{"id":19586,"date":"2025-06-16T09:20:23","date_gmt":"2025-06-16T09:20:23","guid":{"rendered":"https:\/\/www.vtmarkets.com\/?p=19586"},"modified":"2025-06-16T09:20:23","modified_gmt":"2025-06-16T09:20:23","slug":"the-quiet-rise-of-liquidity","status":"publish","type":"post","link":"https:\/\/www.vtmarkets.com\/en-asia\/week_ahead\/the-quiet-rise-of-liquidity\/","title":{"rendered":"Week Ahead: The Quiet Rise of Liquidity"},"content":{"rendered":"\n

At first glance, soaring stock markets would suggest robust economic fundamentals. Yet in 2025, this perception doesn\u2019t hold. The primary driver behind current market performance isn’t productivity or profitability. It’s policy. And that should prompt some reflection among traders and investors.<\/p>\n\n\n\n

Sentiment appears euphoric. Bitcoin has rallied sharply, and gold is reinforcing its reputation as a safe-haven asset. But when one considers the broader macro landscape, it feels suspiciously optimistic. This isn\u2019t a rally born of corporate earnings or broad-based confidence.<\/p>\n\n\n\n

Liquidity At The Core<\/h2>\n\n\n\n

Since 2020, the US money supply has expanded dramatically. M2, which includes cash, current and savings accounts, and money market funds, has reached unprecedented levels. This didn\u2019t unfold organically.<\/p>\n\n\n\n

The Federal Reserve injected trillions into the system via aggressive quantitative easing and ultra-low interest rates in response to the COVID-19 crisis. While this stabilised markets in the short term, it also unleashed an era of abundant, low-cost capital.<\/p>\n\n\n\n

In such an environment, cash doesn\u2019t sit idle. With interest rates near zero, investors pivot away from deposits and bonds, channelling funds into equities, property, gold, and increasingly, cryptocurrencies. This capital inflow into a finite pool of assets naturally drives prices higher.<\/p>\n\n\n\n

A Familiar Playbook<\/h2>\n\n\n\n

This pattern isn\u2019t unfamiliar. Following the 2008 financial crisis<\/a>, central banks embarked on a similar path, fuelling one of the longest bull markets in history. What we\u2019re witnessing now is a magnified version. The scale and pace of post-2020 monetary expansion dwarfs anything previously seen, boosting blue-chip stocks and speculative and defensive assets.<\/p>\n\n\n\n

Crucially, much of this new liquidity bypasses consumer spending, funnelling straight into financial markets. That\u2019s why we\u2019re seeing record-breaking asset prices while other economic indicators falter. Corporate earnings remain underwhelming, and labour market data sends mixed signals. Yet markets continue climbing, driven by liquidity rather than fundamentals.<\/p>\n\n\n\n

The Fed hasn\u2019t relied solely on printing money. Measures such as adjustments to the Supplementary Leverage Ratio<\/a> have enabled banks to lend more and hold additional government debt. While these tools support markets during periods of instability, they also highlight the extent to which central banks are willing to intervene.<\/p>\n\n\n\n

The Risk Of Dependency<\/h2>\n\n\n\n

Such interventions are not without consequences. If a vulnerable sector, say, commercial property or a regional banking group, begins to unravel, the likely response will be even more stimulus.<\/p>\n\n\n\n

History provides a cautionary tale. In the 1970s, prolonged monetary easing and fiscal deficits triggered runaway inflation. Gold soared from $35 to $850 an ounce by 1980. To rein it in, the Fed hiked interest rates above 15%, plunging the economy into a harsh recession. That era stands as a stark reminder of the limitations of endless liquidity.<\/p>\n\n\n\n

Navigating The Terrain<\/h2>\n\n\n\n

For those still holding equities, a more selective approach is warranted. Sectors with strong pricing power often weather inflationary pressures better. Energy, industrials, and defence may prove more resilient than technology or high-growth names. Defensive sectors such as healthcare and consumer staples are also worth watching as volatility picks up.<\/p>\n\n\n\n

Holding cash, particularly in US dollars, is no longer the safe option it once was. Despite its reserve currency status, the dollar is facing long-term structural headwinds. Large fiscal deficits, declining demand for US debt, and efforts by other nations to diversify their reserves are eroding its appeal.<\/p>\n\n\n\n

Seeking Shelter<\/h2>\n\n\n\n

Overexposure to cash during aggressive monetary expansion risks silent, gradual capital erosion. For those aiming to preserve long-term value, alternative stores of wealth deserve consideration.<\/p>\n\n\n\n

Precious metals such as gold and silver historically retain their value during currency debasement. Inflation-linked bonds (TIPS) provide protection by adjusting returns in line with inflation. Commodities, especially in agriculture and energy, often appreciate when the dollar weakens. Currencies like the Swiss franc, Singapore dollar, or Norwegian krone also offer diversification benefits.<\/p>\n\n\n\n

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Under pressure from all sides and with cracks in its global currency dominance a key market talking point this year, the dollar\u2019s traditional role as a crisis haven faces a crucial test should Israel\u2019s attack on Iran escalate https:\/\/t.co\/awixanmcUA<\/a><\/p>— Bloomberg (@business) June 13, 2025<\/a><\/blockquote>