Insights into the Global Liquidity Cycle: Current Situation and Future Trends

In the long river of economic development, the enormous wealth that has been passed down through generations often emerges at the turning point from contraction to expansion. Therefore, accurately grasping the rhythm of the Liquidity cycle is crucial for precise asset allocation. Let's explore the current economic situation and the possible directions for the future.

The Importance of Liquidity Cycle

The central bank's liquidity policy acts as the lubricant for the giant machine of the global economy. Excessive injection can lead to an "overheating" of the economy, while excessive withdrawal may cause the economy to "jam". Grasping the pulse of the liquidity cycle allows us to foresee the prosperity and recession of the market.

The Four Stages of Liquidity from 2020 to 2025

1. Surge Phase (2020-2021)

The central bank has implemented unprecedented easing policies: interest rates have been lowered to zero, the scale of quantitative easing has reached a new high, and a massive fiscal stimulus plan has been introduced. The global money supply growth rate has reached its highest level since World War II.

2. Depletion Stage (2021-2022)

   Interest rates have risen sharply, quantitative tightening has begun, and rescue plans are gradually being phased out. The bond market faced the largest drop in history in 2022, approximately 17%.

3. Stable Phase (2022-2024)

The policy maintains a tight stance, and decision-makers keep the existing policies to curb inflation.

4. Initial Transition Phase (2024-2025)

Global interest rates have begun to decline and policies are gradually being loosened. Although rates are still relatively high, they are on a downward trend.

Mid-term Situation Analysis for 2025

We are currently at the intersection of a stable phase and an initial turning phase. Interest rates remain high, and quantitative tightening continues, but unless a major shock occurs, the next step is likely to continue toward a direction of easing.

Liquidity Leverage Indicator Interpretation

By comparing the key indicators of 2017, 2021, and 2025, we can clearly see the evolution of liquidity policy:

1. Interest rate cuts: In 2017, the world was in a rate hike cycle, in 2021, emergency rate cuts brought it close to zero, and by 2025, interest rates remained high but showed signs of rate cuts.

2. Quantitative Easing/Tightening: In 2017, the U.S. began to reduce its balance sheet while other central banks continued to expand theirs. From 2020 to 2021, large-scale quantitative easing was implemented globally. By 2025, the policy stance shifted, with the Federal Reserve continuing to tighten, Japan maintaining easing, and China selectively injecting Liquidity.

Key Indicators for Mid-2025

• Interest rate cut: The policy interest rate remains high, and a slight cut may occur for the first time at the end of the year.
• Quantitative policy: Quantitative tightening is still underway, and no new easing policies have been introduced, but early signs of stimulus have emerged.

Market Signals to Keep a Close Eye On

1. The inflation rate has dropped to 2% and policymakers announced a balanced risk.
2. Quantitative Tightening Paused
3. The three-month FRA-OIS spread exceeds 25 basis points or the repo rate suddenly rises.
4. China comprehensively lowers the reserve requirement ratio by 25 basis points.

Conclusion

The current economy has not yet entered a full-blown liquidity surge stage. Before most liquidity indicators shift towards easing, the market may continue to exhibit characteristics of fluctuating risk appetite and has not yet entered a true frenzy stage. Investors should closely monitor the key signals mentioned above to prepare for future market changes.