Why Are Gold, Stocks, and Bitcoin All Falling?

From various official economic data released by the United States, it can be seen that the U.S. economy is now very good, a very standard kind of good.

However, against this backdrop, overnight, from U.S. stocks to gold, from the Nikkei to commodities, and even to our most familiar cryptocurrency, almost all assets took a collective nosedive as if planned in advance. This indiscriminate, all-encompassing crash brought many people back to those days dominated by panic in an instant.

What on earth happened? Has the Middle East's conflict finally spread to the financial markets? Or did Trump say something outrageous again? Or perhaps, a long-awaited perfect storm has finally arrived?

Appearance: Geopolitical Conflict, Trump's "Rhetoric," and the MAG7 Trust Crisis

Every time the market takes a dive, the first scapegoat everyone thinks of is geopolitical issues. With recent tensions in the Middle East, this is certainly an important factor influencing market sentiment. After all, war means uncertainty, and uncertainty is the nemesis of capital. Gold and silver, as traditional safe-haven assets, hit new highs before the sudden drop, which in itself is a reflection of the market's risk-off sentiment.

Another person who comes to mind first is Trump. The former president has recently begun to comment on the U.S. dollar again, openly stating that he "doesn't mind if the dollar weakens." With these words, the U.S. dollar index promptly fell to a nearly two-year low. For a global financial system accustomed to a "strong dollar," this is undoubtedly a significant blow.

But the question is, are these the whole truth? If it's just a geopolitical conflict, why did even safe-haven assets like gold also plummet? If it's just a single comment from Trump, is the market's reaction not too intense?

Just like watching a mystery movie, the culprit is often not the first to appear or the one who looks most like the villain. The real "hidden hand behind the scenes" remains more hidden.

User X @sun_xinjin mentioned an interesting observation, saying that he noticed something intriguing—the forward PE ratio of the MAG7 (U.S. Big Tech) has started to decline.

While this may seem like a small detail, it reflects a larger shift— the market is beginning to cast doubt on these tech giants' massive capital expenditures. In the latest earnings season, the market has become unusually "picky." Beating expectations equals what used to be meeting expectations, and greatly exceeding expectations equals what used to be just beating expectations. If there's anything disliked in the earnings report, the stock price will plummet significantly.

This has led the MAG7, along with the Nasdaq index, to consolidate at high levels for several months. Some say this is a signal that the epic rally initiated by the MAG7 in May 23 is starting to fade. The market's focus has temporarily shifted away from the MAG7 and turned towards "commodities, semiconductor equipment, precious metals like gold, silver, copper, and energy."

The Paradox of Bank Liquidity and Balance Sheet Reduction

At the same time, @sun_xinjin also mentioned another underlying issue: bank reserve levels remain low, and both SOFR and IORB are not accommodative.

SOFR stands for the Secured Overnight Financing Rate, and IORB is the Interest on Reserve Balances. The difference between these two indicators reflects the liquidity condition of the banking system. When this difference widens, it signifies a tightening liquidity in the banking system.

The current situation is that this difference is not accommodative, and this lack of accommodation would reduce the likelihood of seeing Federal Reserve's new Vice Chair Kevin Warsh advancing his balance sheet reduction plan. Because, with bank reserve levels already low, further balance sheet reduction is like draining water from a pool that is already low, which would exacerbate liquidity stress.

However, this is precisely the issue. Market expectations of balance sheet reduction are already pushing up long-term bond yields, subsequently raising mortgage rates, and then freezing the real estate market.

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

It's not that there is no money in the market; it's that all the money is fleeing from risk assets into the dollar and cash. Everyone is selling everything just to get back to dollar cash and liquidity. This is the true core of the global asset sell-off this time—a risk-off shift and deleveraging triggered by an unsustainable fiscal narrative with global implications.

Will We See a Repeat of 3/12 or 5/19?

Will this be a new "3/12" or "5/19"?

Let's take a look back at history:

3/12 (2020): The time when the COVID-19 pandemic broke out globally, sparking an unprecedented global liquidity crisis. Investors sold off all assets for USD, and Bitcoin plummeted over 50% within 24 hours. The underlying logic of this liquidity crisis we are experiencing now is most similar to the one experienced then, both driven by external macro factors leading to an extreme demand for USD liquidity.

5/19 (2021): Primarily triggered by Chinese regulatory actions. This was a classic collapse driven by a single, forceful regulatory action, with the impact relatively concentrated within the crypto industry.

Comparatively, the current situation we face is more akin to 3/12. Macro liquidity is tightening. Global funds are all pulling out of risk assets to fill the liquidity gap. In this scenario, cryptocurrency, as the "peripheral nerve" of risk assets, naturally receives the most severe impact.

However, Trump's friendly policies since taking office have played a significant role in this cryptocurrency bull market. Nevertheless, none of us can predict what Trump will say tomorrow. In a market structure that has already become fragile, even a relatively unfriendly comment could have a devastating impact.

The Impact of the AI Bubble

Back to the original question. What is the real reason behind the global asset meltdown?

It is not geopolitical conflicts, not Trump's comments, and not any "dollar carry trade," but rather a paradigm shift in the market.

The epic rally that started in May 23 years ago was built on the narrative of the "AI revolution" and the "invincibility of tech stocks." But now, this narrative is being questioned. The market is starting to ask: Can these massive capital expenditures really generate corresponding returns?

At the same time, the 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 rate cuts can solve this problem because the root of the problem is not in interest rates but in fiscal policy. The market has already begun to prepare for the "post-optimistic era," realizing that the current data-rich economic environment might already be the peak of this cycle.

Against this backdrop, cryptocurrency, as a representative of risky assets, is being sold off first, but this is just the beginning.

Finally, this may be an opportunity to rethink asset allocation. True value opportunities only emerge when everyone is panic-selling. But the precondition is that you have enough ammunition to survive until then.