Darius sat down with Gordon Johnson last week to discuss the macro outlook for asset markets, the fourth turning, China, and more.

If you missed the interview, here are three takeaways from the conversation that have significant implications for your portfolio: 

1. US Liquidity Is Likely to Peak Around Midyear 

The Federal Reserve has significantly increased the supply of Treasury bills, accounting for 69% of the total net marketable borrowing on a TTM basis through the first quarter. 

This has led to a reduction in the RRP and an injection of liquidity into the financial system, supporting asset markets. However, this trend is likely to shift in Q2, with the proportion of Treasury bills in net marketable borrowing dropping to 49% on a TTM basis. 

As a result, the drain on RRP will likely be halted, potentially impacting the favorable liquidity conditions supporting the stock market’s recent positive performance.

2. During The Fourth Turning Regime, Inflation Is Likely to Remain Elevated

Our research indicates that Headline CPI typically exhibits faster growth during Fourth Turning regimes, averaging 2.1%, in contrast to the 1.2% observed during the First, Second, and Third Turnings. 

As a result, we anticipate a shift towards a more inflationary climate over the next decade, diverging from the relatively stable price levels experienced in recent decades.

Consequently, this evolving landscape is likely to prompt the Federal Reserve to engage more actively in debt and deficit monetization, a trend we believe is likely to intensify over the coming decade.

3. China’s Structural Liquidity Trap

China is currently facing a structural liquidity trap, similar to the situation Japan encountered starting in the early 1990s. In this structural liquidity trap, additional credit growth in China is not effectively fueling economic expansion. Instead, it is primarily being used to roll over existing debt, allowing them to refinance current obligations.

Moreover, the expansion of the PBOC’s balance sheet has been largely driven by China’s foreign exchange reserves, a trend that halted in 2015. That said, incremental policy adjustments such as reducing the reserve requirement ratio (RRR), cutting loan prime rates, and bolstering medium-term financing are creating positive global liquidity conditions. 

These policy measures have had a positive impact on asset markets and have been contributing to the current GOLDILOCKS Market Regime. 

That’s a wrap! 

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