From May nineteenth to May twenty-third, twenty 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 economic 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’ incentives to build skills will weaken, and companies will also reduce investment, especially investment in innovation. These factors will all 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, leading to a permanent decline in potential output...

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

But what matters more to us is that, Many signals indicate that in its upcoming policy review, the Fed may abandon the concept of “makeup easing” within FATE (Flexible Average Inflation Targeting),the idea of “makeup easing,” which is one of the important mechanisms for addressing the hysteresis effect.

Last year, in 12, Draghi delivered a keynote speech titled “Responding to the EU’s Future Direction.” In the speech, in addition to noting that “low productivity growth is one of the major problems facing the EU,” he emphasized a core point: that Weak domestic demand is an important cause of low productivity growth.

His logic is as follows: Since the global financial crisis of 2008, Europe has consistently pursued tight fiscal policy. This led to prolonged weakness in domestic demand. In an environment of insufficient domestic demand, companies 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.

This was also clear in the recovery after the pandemic: compared with the United States, Europe's fiscal stimulus was much smaller. Europe also suffered 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 the “hysteresis effect,” “insufficient domestic demand,” and “low growth” is especially close and pronounced.

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

So the market often says that business-cycle fluctuations are on one side and the potential long-term growth trend is on the other, and that the two are separate. But what endogenous growth models really emphasize is that they cannot be divided so neatly: the economic cycle does affect trend growth. We cannot simply say that growth has a cyclical component and a trend component; the two are intertwined.

Between the short run and the long run, there is a more important medium term, where the two intertwine. The medium term is in fact a sufficiently long period for companies to have the opportunity to adjust their capacity, technology, or organizational structure, roughly 5 to 10 years. This period is precisely a blind spot overlooked in traditional macroeconomics. During this stage, the interaction between the economic cycle, macroeconomic policy, and productivity growth is crucial.

From an empirical standpoint, truly studying the “long run” is very difficult because real-world data series do not extend that far. Therefore, 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 to warrant close attention as a turning point in the core trend.

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

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

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

In other words, low 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,” the emergence of “animal-spirit-style pessimistic expectations”—for example, households and businesses losing confidence in future growth—could self-fulfill and trigger this stagnation trap. Supply-side shocks can also trigger effects on the demand side.

Weak demand + a weak 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. This also means that any particular view held by market participants could be replaced overnight.

An environment of uncertainty can be understood through a simple cause-and-effect relationship in economics:

People always hope 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 leads to low expected returns and low volatility, leaving many investors facing an environment of low alpha returns.

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

In such an environment, three factors become exceptionally important:

1) Diversification: losses caused by inherently random events need to be minimized as much as possible.Diversification also means paying attention to multiple asset classes across the entire market. Under the same narrative, assets following the same trading path can still have different risk-return profiles; choosing which horse to send into the race is sometimes more important than correctly judging the direction.

2) Maintain liquidity so you retain the ability to change your mind:The risk of taking profits early is that we may miss part of the move, but the benefit is greater flexibility in managing our positions. For us, that flexibility is far more valuable than continuing to hold positions during periods of risk.

3) Understand the correlations: when new information shifts from unknown to known, what outcomes might follow?As for what comes next, causal links across assets 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

Introduction to stablecoins

This introduction to stablecoins was written mainly with the GENIUS bill mentioned in today’s Notes in mind. Read this first before the GENIUS article to establish a foundational understanding of the broader context.

Current The total global stablecoin market is approximately 2,300 hundred million dollars, of which 60%running on the Ethereum blockchain, 30%based on Tron (TRON)... The two dominant stablecoins are USDT, issued by Tether (market share: 63%), and USDC, issued by Circle (market share: 25%)...

Stablecoins were initially used mainly for trade matching, lending, and settlement within the digital-asset ecosystem, especially on centralized exchange platforms. In recent years, however, their use cases have expanded significantly, gradually approaching the functions offered by traditional finance (TradFi). A growing body of evidence now shows that stablecoins are used for dollar-denominated savings, payments, and cross-border dollar-to-dollar settlement.

Chart: Supply and uses

These “non-CEX” uses are statistically classified as “other, unclassified” transactions… The annualized growth rate over the past two years reached 50%, and that was before the GENIUS bill had been enacted.

Once the legislation is passed, the annual growth rate of this segment will accelerate rapidly… Combined with steady growth in exchange-related uses, total monthly stablecoin transaction volume is also expected to surge several-fold, According to Steve Englander’s estimate, stablecoin trading volume will then account for 10% of global spot foreign exchange market trading volume (currently only about 1%).

...Assuming the velocity of stablecoins remains unchanged, this means Total stablecoin market supply would grow from the current 2,300 hundred million dollars to 2 trillion dollars…

2025.05.23

II. Insights

Our Viewpoints and ideas on market...

The bond market’s two-mode trading

In today’s macro environment, putting on bond trades is quite difficult because the market is constantly being pulled between two forces, repeatedly switching between the narratives of “economic weakness” and “fiscal risk”:Student-loan policy and the low-oil-price narrative are factors that strengthen deflation expectations and benefit the bond market; a wide-open fiscal spigot, by contrast, is negative for bonds…

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

The economy may be soft—not necessarily collapsing, but unlikely to show much strength—while fiscal policy is a textbook source of pressure…

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

Our usual approach to this situation is:

Stay away, because there are always clearer trading opportunities.

As noted in “Notes250520The Weakening Dollar Remains the Core Trend: Hedging, Real-Money Demand, and Time-Zone Trading Arbitrage”:

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

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

The platinum narrative is gaining traction. One of the most striking rallies in recent times has clearly brought renewed market attention to a metal that was long popular 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 stronger investors’ fear of missing out on FOMO will become This could increase investors’ interest in white precious metals, especially silver and platinum, because capital that has not yet entered the market will look for other ways to express a bullish view on gold, and chase the rally”

Everyone can also reread Livermore’s memoirs, the section on rye and wheat.

There are a few key points in trading platinum:

1) Gold trading as the reference, The longer gold stays near the top of its range, the more the bottom of platinum’s trading range will rise.

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 also be replaced by the automotive sector in the stock market, which is relatively easier to quantify and monitor 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 serious impact on platinum’s price trajectory, so it is important to watch market details after 4.2:

Chart: Positioning in platinum

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

Structurally, the platinum/gold ratio remains near historical lows, while speculative net positions in platinum futures were still negative in the CFTC report released as of 5.13, far below the levels of the past two years. Real-money investors have not yet built up sufficient exposure to this asset.

The futures market has seen some increase in long positions, and the options market also shows a pursuit of upside: demand for bullish exposure has risen, while implied volatility has increased 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 net positioning still bearish, there is indeed still a case for a bullish view 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 stop at a round-number level commonly used by the market (from a counterparty perspective) could be set at 1005. If the uptrend is healthy (and the gold-substitution effect thesis holds), the price theoretically should not return here.

Ideally, the price holds at a high level and triggers trend-following buying from CTA. That is the money to be made. As always, it is important to know whose money you intend to make before entering a trade.

2025.05.21

Why We Choose to Stay Short Oil: Stable Turmoil 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 forces really do not want to see oil prices fall—Iran, for example…

And they may prolong the geopolitical standoff with Trump as much as possible. News reports from various outlets have recently been pushing 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 deliberately 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 ongoing wars in the world can be sustained (under sanctions, maintaining regional networks essentially depends on oil exports. If oil prices collapse, the financial hole will be exposed all at once, and strategic actions will naturally be scaled back).

What they truly want is a form of “stable turmoil”: the situation cannot be too calm, or oil prices will have no room for a 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 sustained tension in the Middle East without the great powers getting involved. So oil’s upside is capped, and that is by design.

On the other hand, Saudi Arabia’s daily crude output rose slightly to 896 ten thousand barrels in 3 (with a two-month data lag). This modest increase came against the backdrop of OPEC’s internal strategic shift—Arab News reports that OPEC have reached an agreement to significantly raise output starting in 6.

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

The plane wasn’t given away for nothing.

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

Ultimately, if the Gulf states 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, some micro-level clues (from Earth’s Core):

Chart: Some detailed tracking of commodity markets will be posted in Earth’s Core; interested readers can use this link

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

2025.05.22

Taking the Other Side of Treasuries: The GENIUS Bill Is Gaining Momentum

The GENIUS bill is the first major piece of cryptocurrency legislation, focused mainly on stablecoins. It is the first step toward bringing them into the mainstream financial system, The bill had repeatedly been sent back and shelved for a while, but now there are suddenly signs of progress, after the Senate it will go to the Republican-controlled House, and if all goes smoothly (which is highly likely), it will ultimately go to Trump to be signed into law.

The reason we are discussing this now is that it is closely linked to the U.S. Treasury market.

If the bill is enacted, stablecoin issuers could become some of the largest buyers of U.S. Treasuries…

This is very important.

Under the bill, stablecoin issuers must hold reserve assets at a ratio of at least 1:1 to provide full backing (fully backed by dollar-denominated fiat assets).…Eligible reserves include U.S. dollar cash, reserves held at the Federal Reserve, demand deposits at federally insured depository institutions, U.S. Treasury bills, notes, or bonds with no more than 93 days remaining to maturity, certain types of repurchase and reverse repurchase agreements, and money market funds.

Currently, Tether (USDT issuer) and Circle (USDC issuer) back USDT and USDC, respectively, with T-bill holdings of 66% and 88%. (See Notes250523Introduction to Stablecoins）...

…Tether has stated that the average duration of its T-bill reserves is no more than 90 days; Circle’s is 12 days.Under the GENIUS bill, the duration of held assets must not exceed 93 days. Given that stablecoin issuers generally want to avoid duration risk during FOMC meetings, Tether’s average duration may eventually approach Circle’s 12 days.In other words, a short-duration allocation can significantly reduce the share of T-bill maturities that “cross” meeting periods.

In fact, stablecoin-related allocation activity already has a material market impact. Take Tether: it currently holds 940 hundred million dollars’ worth of U.S. Treasury bills. Ranked by country, Tether’s T-bill holdings would be the sixth-largest sovereign holding in the world. Tether added 330 hundred million dollars in allocations in 2024 alone; if treated as a “foreign buyer,” its annual inflows would rank second.

Circle’s shorter-duration approach is very likely to become the new industry standard…

…issuers will tend to adopt the reserve-allocation model used by Circle (USDC issuer).

If Circle’s 88% T-bill holdings(T-bills with an average duration of only 12 days)share becomes the industry-wide standard, and if the total stablecoin supply rises to 2 trillion dollars, then approximately will need to be allocated over the next four years 1.6 trillion dollars in T-bills（equivalent to about one quarter of the current total T-bill market (6.4 trillion dollars)), or about 4000 hundred million dollars per year.If short-term debt maintains the same share of total U.S. Treasury supply, this increase would be enough to absorb all remaining net T-bill issuance during Trump’s second term.

From the perspective of Treasury supply, combining the Congressional Budget Office’s (CBO) baseline forecast for short-term issuance over the next four years with the assumption that T-bills’ share of total public debt remains unchanged, stablecoin demand for T-bills could roughly cover all new net T-bill issuance.

By holdings size, the only T-bill buyer still larger than stablecoin issuers at that point would be money market funds (currently holding 2.4 trillion dollars in T-bills, the largest share of the total 6.4 trillion-dollar outstanding amount)…

…money market funds currently hold about 2.4 trillion dollars in T-bills. By comparison, foreign institutions hold about 1.2 trillion dollars in T-bills, and the Federal Reserve holds about 1950 hundred million dollars…

Although the GENIUS bill allows stablecoin reserves to include Treasury bills, notes, or bonds with no more than 93 days remaining to maturity, the outstanding stock of notes and bonds with “93 days or less remaining to maturity” is currently only about 6300 hundred million dollars, so stablecoin issuers will clearly focus almost entirely on T-bills for liquidity reasons

Bessent previously said: the shift in the U.S. Treasury debt mix toward medium- and long-term maturities is still “a long way off.”Sustained strong demand for T-bills from stablecoins will provide practical support for his position and may even justify maintaining or moderately increasing the share of short-term debt in the U.S. Treasury issuance mix…

Chart: A number of leading U.S. banks are preparing to enter the market

As stablecoin use cases expand and the bill is enacted (most likely this summer), this new source of demand for dollars and U.S. Treasuries will, over the medium term, offset concerns about a “retreat of dollar hegemony” driven by factors such as tariff policy, This has not yet entered the mainstream narrative, but many people are already moving. We need to spot these marginal changes early.

2025.05.23

III. Market Pulse

Our latest Comments on the economic and market environment

The Weakening Dollar Remains the Core Trend: Hedging, Real-Money Demand, 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),

Shorting the dollar is the clearest trade direction right now:

In Notes250515Continuing the discussion of those unhedged dollar exposures & the EUR/USD target price we discussed:

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

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

Chart: If SPX and EURUSD are brought together

The most striking feature on the EURUSD chart at present is its slow, steady decline when U.S. equities rebound, versus its rapid, impulsive rallies when U.S. equities weaken—a classic case of “up fast, down slowly.”

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. Currently, overseas investors are continuously reducing their U.S. asset holdings and increasing their dollar hedges, while U.S. companies keep buying dollars—This mismatch between hedging and genuine demand means this trading rhythm will continue.

Unless domestic U.S. real-money investors begin selling dollars on a large scale, or central banks sell enough dollars that they must extend their operations into the New York session, this pattern of “strength outside the U.S., then a stronger dollar in New York” will remain the dominant one.

A suitable arbitrage strategy can be used (long during the New York session, short outside the New York session).