The market sounds the alarm! The liquidity engine has stalled, and macro data begins to weaken

The Zhitong Finance APP noted that the Federal Reserve has been implementing quantitative tightening (QT) since June 2022, which is completely contrary to the market's heated discussion of "excessive monetary issuance." Despite the Federal Reserve's continued tightening policies and multiple increases in the federal funds rate, the M2 money supply has actually increased over the past year.

Analyst Kirk Spano stated that the core of this abnormal phenomenon lies in the commercial banking system: by significantly expanding credit to households and private credit entities, the banking system has created over 90% of the monetary increment—just as the Bank of England's research pointed out in 2014, although the Federal Reserve stopped publishing relevant data since 2020, the trend in its balance sheet has clearly confirmed this mechanism.

There is a significant correlation between M2 money supply and asset prices. Apollo Global Research shows that for every 1% change in global M2, Bitcoin's price elasticity reaches 2.65%, gold is at 2.77%, while the S&P 500 index is only 1.20% with a longer lag period.

This difference means that when M2 contracts, the declines in Bitcoin and gold will far exceed those in stocks. The high synchronization of M2 flattening and Bitcoin price stagnation since 2023 is a realistic annotation of this correlation.

The sustainability of current monetary expansion is facing challenges. After rising in 2022-2023, the credit card default rate has stabilized, but the auto loan default rate has risen to 5.1% (historical average is 3.5%). More concerning is that the Federal Housing Administration (FHA) mortgage tolerance rate has doubled.

According to media reports, about 15% of FHA loans have been maintained through reductions or deferrals in the past two years. Without these measures, the default rate would approach the levels seen during the 2008 financial crisis. This fragile balance maintained by modifying loan terms (such as extending to a 40-year term) suggests that the banking system, as the main creator of M2, is about to be forced to contract credit.

The unemployment rate has become a key leading indicator. Although current data only shows preliminary signs of weakening, companies have already begun to respond in advance by reducing inventory and suspending 401(k) matching contributions. The service sector, which accounts for over 70% of GDP, has a particularly significant impact on the job market, and the decline in consumer confidence along with cautious spending trends is forming a self-reinforcing cycle.

Fiscal Dominance Faces Economic Slowdown

The space for policy response is narrowing. The Federal Reserve's anticipated interest rate cuts (25 or 50 basis points) will have limited effects on economic stimulation, while fiscal policy is constrained by the scale of debt and deficit pressures. Although the "fiscal dominance" theory has raised questions about the dollar's status as a reserve currency, the resilience of the U.S. economy may still drive a restart of quantitative easing around 2026.

It is noteworthy that the independence of the Federal Reserve may weaken with political appointments, meaning that future policies will more directly serve government economic goals.

Spano stated that market technical patterns are sending warning signals. The Nasdaq 100 index ETF has formed a larger "amplifier pattern" compared to 2022, combined with valuation indicators at historical highs, suggesting a potential for deep adjustments If combined with the "long-term variable lag" of policy effects, the market may reproduce the long-term oscillation pattern of the 1970s, and may even test the 2022 lows multiple times.

Investment strategies need to respond to paradigm shifts. Spano suggests that investors increase their cash ratio to 60-70% and obtain excess returns through cash-secured put strategies. Although buying on dips remains a long-term effective strategy, it is necessary to avoid catching falling knives.

Spano states that for conservative investors, at least suspending dividend reinvestment or using covered call options to reduce risk exposure is advisable. In the context of high policy uncertainty, maintaining flexibility and formulating a phased position-building plan in advance is crucial