and the nature of oil trading

Oil prices have returned to our trading range.We remain fairly firmly bearish on oil trades.

Chart: Previous trades (see Notes250511)

It must be acknowledged that some actors really do not want to see oil prices fall, such as Iran...

And they may prolong the geopolitical standoff with Trump as much as possible. Recent news reports from various sources have continued to push oil prices higher, Behind the chaos and calculations lies an unavoidable reality:Oil money flows are the fundamental logic behind these wars.

In other words, countries or groups that actively create geopolitical uncertainty may not actually want a major war, but they know that if the situation is chaotic enough, the market will price in a war premium (history has repeatedly shown that war is the basis of the oil premium). Oil prices will naturally stay elevated and may even be pushed higher, On the surface, the market is pricing in geopolitics, but in reality it is being countered by geopolitics.

Chaos itself is a strategy.

In fact, if oil prices fall, neither of the two wars in the world today will be sustainable (even under sanctions, maintaining regional networks is fundamentally supported by oil exports. If oil prices collapse, the shortfall becomes exposed all at once, and strategic actions naturally become more restrained).

What they truly want is “stable turbulence”: the situation cannot be too calm, or there will be no room for an oil price premium; but it cannot become a full-scale war either, because that would invite outside intervention and disrupt the balance of leverage. The ideal state is continued tension in the Middle East without the major powers getting involved. So, the upside in oil prices has a ceiling, and that is intentional.

On the other hand, Saudi Arabia’s daily crude oil production edged up to 896 ten-thousand barrels in 3 (data delayed by two months). This slight production increase came amid an internal strategic shift in OPEC—Arab News reports that OPEC have agreed to sharply increase production starting in 6.

Those following the crude oil market can ignore CNN and Bloomberg’s oil market news. The most important fundamental change now is not the end of the quota system, but the “royal-level reception” Trump received during his Middle East trip to Saudi Arabia and the UAE.

Giving away an aircraft is not a no-strings-attached gift.

Link to the full interview:https://mp.weixin.qq.com/s/ZVzOREe-dgKelru-1PS2wA

Ultimately, if Gulf countries want oil prices to fall, they will fall.

Lower oil prices would naturally also encourage the United States to replenish its Strategic Petroleum Reserve...

Finally, a few micro-level clues (from the Earth’s Core community):

Chart: Some detailed tracking of the commodity market will be posted in the Earth’s Core community; those interested can use this link

hhttps://www.meridianresearch.app/home?product=commodity-strategies

2025.05.22

III. Market Pulse

Our latest Comments on the economic and market environment

Dollar weakness remains the core trend: hedging, real-money demand, and time-zone trading arbitrage

Compared with the repeated reversals in bond selling, the pain of selling equities (institutions are underallocated while retail investors keep adding),

shorting the dollar is currently the clearest trade direction:

in Notes250515Continuing the discussion of unhedged dollar exposure and EUR/USD targets we discussed:

1/ once there is systematic reductions in allocations to U.S. assets, could trigger a convexity effect in the foreign exchange market—that is, capital flows themselves amplify selling pressure on the dollar, causing exchange rate movements (the extent of the dollar’s depreciation) to far exceed and diverge from what traditional fundamentals, such as monetary policy and interest-rate differentials, can explain. And the potential volatility naturally creates trading opportunities.

2/ among those with the largest holdings of U.S. assets G10 investors, the largest share is capital from Europe—which means that if the dollar undergoes another genuine correction later on (a correction driven by hedging of actual dollar exposure), then EUR/USD will be the key currency pair to trade.

Chart: If we bring SPX and EURUSD together

The most striking feature on the chart at EURUSD is that it drifts lower slowly and steadily when US equities rebound, but surges rapidly and impulsively when US equities soften—a classic case of “rising fast, falling slowly.”

On the other hand, the market still follows a classic time-zone trading pattern: the dollar is weak outside New York hours and actively bought during New York hours. At present, overseas investors are steadily reducing their US asset holdings and increasing their dollar hedges, while US companies continue buying dollars—This mismatch between hedging and underlying demand means that this trading rhythm will continue.

Unless US-based real money investors begin selling dollars on a large scale, or central banks sell so many dollars that they must extend their operations into New York trading hours, this pattern of “strength outside the US, then strength in New York” will remain the main theme.

A carry strategy may be appropriate (long during New York hours, short outside New York hours).