May nineteenth, two thousand twenty-five to May twenty-first, two thousand twenty-five

I. Foundation

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

Hysteresis and the Broad Domestic Demand Growth Model: Cycles and Trends

One of the most important insights of endogenous growth models is that business cycles cannot be separated from long-term trend growth—that is, the cycle itself affects productivity and, in turn, the trajectory of the economy’s potential growth path...

Another concept related to endogenous growth is “hysteresis”, a concept that means—if the economy goes through a period of weak demand or subdued overall activity, workers will have less incentive to build skills, and businesses will also reduce investment, particularly investment in innovation, all of which will damage future productive capacity and long-term growth potential.In other words, a period of weak demand may cast a long shadow into the future, causing potential output to decline permanently...

The reason for discussing this is that many members of our community are very concerned about Powell’s recent moves,

but in fact, what matters more to us is, Many signals suggest that, in its upcoming policy review, the Fed may abandon, within FATE (flexible average inflation targeting), thethe idea of “compensatory easing,” which is one of the important mechanisms for addressing hysteresis.

Last 12 month, Draghi delivered a keynote address titled “Responding to the Future Direction of the European Union.” In the address, 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 continued to pursue contractionary fiscal policies. This has kept domestic demand weak over the long term. In an environment of insufficient domestic demand, businesses lack the incentive to invest in future productive capacity.This is the path of “weak domestic demand → lower investment → declining productivity,” and it is precisely how “hysteresis” manifests in reality.

This was also clear in the recovery after the pandemic: compared with the United States, Europe's fiscal stimulus was much smaller. Europe also experienced a severe energy-supply shock caused by the war in Ukraine (with natural-gas prices surging), which restrained investment and trend productivity growth. So, for Europe,the relationship between “hysteresis,” “insufficient domestic demand,” and “low growth” is particularly close and clear.

Mainstream macroeconomics often treats the study of “business cycles/aggregate demand management” as separate from that of “long-term productivity growth.” In standard macroeconomics, the economy is usually divided into two parts: the “short run” and the “long run.” In theory, in the long run, nominal variables do not affect real economic variables.

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

Between the short run and the long run, there is an even more important medium term, where the two intersect. In practice, the medium term is a sufficiently long span for businesses to have a chance to adjust their capacity, technology, or organization—roughly 5 to 10 years. This period is precisely a blind spot overlooked by traditional macroeconomics; at this stage, the interactions among the business cycle, macroeconomic policy, and productivity growth are crucial.

From an empirical standpoint, it is very difficult to truly study the “long term,” 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 a period of 5 to 10 years, that is enough for it to merit close attention as a turning point in the underlying trend.

Bringing these two parts together is particularly interesting, because they form a feedback loop:

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

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

In other words, weak demand leads to low growth, and low growth in turn restrains 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,” the emergence of “animal-spirits-style pessimistic expectations”—for example, households and businesses losing confidence in future growth—could self-fulfillingly trigger this stagnation trap. Supply-side shocks could also trigger a shift on the demand side.

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

This is another reason why deficit expansion will not stop. The United States understands this, and Europe has understood it too.

2025.05.19

II. Insights

Our Viewpoints and ideas on market...

Two-mode trading in the bond market

Against today’s macroeconomic backdrop, putting on bond trades is quite tricky, because the market is constantly being pulled back and forth by two forces, switching repeatedly between the narratives of “economic weakness” and “fiscal risk”:Student loan policy and the low-oil-price narrative—these factors strengthen deflation expectations and support the bond market; a major fiscal spending expansion, on the other hand, is bearish for bonds..

Chart: The idea of pushing oil prices down has never gone away

The economy may be somewhat soft—not necessarily collapsing, but unlikely to show any bright spots—while the fiscal side is clearly adding 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 is voting on a fiscal bill, fiscal policy becomes the main theme, making Today’s bond market is basically running on two sets of logic in parallel, switching between them very frequently, which makes it quite tricky 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 Flows, and Time-Zone Trading Arbitrage”:

“...compared with the back-and-forth of selling bonds, and the pain of selling stocks, shorting the dollar is the clearest trade at present...”the back-and-forth of selling bonds, the pain of selling stocks, shorting the dollar is the clearest trade at present...”

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

2025.05.20

Potential Catch-Up Trades in Platinum (on the catch-up rally logic for precious metals)

The platinum narrative is gaining traction. One of the most striking rallies recently has, in effect, brought this asset back to the market’s attention after it was long favored in China’s jewelry market but then forgotten for years.

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

“The longer gold stays above 3000 dollars, the more investors feel they have missed out on FOMO. This could increase investor interest in white precious metals, especially silver and platinum, because Capital that did not get in time will look for other ways to express a bullish view on gold, and chase the rally”

You can also Reread Livermore’s memoirs, the section on rye and wheat.

There are a few key points for trading platinum:

1) Gold trading as the prime example, the longer gold stays in its upper range, the more the bottom of platinum’s trading range will move up

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

To add to this, platinum is in fact an asset with a significant positive correlation to the automotive sector in the market, so,

This can actually be replaced by the automotive sector in the stock market, which is relatively more amenable to quantitative observation 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 the “catalyst” the market is looking for to break out

Tariff pressure has a major impact on platinum’s price trajectory, so the market details after 4.2 become very important:

Chart: Positioning in platinum

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

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

The futures market has seen a certain degree of additional long positioning, and the options market also shows a pursuit of upside: demand for bullish exposure is increasing, while implied volatility is rising overall.

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

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

Overall, with the platinum/gold ratio still low and speculative funds’ net positions still bearish, the market does have grounds to remain bullish on platinum, and we will continue to monitor it.

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, commonly used round-number stop level—considering the other side of the trade—could be 1005. If the uptrend is healthy (and the gold-substitution effect thesis holds), the price should theoretically not return here.

Ideally, the price holds at a high level and triggers trend-following buying by CTA. That is the money to be made. As always, it is important to know whose money you are trying to earn before putting on a trade.

2025.05.21

III. Market Pulse

Our latest Comments on the economic and market environment

The dollar’s weakness remains the core trend: hedging, real money flows, and time-zone trading arbitrage

Compared with the back-and-forth of selling bonds and the pain of selling stocks (institutions are underallocated, while retail investors keep adding positions),

Shorting the dollar is the clearest trade at present:

In Notes250515Continuing the discussion of unhedged dollar exposures and including the euro-dollar target price in which we mentioned:

1/ Once a systematic reduction in allocations to U.S. assets, it could trigger a convexity effect in the foreign exchange market—that is, capital flows themselves would 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 will naturally create trading opportunities.

2/ Among those holding the largest amounts of U.S. assets G10 investors, the largest share comes from European funds—which means that if the dollar undergoes another genuine adjustment later on (an adjustment driven by hedging of actual dollar exposure),EUR/USD will be the core pair to trade.

Chart: Bringing SPX and EURUSD together

The most striking feature of the EURUSD chart at present is that it falls slowly and steadily when U.S. stocks rebound, but rallies rapidly and impulsively when U.S. stocks weaken—a typical “rises fast, falls slowly” pattern.

On the other hand, the market still follows a classic time-zone trading pattern: the dollar is weak outside New York hours and is actively bought during the New York session. At present, as overseas investors continue to reduce their U.S. asset holdings and increase their dollar hedges, U.S. companies continue buying dollars—This mismatch between hedging and real-money demand means that this trading rhythm will continue.

Unless U.S.-based Real Money begins selling dollars on a large scale, or central banks’ dollar selling becomes large enough that they must extend their operations into the New York session, this “strong outside the U.S., stronger in New York” rhythm will remain the dominant pattern.

A suitable arbitrage strategy would be to go long during the New York session and short outside New York hours.