Market sounds the alarm! The liquidity engine has stalled, and macroeconomic data is starting to weaken.

Attention, the Federal Reserve has implemented quantitative tightening (QT) since June 2022, which is completely contrary to the hotly debated "currency overissuance" in the market. Despite the Federal Reserve's continued implementation of tightening policies and multiple increases in the federal funds rate, the M2 money supply has not decreased but instead increased over the past year. Analyst Kirk Spano noted that the core of this anomaly 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 money supply increment - as pointed out by the Bank of England Institute in 2014, although the Federal Reserve stopped releasing relevant data since 2020, the trend of 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 prices have an elasticity of 2.65%, gold of 2.77%, and the S&P 500 index of only 1.20% with a longer lagging period. This difference means that when M2 contracts, the decline in Bitcoin and gold prices will far exceed stocks. The synchronization between M2 leveling off since 2023 and the stagnation of Bitcoin prices underscores this reality. The sustainability of current monetary expansion is facing challenges. While credit card default rates have temporarily stabilized after rising in 2022-2023, auto loan default rates have risen to 5.1% (historical average of 3.5%), and the most concerning is the doubling of forbearance rates for Federal Housing Administration (FHA) mortgages. According to media reports, about 15% of FHA loans have been maintained in the past two years through forgiveness or deferment measures, and without these measures, default rates would approach levels seen in the 2008 financial crisis. This fragile balance maintained by modifying loan terms (such as extending to a 40-year term) implies that the banking system as the primary creator of M2 will soon be forced to tighten credit. The unemployment rate has become a key leading indicator. Although current data only show initial signs of weakening, companies have already taken preemptive measures by reducing inventory, suspending 401(k) matching contributions, and more. The service sector's weight of over 70% of GDP makes its impact on the job market particularly significant, and a trend towards declining consumer confidence and cautious spending is forming a self-reinforcing cycle. Fiscal dominance faces economic slowdown Policy response options are narrowing. The Fed's expected rate cuts (25 or 50 basis points) have limited efficacy in stimulating the economy, and fiscal policy is constrained by debt levels and deficit pressures. Although the "fiscal dominance" theory has raised questions about the US dollar's reserve currency status, the resilience of the US economy could lead to a restart of quantitative easing around 2026. It is worth noting that the independence of the Federal Reserve may weaken with political appointments, meaning that future policies may more directly serve government economic goals. Spano noted that market technical patterns are sending warning signals. The Nasdaq 100 index ETF has formed a larger "megaphone pattern" compared to 2022, and coupled with valuation indicators at historic highs, suggests a possible deep correction. If combined with the "long-term variable lag" effect of policy, the market may repeat the long-term volatility pattern of the 1970s, and may even test the lows of 2022 multiple times. Investment strategies need to adapt to a paradigm shift. Spano recommends that investors raise their cash allocation to 60-70%, earn excess returns through cash-secured put writing strategies, and avoid catching a falling knife. While buying on dips remains a long-term effective strategy, it is important to avoid impulse decisions. For conservative investors, Spano suggests at least pausing dividend reinvestment or using covered call options to reduce risk exposure. In the face of high policy uncertainty, maintaining flexibility and pre-planning a phased investment strategy is crucial.