Bank of America's Hartnett: Everything has reached "peak liquidity" and the Federal Reserve will be forced to "surrender," with Bitcoin leading the way in sniffing out market rescue signals.

Recently, there has been a significant divergence in the market's assessment of the Federal Reserve's interest rate path for December. Previously, due to mild inflation and weak labor data, it was widely believed that another rate cut in December was almost certain; however, a series of hawkish statements from the Federal Reserve in recent times have dampened these optimistic expectations. Despite signals of dovishness from officials on Friday, the debate about the year-end monetary policy direction has not been settled. Michael Hartnett, Chief Investment Strategist at Bank of America, stated in his latest "Flow Show" report that the impact of current liquidity tightening on various asset classes is putting pressure on the Federal Reserve to continue cutting rates, with the cryptocurrency market poised to be the first to perceive the central bank's policy shift. Hartnett pointed out that assets such as cryptocurrencies, credit, the dollar, and private equity have all shown a "liquidity peak" signal. Over the past two years, multiple rate cuts by central banks globally have fueled speculative sentiment in the market, but recent hawkish comments from the Federal Reserve have raised doubts about further easing in 2026. Cryptocurrencies have taken a hit, with Bitcoin and Ethereum continuing to decline, highlighting the impact of liquidity tightening on risk assets. Hartnett predicts that the weakness in US bank stocks is sending out a signal similar to the one in December 2018, and the continued decline of liquidity-sensitive sectors may force the Federal Reserve to shift towards a more accommodative policy. Looking back at 2025, 316 rate cuts by central banks globally have fueled a liquidity frenzy, directly driving trends in AI investments, volatile movements in Japanese stocks, and speculation in cryptocurrencies. Looking ahead to 2026, Hartnett forecasts that the Federal Reserve will once again resort to "policy surrender" and be forced to initiate a rate-cutting cycle. In this scenario, three types of assets will benefit the most: long-term zero-yield bonds with their duration advantage cashing in on valuation premiums brought by rate cuts; Bitcoin, as the asset most sensitive to liquidity changes, historically surging before market rescue signals fully materialize; mid-cap stocks, which are most sensitive to financing costs, showing significant profit elasticity and room for growth after rate cuts are realized. Japanese Debt Crisis Intensifying Global Liquidity Concerns Japan is facing a crisis of simultaneous collapse in bonds and the yen. 30-year government bonds have dropped by 5% in the past two weeks, with a cumulative decline of 12% for the year, marking the worst performance since the 1970s; the yen-dollar exchange rate is nearing the 160 level, hitting a 40-year low. At the same time, there is a clear policy mismatch. The new Japanese Prime Minister has implemented a large fiscal stimulus equivalent to 3% of GDP, while the actual policy interest rate of the Bank of Japan remains at negative 2%. This combination of "loose fiscal policy + loose monetary policy" has exacerbated yen depreciation and selling pressure on government bonds. Yield rates on Japanese government bonds have breached key resistance levels, contrasting sharply with the global bond market's trend of recovery. Policymakers are facing a dilemma: raising interest rates to control inflation may trigger a stock market crash, while maintaining loose policies will continue to put pressure on the currency and government bonds. This crisis is spreading globally through the chain reaction of unwinding carry trades, with a rise in Japanese bond yields potentially leading to capital outflows internationally, impacting dollar liquidity and affecting US stocks, credit bonds, and cryptocurrency markets. Signals of Liquidity Tightening Emerging in Multiple Markets, Fed Policy Shift Imminent US mid-cap stocks are currently showing a significant divergence between valuation and performance. Despite being at a low valuation of 15 times earnings and benefiting from easing trade tensions and the trend of reshoring manufacturing, their performance has been under pressure throughout the year. This contradiction highlights the significant lag of the Federal Reserve's policy adjustment behind actual market demand. Indices of bank stocks falling below 140 and brokerage indices falling below 950, these two highly liquidity-sensitive sectors have always been leading indicators of policy shifts. Just as in December 2018, they will be the first to react to potential liquidity easing. Hartnett believes that the signal for the Federal Reserve to continue cutting rates has already been revealed. Over the past two years, central banks globally have cut rates 316 times, fueling a "collective euphoria" in the market. Investors generally anticipate more rate cuts in 2026, but recent hawkish statements from the Federal Reserve have raised some concerns. Furthermore, Hartnett emphasizes that when the Fed is forced to make significant rate cuts, there will be a plethora of investment opportunities in the market. Historical experience shows that the central bank's policy "surrender" often brings significant revaluation opportunities for risk assets. Cryptocurrencies as a Barometer for Policy Shifts Hartnett believes that digital assets such as Bitcoin will serve as "canaries in the coal mine" for perceiving changes in central bank policy, with their price trends providing crucial policy warning signals for investors. This judgment is based on the high sensitivity and rapid response capabilities of the cryptocurrency market to liquidity changes. Despite recent setbacks in the cryptocurrency market, with both Bitcoin and Ethereum experiencing sharp declines, Hartnett believes that cryptocurrencies will be the first to pick up on the Federal Reserve's market rescue actions. According to a November survey of fund managers by Bank of America, cryptocurrencies account for only 0.4% of institutional asset allocation, but retail funds pouring into the cryptocurrency market in 2025 reached a record $46 billion. Derivatives trading currently accounts for 74% of cryptocurrency trading volume, making it a forefront battlefield for liquidity and speculation. Although institutional investors' allocation to cryptocurrencies is limited, the influx of retail funds indicates a strong market expectation for loose liquidity. Once the Federal Reserve signals a policy shift, the cryptocurrency market could be the first to rebound. This article is reprinted from "Wall Street View", written by Li Jia; GMTEight editor: Xu Wenqiang.