Introduction to Macroeconomics
The current state of the economy is dominated by liquidity expansion, which is driving the macro narrative. This means that there is a lot of money circulating in the economy, leading to increased spending and investment. However, recession signals are lagging, and structural inflation is sticky, making it difficult to predict what will happen next.
Understanding the Policy Rate
The policy rate is above neutral but below the tightening threshold, which means that it is not yet high enough to slow down the economy, but it is also not low enough to stimulate it. Markets are pricing in a soft landing, which means that they expect the economy to slow down gently without a major crash. However, the real adjustment is institutional, meaning that it is about changing the way finance works, from cheap liquidity to disciplined productivity.
Cycle Conversion
The Token2049 Singapore conference marked a turning point from speculative expansion to structural consolidation. This means that investors are moving away from risky investments and towards more stable ones. Markets are repricing risk, which means that they are re-evaluating the potential risks and rewards of different investments. Key shifts include the dominance of perpetual decentralized exchanges, the emergence of prediction markets, and the growth of AI-related protocols.
Macroeconomic System
The macroeconomic system is driven by three structural drivers: currency devaluation, demographic structure, and liquidity. Asset inflation reflects currency depreciation, not organic growth, which means that the value of assets is increasing because the value of the currency is decreasing. When liquidity expands, duration assets outperform, which means that investments with a longer timeframe tend to do better when there is more money circulating in the economy.
Recession Risk
Mainstream recession indicators are lagging, which means that they are not good at predicting when a recession will happen. The United States is in the late stages of the economic cycle, but it is not yet in a recession. The likelihood of a soft landing remains higher than the risk of a hard landing, but policy timing is a constraining factor. Leading indicators, such as an inverted yield curve, credit spreads, and the labor market, are important to watch.
Inflation Dynamics
Goods disinflation is complete, but services inflation and wage stickiness are now anchoring the headline CPI around 3%. This is the most complex phase of disinflation since the 1980s. Policy implications include the trade-off between credibility and growth, and the risk of reacceleration if rates are cut too soon. The equilibrium outcome is that the new inflation floor is closer to 3%, not 2%.
Macrostructure
Three long-term inflation anchors remain: deglobalization, energy transition, and demographics. These limit the Fed’s ability to achieve normalization without higher nominal growth or higher equilibrium inflation. The macrostructure is complex and influenced by many factors, making it difficult to predict what will happen next.
Conclusion
In conclusion, the current state of the economy is complex and influenced by many factors. Liquidity expansion is driving the macro narrative, but recession signals are lagging, and structural inflation is sticky. The policy rate is above neutral but below the tightening threshold, and markets are pricing in a soft landing. However, the real adjustment is institutional, and the macroeconomic system is driven by three structural drivers. Understanding these factors is crucial for making informed decisions about investments and the economy.
