Liquidity cycle has changed direction, have your assets kept up?

Only by seeing the present clearly can one seize the opportunity.

Written by: hoeem

Compiled by: Saoirse, Foresight News

Wealth that is passed down through generations often arises during the transition from a tightening cycle to a loosening phase. Therefore, understanding one's position in the liquidity cycle is key to accurately allocating assets. Which stage are we currently in? Let me explain in detail...

Why You Must Pay Attention to the Liquidity Cycle (Even If You Hate Macroeconomics)

Central bank liquidity is like the lubricant for the global economic engine:

Injecting too much will cause the market to "run at high speed"; excessive withdrawal will lead to "pistons getting stuck", just like your carefully dressed date suddenly leaving you. The key is: if you can keep up with the rhythm of liquidity, you can anticipate bubbles and crashes in advance.

Four Stages of Liquidity from 2020 to 2025:

1. Surge Phase (2020-2021)

The central bank is like a fire hose running at full blast, injecting funds madly: zero interest rates have been established, and the scale of quantitative easing (QE) has reached historic records, with $16 trillion in fiscal relief pumped into the market.

From the background, the growth rate of global money supply (M2) is faster than any period since World War II.

2. Exhaustion Phase (2021-2022)

Interest rates soared by 500 basis points, quantitative tightening (QT) commenced, and the crisis rescue plan expired.

Visually, the bond market recorded the largest drop in history in 2022 (approximately -17%).

3. Stable Phase (2022-2024)

The policy remains tight, with no new actions.

The policymakers maintain the existing policies to fully utilize them to suppress inflation.

4. Preliminary Transition Phase (2024-2025)

The world is starting to cut interest rates and relax restrictions. Although interest rates remain relatively high, a downward trend has begun.

Mid-2025 Status: One foot is still in a stable phase, while the other foot is cautiously stepping into the first step of a preliminary turning phase. Current interest rates are high, and quantitative tightening is still ongoing, but unless a new shock pulls us back into a surge mode, the next step is likely to continue easing.

For more details, see the "Traffic Signal Quick Reference Manual" below...

That's right, I asked GPT for help to create a super cool table! The table below allows you to see the situation in these three key years: 2017, 2021, and 2025 at a glance.

Twelve Major Liquidity Leverage Traffic Light Quick Reference Manual:

🔴 Not Activated 🟧 Mildly Activated 🟢 Strongly Activated

🔑 Which switch can activate the total switch for the other 11 leverages?

Step-by-step breakdown:

Interest Rate Cuts — In 2017, the Federal Reserve raised interest rates, and there was almost no easing policy globally; in 2021, there was an urgent global interest rate cut to nearly zero; in 2025, to maintain credibility against inflation, interest rates will remain high, but the U.S. and core European countries have planned to make a small cut in interest rates for the first time at the end of 2025.

Quantitative Easing / Tightening (QE/QT) — In 2017, the Federal Reserve was reducing its balance sheet while other major central banks were still buying bonds; from 2020 to 2021, record-breaking quantitative easing policies were launched around the world; by 2025, the policy stance reversed, with the Federal Reserve continuing to implement quantitative tightening, the Bank of Japan still engaging in unlimited bond purchases, and China selectively injecting liquidity.

In simple terms: quantitative easing is like "blood transfusion" for the economy, while quantitative tightening is like "slowly drawing blood."

You need to know when we will enter the quantitative tightening or quantitative easing phase, and where we currently are in the liquidity cycle...

Mid-Year Status Dashboard for 2025:

• On interest rate cuts: The policy interest rate remains high; if progress goes smoothly, the first interest rate cut may occur in the fourth quarter of 2025.
• Quantitative Easing / Tightening (QE/QT): Quantitative Tightening (QT) is still ongoing, and no new Quantitative Easing (QE) policy has been introduced yet, but early signs of stimulus have emerged.

Signals to Pay Special Attention To:

Signal 1: Inflation rate drops to 2% and policymakers announce risk balance

• Observation points: The Federal Reserve or the European Central Bank may clearly shift to neutral wording in their statements.
• Key significance: Clearing the last public opinion obstacle for interest rate cuts.

Signal 2: Pause in Quantitative Tightening (QT) (Cap set at 0 or 100% reinvestment)

• Key Observations: The Federal Reserve Open Market Committee (FOMC) or the European Central Bank (ECB) may announce full reinvestment of maturing bonds.
• Key significance: Transitioning the balance sheet reduction to a neutral state, increasing market liquidity reserves.

Signal 3: The three-month forward rate agreement and overnight index swap spread (FRA-OIS) exceeds 25 basis points or the repo rate suddenly spikes

• Observation point: The three-month FRA-OIS spread* (Note: The difference between the forward rate agreement (FRA) rate and the overnight index swap (OIS) rate is an important indicator of credit risk and liquidity risk in the financial market.)* or the general collateral (GC) repurchase rate has jumped to around 25 basis points.
• Key significance: Indicates financing pressure on the US dollar, which usually forces central banks to provide liquidity support

Signal 4: The People's Bank of China (PBoC) comprehensively lowers the reserve requirement ratio (RRR) by 25 basis points

• Observation point: The national reserve requirement ratio has fallen below 6.35%
• Key significance: Injecting 400 billion yuan of base currency often becomes the first domino in the easing policies of emerging markets.

In summary...

We have not yet reached the surge stage.

Therefore, before a large amount of leverage turns green, the market will continue to experience fluctuations in risk appetite and will not truly enter a frenzy stage.