From January twenty-seventh, two thousand twenty-five to January twenty-ninth, two thousand twenty-five

I. Foundation 

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

The four quadrants of the macro cycle

There are four types of macro cycles: Disinflationary Boom, Inflationary Boom, Stagflation, and Deflationary Bust.

1）Disinflationary Boom

Rising growth alongside falling inflation constitutes a Disinflationary Boom, A Disinflationary Boom is typical of the early-cycle stage; during this stage, financial conditions tighten and credit availability declines, leading to reduced spending, which in turn suppresses profit growth and prompts central banks to adopt accommodative policies, steepening the yield curve in a bull steepener.

2）Inflationary Boom

Rising growth alongside rising inflation constitutes an Inflationary Boom, an Inflationary Boom usually occurs in the middle of the cycle, or the mid-cycle stage; at this stage, central banks are still implementing accommodative policies, and liquidity inflows drive interest rates down and risk premiums tighter.This self-reinforcing expansion drives cash flow growth, but later in this stage central bank policy gradually turns restrictive and the economic output gap narrows.

The market characteristics of an Inflationary Boom are relatively clear, the market narrative behind it The trading narrative is a recovery in cyclical sectors, including industrials (XLI), materials (XLB), energy (XLE), financials (XLF), technology (XLK), and small caps (IWM),The relative performance of these sectors versus the S&P 500 index can serve as one of the criteria for making this assessment.

3）Stagflation

Slowing growth alongside rising inflation constitutes Stagflation, Stagflation usually occurs late in the cycle, or in the post-cycle/late-cycle stage; during this stage, economic growth remains above potential but has peaked, and central banks begin to turn hawkish. Risk assets are usually in their final melt-up stage.Later in this stage, monetary tightening pushes yields higher, amplifying the market’s reaction to adverse news and events.

The stagflation phase of the cycle is a macroeconomic phase in which growth momentum weakens while inflation momentum accelerates, This is one of the hardest stages to navigate. The challenge is not which assets to hold, but how much beta risk to carry in the portfolio.

The reason is that during this stage, growth slows while inflation rises. This causes sales to fall over the business cycle at the same time that input or labor costs rise, dealing a double blow to margins.In this environment, corporate earnings come under pressure, weighing on the stock market and company profits.

This stage is also relatively difficult to identify, because Stagflation may also be temporary noise caused by tighter financial conditions; as financial conditions ease, the market could turn back to an Inflationary Boom at any time.

4）Deflationary Bust

Slowing growth alongside falling inflation constitutes a Deflationary Bust, A Deflationary Bust is a typical economic slowdown/recession stage. During this stage, monetary tightening widens risk premiums and gradually transmits to the real economy, with corporate earnings affected with a lag. The economic output gap is large at this point.

2025.01.28

How did the Fed view tariffs during the last trade war?

A review of the Fed’s meeting minutes and staff analyses during the first trade war in 2018 and 2019 yields three conclusions:

1）Fed staff and FOMC members took a relatively relaxed view of tariffs’ impact on inflation

2) Staff estimates of the impact of a larger-scale tariff plan The estimated impact on GDP was far more severe than the market had predicted

3) Although FOMC ultimately chose to cut rates, some members were skeptical that “the impact of tariffs was sufficient to serve as a factor driving monetary policy adjustments.”

This is also why Notes250129 was one of the least-noticed FOMC in months? It said that “tariffs would not constrain FOMC’s policy adjustments over the long term.”

2025.01.29

II. Insights 

Our Viewpoints and ideas on market.

The United States can no longer sustain the narrative of its technological hegemony on its own

The Stargate project, a 5000-billion-dollar gamble aimed at leading the competition over AI infrastructure, presents a paradox:It is both inevitable and seemingly impractical. Its success does not depend on technological breakthroughs, but on whether it can navigate the maze of sovereignty disputes, financial dependence, and geopolitical red lines.

The United States cannot, and will not, fund the Stargate project on its own.Even with 1000 hundred million dollars in federal loans and 1250 hundred million dollars of investment from Microsoft/NVIDIA, the project’s first phase still faces a funding gap of 2750 hundred million dollars. To fill this gap, the United States will have to strike a “Faustian bargain” with foreign sovereign wealth funds.These funds will exchange infrastructure for equity and capital injections for ownership of Stargate data centers. For example, the 750 hundred million dollar investment proposed by MGX would give Abu Dhabi an 15% equity stake and control of server operations in the Middle East.

 Figure: Stargate’s ownership structure

Meanwhile, SoftBank may restructure its debt through the Stargate project, with 400 hundred million dollars of related Vision Fund debt secured by Stargate project assets.In exchange, SoftBank may grant U.S. regulators access to ARM chip designs in return for looser antitrust oversight.

Stargate’s “American” branding is inherently contradictory.It relies heavily on foreign capital, whose participation inherently undermines the U.S. sovereign interests it claims to champion.By 2030, non-U.S. entities may hold 55% to 60% of Stargate’s equity, giving them veto power over Pentagon AI contracts and chip export policies.

On the other hand, Stargate's dependence on AI chips produced by TSMC and Samsung reaches 80%, while these companies themselves rely on rare earth imports from China, leaving their supply chains highly vulnerable to China's leverage. China China holds 92% of the global market for rare-earth processing, enabling it to disrupt chip production through export controls.This strategy already showed its effectiveness during the trade war in 2020. If China retaliates against U.S. technology sanctions by restricting magnesium or gallium exports, Stargate’s supply chain could grind to a halt.

Another potential threat is data sovereignty. The G42 data centers located in Abu Dhabi are an important part of the Stargate network, but these facilities are subject to UAE law. This legal gray area means that U.S. privacy laws and export controls are difficult to enforce.

Thus, the Stargate project reveals a harsh reality: the United States can no longer sustain the narrative of its technological hegemony on its own.By bringing in MGX and SoftBank, the United States has secured short-term capital but also faces long-term risks that could run counter to its goal of winning the AI competition. Yet this also points to a changing reality: global AI leadership no longer depends on unilateral advantage, but on cooperation. Stargate’s ultimate legacy is that, even as the AI competition rages, capital knows no borders, and power, as the new Trump administration has shown, always flows to those who control the money.

2025.01.27

The most overlooked FOMC in months?

At this point, this may truly be the most overlooked one, The 1 FOMC meeting is expected to offer little new information. The statement may mention a stabilizing labor market, but is unlikely to provide clear guidance on rate cuts in 3.

A few key points to watch at the press conference:

1) Whether the Fed believes Further disinflation (expected over the coming months) could open the door to rate cuts

2) Whether the Fed still firmly believes current interest rates are“Materially restrictive”, and not appropriate as an endpoint

3) How FOMC assesses potential tariff hikes and their impact on future prices

The current baseline expectation is for a 25bp rate cut in each of 6 and 12 this year, followed by another rate cut in 2026.Inflation is likely to continue falling, and tariffs will not constrain FOMC’s policy adjustments over the long term.

What remains highly uncertain is the precise timing of Fed rate cuts, mainly for two reasons: first, the economic forecasts (inflation and the labor market) cannot yet provide clear policy guidance; second, it is not yet clear how FOMC plans to respond to this round of tariffs.

However, One point we can be fairly confident about is that market pricing is now too hawkish in reflecting the possible future path of FOMC, particularly because the market-implied probability of rate hikes is too high.

We are skeptical that the new administration’s policies will generate enough inflationary pressure; FOMC will not readily consider raising rates further from the level already viewed as “restrictive.” Moreover, The market may also be overlooking the lesson from 2019: tariff uncertainty then shook equities and prompted FOMC to implement insurance cuts.

2025.01.29

III. Market Pulse 

Our latest Comments on the economic and market environment

Note: All content in this article is for reference only, does not constitute investment advice, and is not a basis for any laws, regulations, or regulatory policies. Investors should not use or rely on this information as a basis for their decisions.