THE LIQUIDITY PARADOX: Charting the Macro Environment for 2025
WEN QE !?
TL;DR there will be NO Quantitative Easing this cycle.
YES the markets will still go to Valhalla.
LIQUIDITY DRIVES MARKETS HIGHER. FULL STOP.
Global M2 has a highly correlated inverse relationship with the US Dollar and 10Y Yield.
Hence why we have been seeing the DXY and 10YY go up while Global M2 goes down.
THE SETUP
We are in a similar setup to 2017 when Trump took office.
M2 found a bottom and ramped up, which toppled the DXY.
Inflation nearly got cut in half until July 2017, where it then slowly started to creep back up as M2 and markets exploded.
To much surprise, all this occurred while the Fed continued to RAISE INTEREST RATES.
This was in part due to policy normalization with a growing economy coming out of the financial crisis and having near 0% interest rates for so long.
In Q4 2014, the Fed paused QT, keeping its balance sheet near neutral for the next 3 years.
As inflation started rising, QT was once again enacted, but very strategically with a slow roll-off in Q4 2017. This allowed markets to push further into 2018.
THE PLAYBOOK
TOOLS
HOW COULD WE POSSIBLY WEAKEN THE DOLLAR?
Trump has been screaming from the mountain tops; TARIFFS.
Tariffs will slow imports and focus more on exports to weaken the dollar.
The strong jobs data that has been spooking markets and strengthening the DXY will be revised to show it’s much worse than numbers are showing.
The Fed will pause QT, saying it has ample reserves, but not enable QE.
At the same time, they could pause interest rate cuts to keep a leash on markets and not kickstart inflation.
Then once all the jobs data is revised and markets get spooked at a softened economy (Q2), they will continue cutting.
WHY DOES THE FED KEEP CUTTING RATES EVEN WITH A STRONG ECONOMY?
In short, the Fed has to cut interest rates for the US to manage its debt.
THE US government is
36T in debt.
In 2025, interest projections are well above 1T.
That would put the debt on par with the highest line items in the national budget such as social security, healthcare and national defense.
The Treasury manages its debt by issuing securities with various maturities. When rates are low, they can refinance or issue new debt.
As rates rise, the cost of servicing debt increases, and vice versa.
It’s one of the underlying reasons why the Fed cut (but no one will say it out loud)…
hence why everyone is so confused and screaming that they cut too early and the bond vigilantes have been revolting.
HOW DOES THE MONEY SUPPLY GO UP IF NO QUANTITATIVE EASING?
We’ve seen this before.
President Trump and Treasury Secretary Scott Bessent have been telling you their playbook.
In 2017, deregulation and tax cuts led to an increase in disposable income from individuals and corporations.
Banks created more money in the markets through lending based on increased economic activity.
Global liquidity increased in other major central banks like the ECB, BOJ, and PCOB who were still engaged in QE, and / or maintained very low interest rates, which created more liquidity in the US money supply.
We’re seeing the same thing now with Central Banks around the world.
The tax reform allowed for the repatriation of overseas profits at a lower tax rate, which brought a significant amount of cash back to the US.
Like 2017, the US Treasury will increase short-term bill issuance (T-Bills), providing an alternative to the Reverse Repo (RRP), which reduces RRP usage. This provides liquidity to the markets because once the T-bills mature, funds can use the proceeds to invest in other assets, including stocks.
Banks will buy T-bills and sell in the secondary market or hold til maturity, where they can then lend the cash or invest in equities.
Another strategy to inject cash into the banking system would be standard Repo Operations. Here the Fed buys securities from banks with an agreement to sell them back later. This would increase lending and liquidity.
Hopefully now you can see why markets DON’T NEED QUANTITATIVE EASING !
That would for sure lead to rampant inflation (see 2021), and blow up the system all over again.
TL;DR there will be NO Quantitative Easing this cycle.
YES the markets will still go to Valhalla.
LIQUIDITY DRIVES MARKETS HIGHER. FULL STOP.
Global M2 has a highly correlated inverse relationship with the US Dollar and 10Y Yield.
Hence why we have been seeing the DXY and 10YY go up while Global M2 goes down.
THE SETUP
We are in a similar setup to 2017 when Trump took office.
M2 found a bottom and ramped up, which toppled the DXY.
Inflation nearly got cut in half until July 2017, where it then slowly started to creep back up as M2 and markets exploded.
To much surprise, all this occurred while the Fed continued to RAISE INTEREST RATES.
This was in part due to policy normalization with a growing economy coming out of the financial crisis and having near 0% interest rates for so long.
In Q4 2014, the Fed paused QT, keeping its balance sheet near neutral for the next 3 years.
As inflation started rising, QT was once again enacted, but very strategically with a slow roll-off in Q4 2017. This allowed markets to push further into 2018.
THE PLAYBOOK
- M2 Global Money Supply: Higher
- Dollar: Lower
- Fed Funds Rates: Lower
- 10YY: Lower
- Fed Balance Sheet: Neutral
- Inflation: Neutral
TOOLS
- Tariffs
- Deregulation
- Tax Cuts
- Tax Reform
- T-Bills
HOW COULD WE POSSIBLY WEAKEN THE DOLLAR?
Trump has been screaming from the mountain tops; TARIFFS.
Tariffs will slow imports and focus more on exports to weaken the dollar.
The strong jobs data that has been spooking markets and strengthening the DXY will be revised to show it’s much worse than numbers are showing.
The Fed will pause QT, saying it has ample reserves, but not enable QE.
At the same time, they could pause interest rate cuts to keep a leash on markets and not kickstart inflation.
Then once all the jobs data is revised and markets get spooked at a softened economy (Q2), they will continue cutting.
WHY DOES THE FED KEEP CUTTING RATES EVEN WITH A STRONG ECONOMY?
In short, the Fed has to cut interest rates for the US to manage its debt.
THE US government is
36T in debt.In 2025, interest projections are well above 1T.
That would put the debt on par with the highest line items in the national budget such as social security, healthcare and national defense.
The Treasury manages its debt by issuing securities with various maturities. When rates are low, they can refinance or issue new debt.
As rates rise, the cost of servicing debt increases, and vice versa.
It’s one of the underlying reasons why the Fed cut (but no one will say it out loud)…
hence why everyone is so confused and screaming that they cut too early and the bond vigilantes have been revolting.
HOW DOES THE MONEY SUPPLY GO UP IF NO QUANTITATIVE EASING?
We’ve seen this before.
President Trump and Treasury Secretary Scott Bessent have been telling you their playbook.
In 2017, deregulation and tax cuts led to an increase in disposable income from individuals and corporations.
Banks created more money in the markets through lending based on increased economic activity.
Global liquidity increased in other major central banks like the ECB, BOJ, and PCOB who were still engaged in QE, and / or maintained very low interest rates, which created more liquidity in the US money supply.
We’re seeing the same thing now with Central Banks around the world.
The tax reform allowed for the repatriation of overseas profits at a lower tax rate, which brought a significant amount of cash back to the US.
Like 2017, the US Treasury will increase short-term bill issuance (T-Bills), providing an alternative to the Reverse Repo (RRP), which reduces RRP usage. This provides liquidity to the markets because once the T-bills mature, funds can use the proceeds to invest in other assets, including stocks.
Banks will buy T-bills and sell in the secondary market or hold til maturity, where they can then lend the cash or invest in equities.
Another strategy to inject cash into the banking system would be standard Repo Operations. Here the Fed buys securities from banks with an agreement to sell them back later. This would increase lending and liquidity.
Hopefully now you can see why markets DON’T NEED QUANTITATIVE EASING !
That would for sure lead to rampant inflation (see 2021), and blow up the system all over again.
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