From April seventh, two thousand twenty-five to April eighth, two thousand twenty-five
For internal use on Knowledge Planet [Cross-Market Asset Strategy Notes]. Do not distribute!
Table of Contents
Global Liquidity (One): Interest Rates Are Not the Main Story; Liquidity Is the Key
Powell and Yellen’s tricks: “Pump and Dump”
U.S. Treasuries/Gold: A Geopolitical Relative-Value Logic
If Recession Returns: A Simple Analytical Framework for Gold and U.S. Treasuries
I. Foundation
resistance to change and hence greater dependability for the results shown in the past.
Global Liquidity (One): Interest Rates Are Not the Main Story; Liquidity Is the Key
It’s not about interest rates. It’s about balance sheet...
With tariffs taking effect, everyone is turning their attention to the Fed, The real market narrative is not about topics like “how many rate cuts,” but about whether the liquidity and reserve structure of the entire system remains in an ample regime and whether it is nearing the edge of a scarce regime.
The Fed and markets commonly classify liquidity as: ample / abundant / scarce
In fact, since the pandemic, the global liquidity system has remained in a highly ample reserve regime over the past few years. Looking further back, our current starting point follows at least ten years of abundant liquidity and a compressed Debt-to-Liquidity ratio. The main reason for this situation is:After the global financial crisis of 2008, central banks around the world injected liquidity on a massive scale to stabilize the financial system; during the pandemic, they then implemented further unprecedented monetary easing.
These operations created an extremely loose liquidity environment and also lowered the traditional “debt/GDP” ratio. In addition, the prolonged zero-interest-rate environment encouraged many companies and governments to “extend the duration” of short-term debt, in what is known as “debt maturity transformation.”
But by the second half of 2024, this model was close to reversing, and system-wide reserves were rapidly sliding toward a “scarce regime.”Previously, markets borrowed at extremely low interest rates and pushed back repayment schedules. But these extended-maturity debts are gradually coming due, and the so-called “debt maturity wall” will pose a major challenge to capital markets over the next two to three years.
—A large volume of medium- and long-term debt that had previously been “locked in” is now tending to mature all at once.
By definition, this reversal in the liquidity-debt relationship is enough to end the current bull market. Although it may not yet be sufficient to directly trigger a systemic bear market, its destructive potential can no longer be ignored.
Further reading: Notes 250407 Powell and Yellen’s tricks: “Pump and Dump”
If you extrapolate what’s happening at the Fed, the money runs out probably this September. It’s not a question of probability, but of the path.
The essential definition of liquidity can be summed up in one sentence: at its core, it is the balance-sheet capacity of the financial system.
This definition is rough and broad, but it is the most basic starting point.
The system currently needs more liquidity, which essentially means an expansion of balance sheets.
This is why liquidity is so crucial: we live in a “debt-driven” economic system. Debt dominates everything. Every year, enormous amounts of outstanding debt need to be refinanced. Today’s capital markets are no longer centered on “raising funds for new investment projects”; they revolve entirely around “debt rollover.”
Debt rollover requires sufficient balance-sheet capacity in the system. That capacity depends on the degree of expansion of the entire financial system. But the expansion of the financial system itself is constrained or guided by the policy boundaries imposed by central banks and regulators.
If the central bank itself is shrinking its balance sheet, it is difficult for the financial system to expand its balance sheet in tandem. In that situation, the Federal Reserve must step back in and expand its own balance sheet.
Further reading: Notes 250402 Positioning America (Five), Path Dependence: QE isn’t called QE, and liquidity injections aren’t called liquidity injections
Most large market transactions are fundamentally debt rollovers rather than new capital raising. If debt cannot be rolled over smoothly, the market structure will break down. If it cannot be rolled, this is not a matter of price, but of survival. So the core issue is not the level of interest rates, but whether balance sheets have room to absorb the debt.
If liquidity is insufficient to support the debt structure, systemic risk can be triggered even without a rate hike. If the Federal Reserve continues QT, it will bring “liquidity compression,” effectively withdrawing the financial system’s capacity to refinance.
Liquidity is currently somewhere between abundant and ample, but “very close to the edge.” If we linearly extrapolate variables such as the current QT pace, RRP depletion, and TGA rebuild, reserves will fall below the system’s critical threshold by 9 at the latest this year, bringing us back to a state of episodic mismatch similar to the repo crisis of 2019 9.
The repo market is already pricing in this situation. In the repo market, spreads are widening continuously; this is a very clear trend.This persistent widening of spreads must have alerted Federal Reserve policymakers. They once said they did not want a repeat of the 2019 repo market crisis, but we are indeed moving step by step toward that edge.
The spread between SOFR and Fed Funds continues to widen; spread widening is the clearest early signal. This trend is almost a shadow of the eve of 2019 9. Uneven reserve distribution within the system, divergence in reserve structures between large and regional banks, rapid depletion of RRP balances, and continued QT together form a classic liquidity exhaustion path.
The core of modern liquidity is not an independent, static concept, but the dynamic intersection of liquidity × collateral × balance-sheet capacity.Focusing on liquidity means paying close attention to collateral, and the repo market is precisely where these two core variables—liquidity and collateral—intersect, Repo rates will be a very important indicator this year.
If collateral quality deteriorates and balance-sheet capacity is constrained, the system could suddenly freeze up for liquidity even if reserve levels remain unchanged. To understand the current financial system, we cannot look only at interest rates; we must look at repo collateral structure, reserve tiers, and balance-sheet availability across the entire system..
The banking system’s balance-sheet capacity is shrinking, while regulators are still tightening reserve-buffer requirements on banks. This kind of Structural squeeze can only be resolved through active Fed balance-sheet expansion or a blowup in shadow credit; there is no neutral option in between.
Further reading: Notes 250331 Positioning America (Three): Private Credit and the Fragile Symbiosis with Pensions
Further reading: Notes 250402 A non-bailout version of QE: Operation Twist 2.0
We have entered a debt-refinancing-driven world, in which the balance sheet itself is the core variable. Today’s markets are no longer the world where capital expenditure drives activity and interest rates determine investment returns—the defining variable of this era is no longer the level of interest rates, but balance-sheet capacity..
This is a paradigm shift in the macro narrative.
2025.04.07
Powell and Yellen’s tricks: “Pump and Dump”
The essence of Pump and Dump is to inject a whole package of hidden stimulus policies into the U.S. economy through a series of actions outside the rules.Specifically, these were a series of actions taken by Powell and Yellen during 2024, in part, from one perspective, with the aim of building momentum for Biden’s reelection... Although the outcome was clearly unsuccessful... a package of “hidden stimulus policies” was nevertheless injected into the U.S. economy.
This hidden stimulus package could be called “QE’s Not QE,” meaning a series of actions the Federal Reserve took outside its official QT or balance-sheet policy.
“Balance-sheet policy” mainly refers to FOMC’s current definition of QT: allowing U.S. Treasury securities to mature naturally without reinvesting, thereby shrinking the balance sheet. Conversely, if they continue buying Treasuries, that falls under QE operations.
This has in fact already diverged from the original conception of QE. Going back to the Bernanke era, he emphasized that the essence of QE is transmitted through changes in bank reserves (he stated this very explicitly). Now, the Fed is increasingly appropriating the definitions of QE and QT.
Further reading: Notes 250328 Four Different Forms of QE: Introducing the Concept of Monetary Financing
Further reading: Notes 250328 Recalibrating the Definitions of QE and QT
“QE’s Not QE” refers to Federal Reserve operations outside Treasuries and MBS, including RRP (the reverse repo facility), the reduction in RRP balances, fluctuations in the Treasury General Account (TGA), operating losses on the Fed’s holdings, and the now-discontinued BTFP (Bank Term Funding Program), among others—In essence, this is liquidity injected into the system by the Federal Reserve outside its official QT policy. In other words, they are not really tightening; they are quietly carrying out “hidden QE.” That is where the phrase “QE’s Not QE” comes from.
Under Janet Yellen’s leadership, the U.S. Treasury made the very savvy choice to finance the government by issuing short-dated Treasury securities (bills).Since the end of 2023, more than 60% of U.S. deficit financing has been carried out in the form of Treasury bills, an extraordinarily high share by modern historical standards.
Treasury bills are very short-term government bonds, typically maturing within 12 months, and they pay no interest (that is, they are zero-coupon bonds). These instruments are popular with banks and credit institutions. But When these financial institutions buy large quantities of bills, it is effectively the direct “monetization of the fiscal deficit.” If we consider the liquidity created by the Treasury’s financing-structure adjustments and increased short-term borrowing together with the Fed’s “Not-QE QE” operations, we can see a genuine process of systemic liquidity injection.
In essence, fiscal and monetary policy are jointly implementing a form of “duration management.”
This is actually another disguised way of conducting YCC operations.At the beginning of 2024, this kind of liquidity injection peaked at around 6 trillion dollars in total, effectively giving the market and the real economy a shot in the arm. This was very tangible additional liquidity flowing continuously into the system.
Further reading: Notes 250402 A non-bailout version of QE: Operation Twist 2.0
But throughout 2024, it became clear that this liquidity stimulus was winding down rapidly, and the remaining stimulus has now fallen below 1 trillion dollars. The truly important factor is the “second derivative”—that is, the rate of marginal change. Understanding this marginal liquidity contraction is central to judging the market and economic outlook: marginal liquidity is highly correlated with the Philadelphia Fed Manufacturing Index for U.S. equities, with a lag of roughly 9 months.
The global economic slowdown caused by this fading liquidity had already become clearly apparent since mid-12 last year, and it began before tariffs became the market’s focus. This shows that the global economy had already been slowing quietly and was not directly driven by recent trade tensions.
A major factor behind this slowdown is the fading of this “hidden stimulus.” That is why we are now seeing evidence of an economic slowdown gradually emerge. The rise in tariff uncertainty is merely the macroeconomic trigger that intensifies this trend.
2025.04.07
U.S. Treasuries/Gold: A Geopolitical Relative-Valuation Framework
For sovereign reserve managers, the dollar has no genuine substitute in the existing fiat-currency system. Gold may be the only asset with no counterparty risk.The problem is that it is difficult to transport and trade, earns no interest, and It has a holding cost (the dollar funding rate + storage costs − convenience yield).And current U.S. Treasuries can provide 4%-5% in interest returns.
Historically, whenever market concerns about U.S. fiscal overextension or geopolitical risks intensify, U.S. Treasuries tend to depreciate relative to gold.
The early 2000s provide a good example of U.S. Treasuries depreciating relative to gold:
Because the United States had to fight a recession and increase military spending after 9 11. Geopolitical relations were highly tense during the “War on Terror.”
2008-2015, after the global financial crisis, U.S. Treasuries appreciated relative to gold:
The main reasons were: 1) the U.S. deficit was not a major problem because the current account and budget balances did deteriorate sharply, but this was temporary and recovered in 2013; 2) the Fed supported the value of U.S. Treasuries through QE; 3) geopolitical relations were largely stable, and most governments were focused on dealing with the effects of the global financial crisis.
The pandemic period in 2020:
The U.S. twin deficits surged, but U.S. Treasuries remained stable relative to gold because 1) the rest of the world and the United States were “in the same boat,” with a synchronized global recession, while the United States was “the cleanest shirt in the dirty laundry” and, relatively speaking, the most stable region; 2) governments were busy handling domestic problems caused by the pandemic and addressing their own domestic-demand difficulties.
Since 2022:
Since the Russia–Ukraine war and the subsequent financial sanctions took effect, U.S. Treasuries have gradually depreciated relative to gold.
Finally, the most important chart for examining the relationship between U.S. Treasuries and gold:
White line = U.S. twin deficits (current account + budget balance, as a percentage of GDP, left axis)
Yellow line = total outstanding U.S. Treasury debt divided by the gold price
Red shaded areas = U.S. recession periods
2025.04.08
II. Insights
Our Viewpoints and ideas on market.
If Recession Returns: A Simple Framework for Analyzing Gold and U.S. Treasuries
If the next U.S. recession arrives—whenever that may be—the twin deficits will most likely surge again. The core question is: will U.S. Treasuries depreciate against gold then?
A simple, core, multifactor framework for making the assessment, To reiterate, we are talking about a relative trade, not absolute performance：
Related reading: Notes 250408 U.S. Treasuries/Gold: A Geopolitical Relative-Valuation Framework
1. Is it a “U.S.-only recession”?
If the next possible recession affects the United States more than other countries, market concerns about fiscal overextension may cause U.S. Treasuries to depreciate relative to gold. If the global economies are “in the same boat,” then UST may retain its value against gold, as it did after the global financial crisis and Covid.
However, the current cyclical positions of China’s economy and markets differ significantly from those of the United States Therefore, a future U.S. recession may not have as significant an impact on China as it did in the past.
The likelihood of being “in the same boat” is declining sharply. From this perspective, U.S. Treasuries will depreciate relative to gold.
2. Is the geopolitical situation stable or turbulent?
If the ongoing Middle East conflicts escalate further, along with the Russia–Ukraine war and geopolitical issues elsewhere, or if U.S.–China relations worsen (which may first be reflected in disputes over tariffs), other central banks may continue diversifying from UST into gold, alth though diversification itself is a major trend, geopolitics mainly affects its pace and causes short- to medium-term shocks on the trading side (7-14 weeks).
3. Who will buy large volumes of UST during the next recession and absorb the next wave of Treasury issuance?
As foreign holders reduce their positions, U.S. domestic entities (the Fed, banks, mutual funds, banks, pension funds, and households) have already increased their share of UST ownership, For more on this shift of holders toward domestic ownership, you can read the piece on the Mar-a-Lago Accord alongside this one.
Related reading: Notes 250325 The Stillborn Mar-a-Lago Accord
4. Is the petrodollar system secure? This is the question of the petrodollar.
The widespread use of the U.S. dollar in global oil and gas trade sustains natural demand for U.S. Treasuries. Major Middle Eastern oil producers indirectly convert oil revenues into incremental demand for Treasuries through exchange-rate regimes pegged to the dollar. If the “petrodollar” mechanism is disrupted, demand for Treasuries may be affected again.
The dominant use of the dollar in global oil and commodity trade increases demand for UST.Major oil producers in the Middle East maintain currency regimes pegged to the dollar. By pegging their exchange rates to the dollar, they indirectly convert oil revenues into additional demand for U.S. Treasuries, which means oil revenue surpluses indirectly boost demand for UST.If the “petrodollar” mechanism is disrupted, demand for U.S. Treasuries may be affected again.
A good thing to watch here is the coordination between oil-producing countries’ policy moves and those of the U.S. governing party. Oil producers often like to speak out at certain key moments or suddenly raise or cut production.
2025.04.08
III. Market Pulse
Our latest Comments on the economic and market environment
Note: All content in this article is for reference only and does not constitute investment advice or a basis for any laws, regulations, or regulatory policies. Investors should not use or rely on this information as a basis for decisions.