The error-prone Fed, leveraged tech stocks, and angry voters.

Written by: arndxt

Compiled by: AididiaoJP, Foresight News

Over the past few months, my position has undergone a significant change:

At first, I shifted from bearish to bullish, believing that the market was merely experiencing a general pessimistic sentiment that often lays the groundwork for a short squeeze. However, now I am genuinely concerned that the system is entering a more fragile phase.

This is not about a single event, but rather considering five mutually reinforcing dynamics:

The risk of policy missteps is rising. The Federal Reserve is tightening financial liquidity amidst data uncertainty and visible signs of economic slowdown.

Artificial intelligence / conglomerates of tech giants are transitioning from cash-rich to leveraged growth. This shifts the risk from pure equity volatility to more classic credit cycle issues.

Discrepancies in private credit and loan valuations are beginning to emerge, with early but concerning signs of model-based valuation pressures surfacing beneath the surface.

Economic fragmentation is solidifying into a political issue. For an increasing number of people, the social contract is no longer credible, and this will ultimately be reflected in policy.

Market concentration has become a systemic and political vulnerability. When about 40% of the index market value is actually made up of a few technology monopolies that are sensitive to geopolitical issues and leverage, it becomes a matter of national security and policy objectives, rather than just a growth story.

The basic situation may still be that policymakers ultimately “do what they always do”: injecting liquidity back into the system and supporting asset prices before the next political cycle arrives.

However, the road to achieving this result seems to be bumpier, more credit-driven, and politically more unstable than what the standard “buy the dip” strategy assumes.

macroeconomic stance

During most of this period, it is reasonable to hold a 'bearish but constructive' stance:

Inflation is high but slowing down.

The policy generally remains supportive.

Risk assets are overvalued, but adjustments usually encounter liquidity interventions.

Nowadays, several factors have changed:

Government Shutdown: We have experienced a prolonged shutdown that disrupted the release of key macro data and data quality.

Statistical Uncertainty: Senior officials themselves acknowledge that federal statistical agencies are compromised, which means a decline in confidence in the data series that anchor trillions of dollars in positions.

Turning hawkish amid weakness: Against this backdrop, the Federal Reserve has chosen to adopt a more hawkish stance on both interest rate expectations and its balance sheet, tightening even as leading indicators deteriorate.

In other words, the system is tightening under obscured and emerging pressures, rather than moving away from these pressures, which is a very different risk characteristic.

Tightening policies in an uncertain environment

The core concern is not just about the tightening of policies, but rather where and how it is being tightened:

Data Uncertainty: Key data (inflation, employment) has been delayed, distorted, or questioned after the standstill. The Federal Reserve's own “dashboard” has become less reliable precisely when it is most needed.

Interest Rate Expectations: Although leading indicators point to deflation appearing early next year, due to hawkish remarks from Federal Reserve officials, the market's implied probability of a rate cut in the near term has been pulled back.

Balance Sheet: The balance sheet's stance under quantitative tightening, along with a bias towards pushing more duration into the private sector, is essentially hawkish for financial conditions, even if policy rates remain unchanged.

Historically, the Federal Reserve's mistakes have often been timing errors: raising interest rates too late and lowering rates too late.

We may repeat this pattern: tightening policies during a slowdown in growth and data ambiguity, rather than preemptively easing to respond.

Artificial intelligence and tech giants become a leveraged growth story

The second structural change is that the characteristics of giant tech companies and leading artificial intelligence enterprises have changed:

In the past decade, the core “seven giants” companies have essentially been bond-like equities: dominant businesses, massive free cash flow, significant stock buybacks, and limited net leverage.

In the past two to three years, this free cash flow has increasingly been reinvested into capital expenditures for artificial intelligence: data centers, chips, infrastructure.

We are now entering a stage where incremental capital expenditures on artificial intelligence are increasingly being financed through debt issuance, rather than solely relying on internally generated cash.

The impact is as follows:

Credit spreads and credit default swaps have begun to fluctuate. As leverage increases for financing artificial intelligence infrastructure, companies like Oracle are seeing credit spreads widen.

Equity volatility is no longer the only risk. We are now witnessing the beginning of classic credit cycle dynamics in industries that previously felt “indestructible.”

The market structure has amplified this point. These same companies occupy too large a share in the main indices; their shift from “cash cows” to “leveraged growth” has altered the risk characteristics of the entire index.

This does not automatically mean that the artificial intelligence “bubble” has ended. If the returns are real and sustainable, debt-financed capital expenditures can be reasonable.

But this does mean that the margin of error must be much smaller, especially in situations with higher interest rates and tighter policies.

Early fault lines in credit and private markets

Beneath the surface of the public market, private credit is showing early signs of stress:

The same loan is valued by different managers at significantly different prices (for example, one at 70 cents on the dollar and another at about 90 cents).

This divergence is a typical precursor to the broader debate between model pricing and market pricing.

This pattern is similar to the following situation:

In 2007, non-performing assets increased and interest rate spreads widened, while stock indices remained relatively calm.

In 2008, the market that was once seen as a cash equivalent (such as auction rate securities) suddenly froze.

In addition to that:

The Federal Reserve's reserves are beginning to decline.

There is an increasing recognition internally that some form of balance sheet expansion may be needed to prevent problems in the functioning of the financial system.

None of these can guarantee that a crisis will occur. But this aligns with the situation of a system: credit is quietly tightening, while policies are still framed as “data-dependent” rather than preemptive.

The repurchase market is where the story of “reserves no longer being ample” first emerged.

On this radar chart, the “proportion of repurchase transactions conducted at or above the IORB rate” is the clearest indication that we are quietly exiting the regime of truly abundant reserves.

In the third quarter of 2018 and early 2019, that line contracted relatively: ample reserves meant that most collateralized financing was comfortably trading below the lower bound of the interest on reserve balances (IORB).

By September 2019, just before the repo market collapsed, that line sharply extrapolated as more and more repo trades were executed at rates equal to or above the IORB, which is a typical symptom of collateral and reserves scarcity.

Now looking at June 2025 vs October 2025:

The light blue line (June) remains safely on the inside, but the red line for October 2025 extends outward, approaching the outline of 2019, indicating that the proportion of repo transactions reaching the lower bound of the policy interest rate is on the rise.

In other words, traders and banks are driving up the overnight financing quotes because reserves are no longer comfortably ample.

Combining other indicators (more intraday overdrafts, higher purchases of federal funds by the U.S. discount window institutions, and an increase in the number of delayed payments), you get a clear message.

The K-shaped economy is becoming a political variable.

The economic differentiation we call the 'K shape' has, in my view, now become a political variable:

Families are expected to show divergence. Long-term financial outlooks (for example, a 5-year outlook) reveal startling gaps: some groups expect stability or improvement; others anticipate a sharp deterioration.

Indicators of real-world pressure are flashing:

The delinquency rate of subprime auto loan borrowers is rising.

Home buying has been postponed until later in life, with the median age of first-time homebuyers nearing retirement age.

The youth unemployment indicators are marginally rising across multiple markets.

For an increasing number of people, this system is not just “unequal”; it is failing:

They have no assets, limited wage growth, and almost no realistic way to participate in asset inflation.

The perceived social contract – “work hard, make progress, accumulate some wealth and security” – is collapsing.

In this environment, political behavior changes:

Voters no longer choose the “optimal managers” of the current system.

They are increasingly willing to support destructive or extreme candidates on both the left and the right, as the disadvantages feel limited to them: “It can't get any worse.”

This is the context in which future policies regarding taxation, redistribution, regulation, and monetary support will be determined.

This is not neutral for the market.

Market concentration has become a systemic and political risk.

Market capital is concentrated in a few companies, and their systemic and political impacts are less discussed:

Currently, about the top 10 companies account for approximately 40% of the market value of major stock indices in the United States.

These companies simultaneously:

It is the core holding of pensions, 401(k) plans, and retail investment portfolios.

Increasingly reliant on artificial intelligence, facing exposure to risks in China, and sensitive to interest rate paths.

Operate as a de facto monopolist in multiple digital domains.

This creates three intertwined risks:

Systematic market risk

The impact on these companies, whether from profits, regulation, or geopolitical factors (for example, Taiwan and China's demand), will quickly transmit throughout the entire household wealth complex.

National security risk

When so much national wealth and productivity is concentrated in a few companies that have external dependencies, they become strategic vulnerabilities.

Political risk

In a K-type, populist environment, these companies are the most obvious focal points that can easily trigger dissatisfaction:

Higher taxes, windfall taxes, buyback restrictions.

Antitrust-driven divestiture.

Strict artificial intelligence and data regulation.

In other words, these companies are not just growth engines; they are also potential policy targets, and the likelihood of them becoming targets is increasing.

Bitcoin, gold, and the failure of the (currently) “perfect hedge” narrative.

In a world filled with the risks of policy missteps, credit pressure, and political instability, people might expect Bitcoin to thrive as a macro hedge tool. However, the reality is that:

Gold is performing as a traditional crisis hedge: steadily strengthening, with low volatility, and increasing correlation in investment portfolios.

Bitcoin transactions resemble a high beta risk asset:

Closely related to the liquidity cycle.

Sensitive to leveraged and structured products.

Long-term holders sell in this environment.

The initial narrative of decentralization / currency revolution remains conceptually intriguing, but in practice:

The dominant flow today is financialized: yield strategies, derivatives, and shorting volatility behavior.

The behavioral experience of Bitcoin is closer to that of tech beta, rather than a neutral, robust hedging tool.

I still see a reasonable path where 2026 could become a major turning point for Bitcoin (the next policy cycle, the next round of stimulus measures, and further erosion of trust in traditional assets).

However, investors should recognize that at this stage, Bitcoin has not provided the hedging properties that many expect; it is part of the same liquidity complex that we are concerned about.

A feasible scenario framework leading to 2026

A useful way to build the current environment is to view it as a managed deflation of a bubble that creates space for the next round of stimulus.

The process may be as follows:

From 2024 to 2025: Manageable tightening and pressure

Government shutdowns and political dysfunction cause cyclical drag.

The Federal Reserve leans hawkish in its statements and balance sheet, tightening financial conditions.

The credit spread has moderately widened; speculative areas (artificial intelligence, long-duration technology, some private credit) absorb the initial shock.

End of 2025 - 2026: Re-liquefaction entering the political cycle

As inflation expectations decline and the market corrects, policymakers regain “space” for easing.

We see interest rate cuts and fiscal measures aimed at supporting growth and election goals.

Considering the lag effect, the consequences of inflation become apparent after key political junctures.

After 2026: The system's repricing

Depending on the scale and form of the next round of stimulus, we will either get:

A new cycle of asset inflation, accompanied by higher political and regulatory intervention,

The sudden confrontation with issues of debt sustainability, concentration, and social contracts.

This framework is not definitive, but it aligns with the current incentives:

Politicians prioritize re-election rather than long-term balance.

The easiest tools are still liquidity and transfer payments, rather than structural reforms.

To use the toolkit again, they first need to squeeze out some of today's bubbles.

Conclusion

All signals and everything point to the same conclusion: the system is entering a more vulnerable phase in the cycle.

In fact, historical patterns indicate that policymakers will ultimately respond with a significant amount of liquidity.

To reach the next stage, one needs to go through a period defined by the following characteristics:

Tightening financial conditions,

Rising credit sensitivity,

Political volatility,

and increasingly nonlinear policy responses.