The Credit Cycle is setting up for another shift, and consensus is being misdirected by geopolitical risk without realizing the 2nd and 3rd order effects 🧵

We are about to see a quantifiable credit and liquidity injection that will force traders to buy equities and move out the risk curve. This will force everyone to get net long equities as we hit the highest valuations in human history, which will in turn set the stage for a massive bear market

MELT UP FIRST (this is where we are), bear market later

These are all the moving parts you need to be monitoring 🧵 First, you need to understand how capital works in the system. Melt ups NEVER occur because of "investor sentiment" or euphoria, those are simply a reflection of the liquidity changes under the surface.

One of the main ideas I have been explaining and tracking on Capital Flows is the entire risk curve as it relates to the changes in real interest rates: capitalflowsresearch.com/subscribe

In a recent note, I explained that when real rates move DOWN into a resilient economy, this decreases the real return investors receive for holding risk-free treasury bills. The subtle thing people don't talk about much is that it is the real purchasing power of money in the system that moves a ton of capital back and forth along the risk curve.

PPI coming out above expectations was a given

All of us knew PPI and headline CPI are likely to rise from the oil shock

The more important question is HOW MUCH will this drag core CPI up, and TO WHAT EXTENT will the Fed "look through" this inflation

Playbook for FOMC 🧵 The view I have been laying out for FOMC is straightforward. The exit is getting more and more crowded as traders bid up large premiums across equities, FX, bonds, and crude.

The regime dashboard is showing a short-term impulse of stagflation over the last 20 days but consencus has extrapolated this into a full blown 2022 inflationary bear market. You can find this dashboard here: capitalflowsresearch.com/p/the-position…

The Crowded Exit

Markets are pricing geopolitical risk as a short-term inflation accelerant, which is pushing rate cut expectations lower and raising the specter of stagflation. Dollar strength reflects this dynamic precisely: short-end inflation expectations (1y and 2y swaps) are rising while real rates climb on the long end (10y and 30y), a combination that has been mechanical support for the currency.

We are approaching a critical inflection. FOMC this week creates a binary setup. If geopolitical risk fades and crude sells off, or if the Fed signals less concern about inflation on the grounds that the current move is supply-driven rather than demand-driven, the market’s hawkish repricing could unwind quickly. Either catalyst would likely produce equity buying and dollar selling. That reversal would carry extra force right now, given how elevated implied volatility is, which tells you hedging premiums are stretched and any shift in sentiment gets amplified as those positions unwind. I explained the mechanics of the dashboard above, along with an extensive breakdown of the macro regime in the livestream earlier today. You can find the full recording here:

The credit cycle is in the process of one more injection of liquidity, as equity valuations across every country are sitting at all-time highs

None of this is going to end well but the KEY will be playing this final stage of the endgame

This thread explains everything 🧵 I am going to explain WHERE we are in the credit and liquidity cycle and then break down HOW I am looking at the signals for taking risk. These set the stage for the S&P500, Bitcoin, gold, silver, and every major asset.

What is driving the drawdown in Bitcoin?

When you stop listening to Bitcoin pundits and start listening to what Bitcoin is saying about itself, then you will see the real truth

I am going to lay out the 3 major things you need to watch for Bitcoin right now 🧵 First, Bitcoin functions as a release valve for macro liquidity on the RISK CURVE. This means Bitcoin is telling you that it is a risk asset.

https://x.com/Globalflows/status/1953525747349586218?s=20

The credit cycle is starting to flash yellow for the first time in this regime

Most investors will only notice once spreads are blowing out

Here’s the framework I use to track the credit cycle and front‑run where capital goes next: 🧵 First, my macro thesis is simple: Since April we had a massive injection of credit into the underlying economy and liquidity into financial markets. This created procyclical liquidity where growth and liquidity rose at the same time. This is why asset prices melted up.

We are now seeing the beginning of some headwindes in the credit cycle. The entire questions is are these risks shrot term signals or could they materialize into a larger issue?

Real interest rates have been driving the pullback in equities and Bitcoin

You will notice that 2 year real interest rates have begun to drag up credit spreads, which is a very clear signal about how liquidity is impacting risk assets

Here is how to understand this 🧵 Real rates tell you the true cost of money after adjusting for inflation.

Real rate = Nominal yield minus inflation expectations

So real rates move for only two reasons:

- Nominal yields move

- Inflation expectations move

The chart below shows 2 year real interest rates. Notice that they were deeply negative during 2021 when the Fed held rates below inflation. As we moved into the 2022 hiking cycle this reversed. Since this time, we have been normalizing lower.

There has been a lot of talk around how 10 year yields in Japan are melting up and how this is an indication that a massive carry trade is about to unwind

The problem with this is that it doesn't match up with ANY of the actual evidence 🧵 First,

yields have been rising for years now and the Nikkei has been moving in lockstep ever since the BoJ stopped doing yield curve control. On top of this, every major carry trade unwind that pushed the Nikkei and US equities down was when JGB yields were going DOWN, not up!

The credit cycle is in the process of shifting, and this is going to begin increasing volatility significantly

The most important thing you can do is be on the right side of the macro volatility

This 🧵is a breakdown of WHERE we we are and risks for markets The primary place to start is HOW interest rates are impacting equities

You will notice that the bottom in real interest rates created the top in S&P500 market breadth. Why? Because when real rates begin to rise, it begins to contract liquidity. This begins to weigh on some sectors before others.

The macro risks for equities are building but a recession risk remains a LOW probability

It is the tension between liquidity and recession risk that will determine WHERE equities go from here

🧵👇 The main divergence we are seeing taking place right now is Mag7 (blue) has been pulling the index HIGHER as the broad market breadth is falling

In simple terms, we are see dispersion where a small portion of stocks are accounting for the majority of gains in the index

Developing a macro thesis is THE most important skill set to have as we move into a world where geopolitical risks and AI developments could quite literally mean you don’t have a job in a month.

You either understand cause and effect in markets or you get run over by them.
🧵 Every thesis starts from first principles.

Forget what the market narrative says.

Ask: What are the fundamental drivers of this asset?

Growth, inflation, liquidity, and policy are the real levers.

Everything else is noise layered on top.

The Fed is going to keep creating inequality in the system until the middle class gets completely cooked

This means that managing macro flows and cycle risk is the only way to maneuver through the next decade 🧵👇 The Fed’s transmission mechanism lifts asset prices faster than wages. QE and low rates raise the price of duration assets first. Households with assets gain. Households living on labor incomes lag.

Even though we have come off a little, we have a MASSIVE amount of reserves in the system.

We are seeing equities hit ANOTHER all time high as the credit cycle is in full swing

This continues to confirm the view I have been laying out about the amount of money in the system

This is pushing us closer toward the macro endgame as positioning risk into FOMC builds 🧵 Many people are saying the rate cut this week is WHY equities are rallying, but this is completely wrong.

We are already pricing a 100% probability of a cut for BOTH meetings this year.

The dollar debasement narrative is now consensus. Everyone is afraid that cash is trash and they will miss the rally in equities, Bitcoin, or gold.

The problem is that it misunderstands how money actually works

That kind of thinking usually marks market tops 🧵👇 When I analyze the macro flows across every asset, I am always looking for where expectations have a significant divergence from what is likely to take place. The key thing I look for is when expectations are based on an uninformed presupposition.

The reason WHY tariffs have an impact on markets is that they influence the most significant source of liquidity YTD: CROSSBORDER FLOWS

When these flows shift, they will mark a top in the credit cycle

Here is a full breakdown + how it connects to equities and Bitcoin 🧵👇 Foreign direct investment is one of THE critical drivers of flows in US financial markets. The fact that the dollar is the reserve currency and global trade is transacted in the dollar creates a significant surplus of dollar liquidity

This is WHY we have seen equity valuations at all time highs right now

(Chart below is foreign direct investment into the US)

These are all the MUST read macro books

Remember, if you understand interest rates and FX, you understand macro

🧵

How Are Tariffs Impacting Positioning and The Macro Regime 🧵

Is this a one-time volatility spike or the beginning of something larger?

Mapping the macro regime and its connection to tariffs sets the stage for everything moving into the end of the week 👇 If you have been following me for any period of time you know that I have been bullish stocks and neutral bonds on a cyclical basis. This is being driven by the credit cycle, procyclical monetary+fiscal policy, and the entire wall of money from AI.

Crossborder Flows Buying Equities: 🧵

The global dimension of this cycle is critical to understanding why liquidity continues expanding and why capital keeps flowing into U.S. assets despite elevated valuations. When nations run trade surpluses with the United States, they accumulate dollar reserves. Those dollars cannot be spent domestically without creating currency instability, so they must be recycled. This recycling occurs through the purchase of U.S. financial assets—Treasuries, agency debt, corporate bonds, and increasingly, equities. It is a structural flow that links global trade imbalances to U.S. asset prices.

Foreign direct investment inflows: In effect, the United States exports demand and imports capital. The rest of the world sends goods and savings, and the U.S. sends dollars that eventually circle back as investment inflows. This keeps U.S. funding conditions more accommodative than domestic fundamentals would imply. The result is a persistent bid for duration and risk assets, which helps suppress yields and amplify the TINA dynamic. As long as the global system remains dollar-centric, foreign capital recycling becomes a form of external liquidity injection.

US CURRENT ACCOUNT:

CAPITAL IS MOVING OUT THE RISK CURVE 🧵

Capital is steadily migrating out the risk curve because policy and liquidity conditions continue to incentivize it. With nominal rates still below nominal growth and abundant liquidity across both fiscal and monetary channels, investors are being pushed toward assets that offer incremental yield or growth exposure. The real cost of capital remains deeply negative when adjusted for inflation expectations, and that creates an environment where holding cash or short-duration paper guarantees underperformance in real terms. The incentive structure is clear: move into credit, equities, and alternative assets to preserve purchasing power and capture upside in a reflating economy.

Short end real rates continue to fall and reflect this: This is the mechanical essence of the “There Is No Alternative” (TINA) effect. When real returns in safe assets are structurally suppressed, capital seeks higher-yielding risk assets by necessity, not preference. The equilibrium becomes self-reinforcing. As equities rally and credit spreads tighten, portfolio managers experience both absolute and relative performance pressure to rotate further into risk. Passive inflows magnify the dynamic as benchmark weights shift toward outperforming sectors.

This is why low quality companies are rallying right now:

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The biggest risks to equities are building under the surface on a structural basis

The current liquidity flows are sowing the seeds for the future crash, which is why understanding positioning and HOW HIGH macro flows can push us is CRITICAL

Here is a full breakdown 🧵👇 The regime is clearly characterized by expanding growth, procyclical monetary policy AND fiscal policy.

What does this mean? It means we have every major line item and element in both the economy and market pushing capital out the risk curve which means equities MUCH HIGHER

Notice that credit spreads are at cycle lows while there are a lot more upgrades than downgrades in credit ratings