From the various economic data officially released by the United States, the American economy is currently very good, very standardly good.

However, against this backdrop, overnight, from U.S. stocks to gold, from the Nikkei to commodities, and to the cryptocurrencies we are most familiar with, almost all assets collectively plummeted as if they had conspired together. This indiscriminate and all-encompassing crash has caused many people to instantly return to those days dominated by panic.

What exactly happened? Did the fires of conflict in the Middle East finally reach the financial markets? Or did Trump say something shocking again? Or is it that a long-anticipated perfect storm has finally arrived?

Surface Issues: Geopolitical Conflicts, Trump's Rhetoric, and the Trust Crisis of MAG7

Every time the market drops, the first scapegoat that comes to mind is geopolitical politics. Recently, the tense situation in the Middle East is certainly an important factor affecting market sentiment. After all, war means uncertainty, and uncertainty is the nemesis of capital. Gold and silver, as traditional safe-haven assets, had reached new highs before the crash, which itself reflects the market's risk-averse sentiment.

Another person who comes to mind is Trump. The former president has recently started to comment on the dollar again, openly stating that he "doesn't mind a weaker dollar." As soon as this statement was made, the dollar index fell sharply, hitting a nearly two-year low. For a global financial system accustomed to a "strong dollar," this is undoubtedly a heavy blow.

But the question is, is this the whole truth? If it were just geopolitical conflicts, why did even gold, a safe-haven asset, plummet? If it were just Trump's words, wouldn't the market's reaction be a bit too extreme?

It's like watching a suspense movie; the murderer is often not the first one to appear or the one who looks most like a villain. The real "mastermind" hides deeper.

X user @sun_xinjin mentioned an interesting point: he noticed that the forward PE of MAG7 (the seven major U.S. tech stocks) has started to decline.

This may seem like a small detail, but it reflects a larger shift—the market is beginning to cast a vote of no confidence in the massive capital expenditures of these tech giants. In the latest earnings season, the market has become unusually "picky." Exceeding expectations is equivalent to meeting expectations, and significantly exceeding expectations is equivalent to merely exceeding expectations. If there is even a slight dislike in the earnings report, the stock price will drop significantly.

This has led to MAG7 and the Nasdaq composite index consolidating at high levels for several months. Some say this is a signal that the epic market initiated by MAG7 in May 2023 is beginning to fade. The market's main focus has temporarily shifted away from MAG7 to "storage, semiconductor equipment, and commodities like gold, silver, and copper."

But this is just the phenomenon we can directly observe.

The Paradox of Bank Liquidity and Balance Sheet Reduction

At the same time, @sun_xinjin also pointed out another deeper issue: bank reserves remain low, and SOFR and IORB are not loose.

SOFR is the overnight financing rate, and IORB is the interest rate on bank reserves. The difference between these two indicators reflects the liquidity situation of the banking system. When this difference widens, it indicates that liquidity in the banking system is tightening.

The current situation is that this difference is not loose, and this lack of looseness will reduce the likelihood of the new Federal Reserve Vice Chair Kevin Warsh advancing his balance sheet reduction plan. Because, with bank reserves already low, further reducing the balance sheet is like continuing to pour water into a pool that is already lacking water, which will further exacerbate liquidity tension.

But this is precisely the problem. The market's expectations for balance sheet reduction are themselves pushing up long-term bond yields, which in turn raises mortgage rates, thereby freezing the real estate market.

This is also why global funds, when facing a liquidity crisis, choose to indiscriminately sell all risk assets. This is not just a "dollar arbitrage trade" unwinding, but a broader liquidity crisis.

There is not a lack of money in the market; rather, all the money is fleeing risk assets and rushing towards the dollar and cash. Everyone is selling everything just to exchange for dollar cash and liquidity. This is the true core of this global asset crash—a risk preference shift and deleveraging process triggered by a narrative of fiscal unsustainability.

Will 312/519 Recur?

Will this be a new "312" or "519"?

Let’s review history:

312 (2020): At that time, the COVID-19 pandemic broke out globally, triggering an unprecedented global liquidity crisis. Investors sold off all assets for dollars, and Bitcoin plummeted over 50% within 24 hours. This is fundamentally similar to the liquidity crisis we are currently experiencing, both driven by external macro factors leading to an extreme thirst for dollar liquidity.

519 (2021): Primarily triggered by Chinese regulatory policies. This was a typical crash driven by a single, powerful regulatory action, with its impact relatively concentrated within the cryptocurrency industry.

In comparison, the situation we face now is more akin to 312. Macro liquidity is tightening. Global funds are withdrawing from risk assets to fill liquidity gaps. In this context, cryptocurrencies, as the "nervous system" of risk assets, will naturally be hit the hardest.

However, this round of the cryptocurrency bull market has greatly benefited from the policy-friendly environment after Trump took office. Yet, none of us can predict what Trump will say tomorrow. In an already fragile market structure, even a relatively unfriendly remark could unleash the destructive power of 519.

Therefore, we cannot afford to be complacent.

The Impact of the AI Bubble

Returning to the initial question. What is the true reason behind the global asset crash?

It is not geopolitical conflicts, not Trump's remarks, nor any "dollar arbitrage trade," but rather a paradigm shift in the market.

The epic market that began in May 2023 was built on the narrative of the "AI revolution" and "tech stocks being invincible." But now, this narrative is starting to be questioned. The market is beginning to ask: can these massive capital expenditures really generate corresponding returns?

At the same time, the long bond market is sending us a signal: fiscal unsustainability is no longer a theoretical issue but a real one. The market does not believe that interest rate cuts can solve this problem because the root of the issue lies not in interest rates but in fiscal policy. The market has already begun to prepare for a "post-optimistic era," and it has realized that the current data-bright economic environment may already be the peak of this cycle.

In this context, cryptocurrencies, as representatives of risk assets, are the first to be sold off, but this is just the beginning.

Ultimately, this may be an opportunity to reassess asset allocation. When everyone is panic-selling, true value gaps will emerge. But the prerequisite is that you must have enough ammunition to survive until that time.

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