Economic Uncertainty and Liquidity Challenges in 2025

According to PANews, the Federal Reserve's strategy of extending the maturity of its bond holdings to suppress long-term yields signals an impending economic downturn alongside quantitative easing. This approach, likened to driving in fog by Jerome Powell, reflects the current global economic landscape where policymakers, businesses, and investors navigate with limited visibility, driven by liquidity reflexes and short-term gains. The new policy framework is characterized by limited visibility, fragile confidence, and liquidity-driven distortions. The recent 25 basis point rate cut to a range of 3.75%-4.00% is more about risk management than easing, providing future flexibility. Despite opposition from two members, Powell signaled a slowdown, indicating that policy visibility has vanished. The government shutdown-induced data interruption has left the Fed in a blind spot, with no guarantee of a December rate cut. As the market shifts from data dependency to cautiousness in a data vacuum, the likelihood of further rate cuts diminishes, flattening the front-end yield curve. In 2025, central banks' repeated interventions have normalized speculative behavior, with liquidity rather than productivity now determining asset performance. This dynamic inflates valuations while real economy credit remains weak. Discussions extend to a clear understanding of the current financial architecture: passive investment concentration, algorithmic reflexivity, and retail options frenzy. Passive fund flows and quantitative trading dominate liquidity, with volatility now dictated by positioning rather than fundamentals. Retail investors' bullish options purchases cause gamma squeezes, creating artificial price fluctuations in 'Meme' stocks, while institutional funds concentrate on a narrowing range of leading stocks. Looking ahead to 2026, the wave of capital expenditure in artificial intelligence reflects the industrial transformation of tech giants at the end of their cycle. Initially supported by cash flow, AI and data center construction now rely on record debt issuance, such as Meta's $25 billion oversubscribed bond. This shift implies margin compression, rising depreciation costs, and refinancing pressures, setting the stage for a credit cycle shift. The overarching theme from Powell's cautious tone to reflections at the end of the last podcast is the erosion of trust and concentration of power. Continuous policy support for large institutions exacerbates wealth concentration and undermines market integrity. The coordinated actions of the Fed and Treasury, from quantitative tightening to Treasury purchases, reinforce this trend, maintaining top-level liquidity while ordinary households struggle with stagnant wages and rising leverage. The decisive macro risk is no longer inflation but systemic fatigue, as markets appear robust, yet trust in fairness and transparency is eroding, marking the true systemic issue of the 2020s.