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

I. Foundation

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

The non-bailout version of QE: Operation Twist 2.0

Debt refinancing will begin to ramp up in earnest this year, increasing the pressure on asset prices. U.S. government debt of 10 trillion dollars is still coming due, As we keep saying, competition for capital between the public and private sectors will be intense this year.

Further reading: Notes250227 The Fed's QT and the impact of the debt ceiling on market liquidity

Notes250327Positioning the U.S. (two): Warning signs of recession

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

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

Further reading: Notes250328Four different forms of QE: An introduction to the concept of monetary financing

Even if there is no recession or market crash this time, the Fed may still initiate a form of “asset purchases outside a bailout context,” whose possible form would be a balance-sheet composition twist, with the real objective of trying to push down the long end of the yield curve:

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

Even if it is not voluntary, given its core goal of maintaining stability, the Fed will probably step in through some form of “balance-sheet twist” and play a stabilizing role in the long end—whatever banner it uses to do so.

So the process for this operation is:

1) Replace long-duration Treasury financing with T-bills to lower long-term rates;

2) Conduct a duration swap on the Fed’s balance sheet: sell short-term securities and buy long-term ones;

3) Publicly, they do not call it QE; structurally, internally, it becomes an operation resembling QE;

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

This approach resembles a lighter version of Japan’s YCC (yield curve control). Its purpose is to control long-term rates through a “non-QE” form, thereby freeing up fiscal financing space. The Treasury wants to keep financing itself with short-term debt in a high-rate environment to maintain the appearance of manageable interest costs—which means more long-term debt supply in the market, requiring new buyers to step in and absorb it.

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

2025.04.02

II. Insights

Our Viewpoints and ideas on market.

Positioning the U.S. (three): The fragile symbiosis between private credit and pensions

Moral hazard never really left..

If this cycle resembles the year 2008 most, it is not because of the banks or MBS, but because of private credit—and this time it is not only bigger, but also more hidden.Encouraged by policy and exempted by the institutional framework, 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 certainly has problems, but from a systemic-risk perspective, by comparison, today’s housing market no longer poses the kind of systemic threat it did back then; corporate The problems in the corporate credit market are more urgent because its transmission through the financial system is stronger.

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

The problem in the corporate market is that private credit is expanding very rapidly and has very little transparency, yet it is closely tied to traditional financial institutions. This combination may pose a real risk—and the Fed currently has little visibility into this area. That is what makes it complicated.

U.S. Treasury Secretary Scott Bessent recently praised private credit highly, for a clear reason: tighter regulation has left banks with severely reduced lending capacity, while private credit is “more flexible and willing to take risks,” allowing it to fill credit gaps and support employment and business expansion.

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

One of the new administration’s priorities is financial deregulation. Bessent has also been quite positive when discussing private credit, because they want to ease regulation of banks.

The issue with private lending is not whether we should oppose an unregulated lending system. Private credit can finance companies that banks are unwilling to lend to because of regulatory constraints, which is reasonable. The key risk here is that they cannot be allowed both to expand freely and to receive a rapid bailout when things go wrong.

This is a classic moral-hazard dilemma. Once the market expects that risky investments will always be rescued, systemic problems will stem not from bad loans, but from there being no cost for getting it wrong.

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

Many private credit funds obtain financing from banks through various channels. Pension funds continually invest in private equity and private credit, and the latter in particular also provides leverage for the former’s projects, This middle layer looks “market-based,” but both ends are public-sensitive systems.

The core issue is that pension funds have become overly dependent on private credit.It is not that private credit is too greedy, but that pension funds are too hungry. When interest rates stay at zero for a long time, traditional assets struggle to meet benefit obligations, so pension funds start chasing “unmarked risk” and treating illiquid assets that cannot be valued for long periods as a “source of stable returns.”

And this time, they have wagered too much.

On the other hand, pension funds essentially come with a giant “policy put option”, for example, the California Public Employees’ Retirement System (CalPERS)—even if it made bad investments, 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”:If the problem ultimately erupts in public pension funds, the government simply cannot leave them unaided.

The unconscious 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 reach beyond hedge funds or family offices to the pensions of tens of millions of public employees, teachers, and firefighters—the voters.This pattern of turning “systemic risk” into a policy hostage 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 where the regulators overseeing Trump’s financial deregulation agenda intend to build the “firewall”:Will private credit be left to bear the consequences, with intervention limited to spillovers? Or will they say, “To prevent the situation from spiraling completely out of control, we have no choice but to grit our teeth, pay a price, and directly rescue these private lenders to protect the whole system..”

Most likely, they will ultimately choose the “rescue private credit first” path.

Although the circumstances differ, the market has already seen a similar operation in the case of Silicon Valley Bank (SVB). SVB was not a systemically important financial institution at all, and depositors should have borne their own losses. But to maintain confidence in the system, even “non-systemically important” tech bros received full protection. If a credit fund really blows up in the future, the Treasury and the Fed are unlikely to stand idly by,

Private equity, private credit, and public pensions form a “hidden systemic-risk loop.” When risks materialize, the authorities are very likely to use “limited rescues of private entities” to avoid “a wholesale bailout of the public sector.”

Private credit is not outside the system; it is the new front end of systemic risk.The deeper risk is not leverage or liquidity itself, but the fact that the market already believes someone will provide a backstop when things go wrong. Once that belief becomes reality, the market’s original logic comes to an end.

2025.03.31

Positioning the U.S. (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 the underlying consumption structure and the market feedback mechanism.The essence of the K-shaped economy is simple: high-end consumption can still support the macro data because the stock market has not crashed. If the market then catches up on the downside, consumer spending will suddenly lose momentum.

The market’s biggest illusion right now is that consumption still looks acceptable, so the economy must be in decent shape. But in a K-shaped economy, this is actually the result of paper prosperity, while the underlying foundation is already eroding.

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

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

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

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

A representative optimistic view is that the United States does not currently meet the conditions for “falling into recession immediately,” unless the stock market first undergoes a sharp 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 gives the bulls confidence in the consumer data, Although the lower-income groups are deteriorating, as long as upper-income groups remain active consumers and “aggregate spending holds,” then 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 economy or consumption structure is:The marginal consumption of high-income groups is not based on wages, but on their stock portfolios. They spend their “paper gains” in the stock market; once those gains shrink, consumer spending will be sharply reduced immediately.

GDP: Whoever spends the money, as long as someone spends it, can keep the headline data afloat.

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

If, under some macroeconomic shock, downward earnings revisions, a wave of corporate debt refinancing, and debt-service pressure from high interest rates begin weighing on share prices and push the stock market back into a downtrend, the problem will become truly serious.What the upper end of the K consumes is their “paper wealth,” the psychological surplus brought by the stock market. Once the market declines, the entire consumer sector will be hit hard. A decline in U.S. stocks will absolutely show up directly in consumption data.

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

A traditional distinguishing feature of consumer indicators is that sentiment leads while the data lag. This is what makes consumer indicators somewhat unusual compared with other macroeconomic data. The University of Michigan Consumer Sentiment Index, especially its outlook for the labor market, shows extremely strong pessimism, which really is no surprise. In other words, sentiment is a leading indicator of the data.

The first step is often a decline in consumer confidence, followed shortly by a contraction in actual consumer behavior. Meanwhile, the CFO survey also shows businesses taking a “wait-and-see” approach to hiring and capex, These two signals together point to a contraction at both ends of the consumption chain; the data in between just have not fully shown it yet.

This is also the source of one of the core arguments in our Positioning the U.S. series: although macro uncertainty is certainly a factor in this round of valuation contraction for U.S. companies, as repeatedly emphasized in Planet Notes, micro-level earnings always determine everything in the U.S. stock market, and a contraction in the consumption chain is bound to bring a decline in earnings, It is not that macroeconomics does not matter; rather, every narrative must ultimately be tested against financial statements.

In the Atlanta Fed’s Q1 GDP nowcast forecast, the consumer spending component is zero, already a recession-level reading. If it becomes reality, it would be the weakest quarterly reading since the pandemic and the Great Recession. If housing, health care, and other “essential expenses” are excluded, the remaining “discretionary spending” portion is already clearly in recession territory.

One reason the K-shaped economy is fragile, another is the structure of the U.S. stock market, where current reactions are amplified by excessive leverage, There are too many extreme, leveraged speculative instruments in the market today. These instruments are not the problem themselves, but they play a key role in amplifying “sentiment shocks.” Once a decline begins, they can create a negative spiral in the K-shaped economy.

In previous U.S. bear markets, stock declines reflected only a linear shift toward bearish sentiment. But now, with the widespread use of 0DTE (zero-day-to-expiration options) and the presence of leveraged ETF retail investors and institutions, marginal investors actually face much greater swings in net asset value than 5-6%, and even losses that are multiples of their capital.Once this “tail-end liquidation panic” creates a reverse feedback loop, it will magnify the market’s average decline and quickly spill over into consumer sentiment.

At the lower end of the K, one very clear current signal is BNPL (Buy Now Pay Later), the so-called buy-now-pay-later model. BNPL has now reached the very end of the consumption chain: DoorDash allows users to pay for fast-food delivery in high-interest installments, This behavior is essentially a sign of extremely loose credit conditions + an illustration of users “using their last bit of available credit to consume” + a “last-line sentinel” for systemic consumer health—financing a meal at 37% interest.

BNPL’s expansion into food delivery and low-ticket spending is one of the red flags for the consumer system.Meanwhile, credit card delinquencies and serious auto loan defaults are both rising, yet borrowing shows no sign of slowing and credit expansion continues. At the end of the line, this is no longer so much about “confidence” as about “having to borrow.”

Overvalued markets + 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 isn’t called QE, and liquidity injections aren’t called liquidity injections

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

When discussing monetary policy, what has always truly mattered is not what they say, but what they do—And this time, the Fed has chosen “QE called QE” and liquidity injections that are “not called liquidity injections.”

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

Further reading:https://mp.weixin.qq.com/s/kjaoUDQk85Xbr3ji0IZ78g

1. Is balance sheet reduction a “technical adjustment”? No, it is actually 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 stated that it would slow it further to $5B per month in the future.

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

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

Powell publicly claims it is merely a “technical adjustment,” as though expanding the balance sheet were also just a technical adjustment... But honestly, how can slowing balance sheet reduction 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, Stopping balance sheet reduction effectively means the return of the largest “passive buyer” in the supply-demand structure. This is not a technical adjustment, but a genuine change in direction—a shift in monetary policy behavior.

This wording from Powell 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—in other words, to continue reducing its balance sheet. The United States cannot force overseas buyers to purchase Treasuries, and the Fed must at least avoid making things worse.

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

Behind this policy shift is the Fed’s need to make room for government financing.As U.S. Treasury maturities reach a peak (around $2025T+ in 7, and $1.2T in 2026), the Treasury Department is facing enormous refinancing pressure. More importantly, overseas buyers are exiting: the latest data show that foreign investors were net sellers of $500 hundred million in Treasuries that month.

Further reading: Notes250116 The U.S. Treasury’s Intrigue: Neither Inflation nor Debt Is the Issue

When it comes to government financing and stabilizing market liquidity, the only thing the Fed can do is stay out of the way—first stop reducing its balance sheet, then engage in indirect repurchases, and eventually perhaps expand the balance sheet again.

2. Balance sheet expansion again is only a matter of time: the inevitability of coordination between fiscal financing pressures and the central bank’s balance sheet

Further reading: Notes250402 A Non-Bailout Version of QE: Operation Twist 2.0

This is a highly path-dependent chain of operations: balance sheet reduction → slowing the reduction → pause → balance sheet expansion again.

A crisis does not need to happen first—even if “everything looks normal,” expanding the balance sheet again is only a matter of time.And if a credit problem really emerges in this market cycle, the Fed’s response will most likely be even less constrained by the types of assets, For more on this, see Notes250331 Positioning the U.S. (Part Three): The Fragile Symbiosis Between Private Credit and Pensions。

In essence, what the Fed is doing is:

1) abandon the original tightening path;

2) gradually slow balance sheet reduction, make structural adjustments, and reassure the market psychologically;

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

4) pave the way for future balance sheet expansion, avoiding the market resistance and sentiment risks associated with the “QE” label;

This is not a simple technical adjustment; it is another turn toward a phase in which monetary policy serves fiscal needs.

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

2025.04.02

Positioning the U.S. (Part Six): Can geopolitical reconciliation restore confidence in the dollar?

Peace might be good for oil. But it won’t fix the dollar...

Markets have been trying to bet on “positive surprises.” With tariffs offering no favorable cards, many institutions are watching for a possible easing of geopolitical tensions, especially whether a Russia-Ukraine peace agreement could become a new catalyst for risk assets.

If a peace agreement is indeed reached, our view is:For oil prices, perhaps positive in the short term; for stocks, only a slight impact; for the dollar, it may provide short-term support; but it will not reverse the long-term de-dollarization trend.

1. First, oil prices. According to conventional logic, after Trump took office and promoted the “drill, baby, drill” policy while claiming he would resolve the Middle East and Ukraine issues, oil prices should theoretically have fallen.

But in reality, oil prices have been anchored within a narrow range. Even as global growth slows and geopolitical conditions repeatedly fluctuate, oil prices remain relatively firm (always pulled back to $70). This may reflect price anchoring led by OPEC. So, At this point, even if a peace agreement is reached, oil prices may not fall unless peace actually brings a substantial easing in the physical supply structure.

This is also why we think Trump will very likely want to promote a recession narrative: in a market with price controllers, only a major global narrative of this kind could break through a stubborn price range.

After the tariffs took effect, oil prices plunged to test the bottom. The key thing to watch next is whether they can return to $70; if they successfully fall below the range, at least Trump will have achieved the first step here.

2. How peace affects stocks: a sentiment boost ≠ a trend reversal

The core of the Positioning the U.S. series lies in macro shocks as trading catalysts, while structural trends are determined by actual earnings In other words, this also means that even a broad-based easing would be unlikely to provide a genuine medium-term boost to the market.The market’s attention is not on geopolitics, but on earnings, liquidity, and valuation. What determines the market’s direction is not “whether there is peace,” but “whether there is money to be made.”

This can be seen in the market’s reactions to many past wars:

In most cases, stocks react only intraday; sentiment shocks are extremely short-lived in structural trend trading.

3. U.S.-Russia trade normalization could provide short-term support for the dollar

What is truly worth discussing is the dollar. On the one hand, the dollar is linked to dollar-denominated assets as a whole; on the other, the resumption of trade between the United States and Russia, the lifting of asset freezes, and the restart of cooperation on mineral resources form the mainstream narrative for new support for the dollar.

The “weaponization of the dollar” policies of recent years (such as freezing Russia’s foreign exchange reserves and sanctions on the Swift system) accelerated global de-dollarization. If the U.S. makes some form of “soft retreat” in its policies or symbolically restores mutual trust, In the short term, this will certainly ease that trend and certainly support the dollar. But short-term benefits do not mean a long-term reversal, because the root of de-dollarization has never been politics—it is fiscal policy.

In other words, the root of the dollar’s systemic credit crisis is not sanctions, but the fiscal deficit itself. The United States relies on printing money under its “exorbitant privilege” to support its deficit, and central banks around the world have long understood this.In the next series, we will discuss the dollar crisis and the fiscal and liquidity issues behind it.

In a word: a peace agreement can bring localized easing, but it cannot fix America’s structural problems. Oil prices may fluctuate in the short term and the dollar may get short-term support, but what the market should truly care about is fiscal imbalance, capital repricing, and institutional credit overextension.

2025.04.03

III. Market Pulse

Our latest Comments on the economic and market environment

Analysis of Tariff Day

The weighted average of the announced tariff rates is 18.3%; after exemptions for certain categories, the effective tariff increase is 12.6 percentage points. Given subsequent retaliatory measures and the possibility of further tariff increases in certain industries, the overall tariff increase could be even larger.

Taking exemptions for specific products into account, tariffs on China will increase by 26 percentage points, bringing the effective tariff on Chinese goods to 58%, far above market forecasts.China is expected to announce retaliatory tariffs and export restrictions, while avoiding a sharp depreciation of the renminbi and increasing domestic stimulus.

We had already raised the issue of the link between tariffs and A-shares before Trump took office:

Image: Notes240421 Why the trade war2.0 could be good for A-shares

Image: Notes241106 How to trade after the election: Trump trades driving global macro and capital flows

Overall, as things stand, these tariffs:

1）Trade frictions are continuing to intensify around the world, not just between China and the United States.

2）Small- and mid-cap stocks in each region could see a valuation re-rating relative to large-cap stocks with greater exposure to global markets.

3）Stimulus policies will begin, and after the tariffs, a quiet QE will very likely follow (see the Positioning the U.S. series).

4）There is still no plan for Trump to meet with mainland China, which means that “real negotiations” have not yet begun.

Another point worth noting is that future room for negotiation may lie in China reducing its trade surplus with the United States, for example by increasing imports of U.S. goods. The Wall Street Journal reported in 2 that China might use the “Phase One” trade deal as a bargaining chip, including by increasing its annual purchases of U.S. goods by 2000 hundred million dollars.

At this point, the U.S. government clearly understands the market impact of its tariff policy, but has still chosen to move ahead;while China’s Government Work Report this year explicitly mentioned for the first time“the healthy development of real estate and the stock market,” a first in history, which must still reflect policy considerations.

After all, external and domestic demand cannot both fall behind.

Some savvy capital will enter early and wait for policy; when the policy is implemented, that is the time to sell. Either stay out, or get in early if you are going to act.