Since September 2024,
the Federal Reserve has initiated a new round of interest rate cuts.
On September 17, it cut rates by 25 basis points,
and on October 29, it cut another 25 basis points.
In just two months,
the federal funds rate fell from 4.25%
to a range of 3.75%-4.0%.

According to the logic of economic textbooks,
this should be a "liquidity feast"
— rate cuts mean lower borrowing costs,
and funds would flood into the market like a deluge,
pushing up the stock market, real estate, and cryptocurrencies across the board.
However, reality has given us a resounding slap in the face.

The S&P 500 index
rose only 1.9% from September 17 to November 8,
It's almost as if we've made no progress.
Even more shocking is that
Bitcoin, considered a barometer of risky assets,
It plummeted from $116,000 on September 17th to just over $80,000.
The drop was as high as 30% or more.

This completely violates
The traditional logic is that "interest rate cuts are good for risk markets".

What exactly happened?
Why after a 50 basis point rate cut?
The market did not see the expected surge.
Instead, such an abnormal behavior has occurred?
The answer lies in an indicator that 90% of investors overlook.
—U.S. Treasury General Account (TGA).

In the past three months,
The US government uses this account,
Silently sucked away from the market
Nearly $700 billion in cash liquidity.
This "vampire-sucking" operation is the real culprit behind the market downturn.

#Thetrue meaning of interest rate cuts and their traditional impact paths
To understand the current anomaly
First, we need to understand what a rate cut actually means.

The essence of an interest rate cut is that the central bank lowers the benchmark interest rate.
This reduces the cost for commercial banks to borrow money from the central bank.
When borrowing costs decrease
Commercial banks will lend money to businesses and individuals at cheaper rates.
This will stimulate investment and consumption.
This is like paying a "cooling-down fee" for the entire economic system.
—The original borrowing cost of 100 yuan has been reduced to 95 yuan.
Businesses are more willing to borrow money to expand.
Individuals are more willing to take out loans to buy houses and cars.

The traditional interest rate cut transmission mechanism can be simplified to the following chain:
First, the central bank cut interest rates.
This leads to a decrease in bank borrowing costs.
Then bank borrowing costs decreased.
This has led to lower interest rates for loans to businesses and individuals.

Then the loan interest rate decreased.
Stimulate enterprises to increase investment,
Individuals increase their consumption.
This was followed by increased investment and consumption.
Stimulate economic activity
Corporate profitability improved.
Ultimately, corporate profitability improved.
This drives up stock prices.

At the same time, due to the decline in interest rates,
Bonds are becoming less attractive.
Funds have instead flowed into risky assets such as the stock market.

In this ideal model,
Cutting interest rates is like turning on a tap.
Allow funds to flow abundantly into every corner of the market.
Historical data has repeatedly verified this pattern.
—The interest rate cut cycle following the 2008 financial crisis
The interest rate cut cycle following the 2020 pandemic.
All of these factors triggered a significant increase in asset prices.

But this time,
This textbook-perfect logical chain breaks down in reality.
Where is the problem?

🚩The Overlooked "Vampire": The US Government's Financial Crisis
The answer lies in the US government's coffers.

Imagine,
If you need to spend 200 yuan a day on living expenses,
How much cash do you keep in your bank account?
Most rational people would answer:
You should put in at least 6000-7000 yuan.
Equivalent to a month's expenses,
In case of unforeseen circumstances.
The US government faces the same problem.
It has a special "wallet"
—TGA account
(Treasury General Account, U.S. Treasury General Account)

This is a current account opened by the US government at the Federal Reserve.
All government revenue and expenditure must flow through this account.

How much does the US government spend per day?

Fiscal year 2025,
The total US government spending budget is $7.01 trillion.
Divide by 365 days,
That's equivalent to spending $19.2 billion every day.

What does this mean?
That's equivalent to buying more than two Teslas every day.
Or it could cost $800 million per hour.

Logically speaking, if you spend 19.2 billion every day,
You should have at least one month's worth of expenses in your wallet.
That is, $576 billion.
But in July 2024,
The US government's TGA account balance is only $300 billion.
It's only enough for 15 days!

This is like someone who earns 30,000 yuan a month.
There was only 15,000 yuan left in the bank card.
—Although it sounds like a lot,
But for the scale of its expenditures, it has reached an extremely dangerous point.
The longest shutdown in U.S. government history lasted 35 days.
However, the account balance at that time was insufficient to cope with such risks.

#Ministry of Finance's spending target
Faced with this predicament,
The U.S. Treasury Department set itself a "small goal":
Increase the TGA account balance to $850 billion.
This is equivalent to 44 days of operating costs.
This figure is a safety line calculated based on historical experience.
—Sufficient to cope with the risk of a possible government shutdown.

From 300 billion in July to the target of 850 billion,
There is a difference of $550 billion.
Where did this money come from?

🚩The answer is: Take it from the market.

🚩The essence of fluidity: a game of water circulation
To understand how TGA accounts "drain" the market,
We need to integrate the entire financial system
Imagine it as a giant water cycle system.

This system has three main components:
First, there's the market as a large pool of water.
Including bank reserves,
Money market funds,
Working capital of businesses and investors
—All money that can be used for trading, investing, or consumption at any time.

Secondly, there is the government's small pool of funds, namely the TGA account.
This is the government's exclusive reserve.
Finally, there's the Federal Reserve's water tower.
As the central bank, it controls the "pressure" (interest rates).
And the "water volume" (money supply) regulates the entire system.

These three are interconnected through a pipeline system.
Water (funds) flows through it.
When the government wants to fill its small reservoir with water
Where the water comes from is crucial.

#The Three Steps of Pumping Water
Step 1: Issuing government bonds
The Treasury announced the issuance of $700 billion in government bonds.
Including short-term treasury bills, medium-term bonds,
Products with various maturities, such as long-term bonds.

Step Two: Market Purchase
Investors use bank deposits to buy government bonds.
Here is a crucial detail:
Let's say you have 10 million in savings at Citibank.
When using it to buy government bonds
The underlying funding chain is
—Citigroup's reserve account with the Federal Reserve decreased by $10 million.
The government increased its TGA account with the Federal Reserve by $10 million.

Note that during this process,
The money didn't actually "flow" into the government's hands.
Instead, the account transfer takes place within the Federal Reserve.
Bank reserves decreased, while TGA accounts increased.

Step 3: Liquidity Depletion
After the government raised $700 billion,
This means that the banking system's reserves have decreased by $700 billion.
Bank reserves are the foundation of liquidity in the entire financial market.
—It's like the water level in a large market pool.
A drop in water level means a reduction in the "available water" of the entire system.

🚩Why are bank reserves so important?

Bank reserves are funds that commercial banks deposit with the central bank.
It is a core indicator of liquidity in the entire financial system.
Wall Street elites are paying close attention to this number.
Because it directly affects banks' lending capacity and the supply of funds in the market.

Empirical data shows that
Bank reserves should not be lower than 8-10% of US GDP.
Otherwise, you will enter a dangerous area.
The current US GDP is approximately $28 trillion.
This means the safety line is approximately $2.24-$2.8 trillion.

Before the government began its rampant "blood-sucking,"
Bank reserves amount to approximately $3.2 trillion.
After 700 billion was siphoned off,
Only $2.85 trillion remains.
It's already very close to the danger zone.
This is like a person suddenly losing more than 20% of their blood from normal levels.
—Although still alive, it has developed severe symptoms of insufficient blood supply.

🚩Interest Rate Cuts Meet Liquidity Drainage: A Battle of Two Forces
Now we can explain the puzzle at the beginning.

Cutting interest rates is indeed a form of "quantitative easing."
—The Federal Reserve lowered interest rates,
Reduce the cost of using funds.
In theory, this will increase market liquidity.
But just how much "water release" is this?

A 50 basis point interest rate cut
Direct impact on market liquidity
This is mainly reflected in the decrease in interest rate costs.
Rather than a direct injection of funds.

The Federal Reserve's quantitative easing (QE) is what can truly and directly increase market liquidity.
— Directly purchase Treasury bonds and mortgage-backed securities (MBS).
Injecting funds into the market.

But during this period,
The Federal Reserve did not implement QE.
Instead, they are implementing QT (Quantitative Tightening).

Quantitative tightening, commonly known as "quantitative tightening,"
This refers to the Federal Reserve reducing the size of its balance sheet.
The specific steps are as follows:
The Federal Reserve will not renew its holdings of Treasury bonds and mortgage-backed securities (MBS) upon maturity.
Let these funds flow back to the Federal Reserve and be locked up.
Instead of flowing back into the market.

Starting in 2022,
The Federal Reserve continues to shrink its balance sheet.
Before April 2024,
$60 billion per month.
The speed will decrease after April.
A reduction of $38.5 billion per month,
This includes $35 billion in Treasury bonds and $33.5 billion in MBS.
By November 2024, the cumulative reduction had reached $1.5 trillion.

what does that mean?
The Federal Reserve is easing market pressure by cutting interest rates.
On the one hand, they are "siphoning" money from the market by reducing their balance sheets.
It's like someone paying for cooling you down.
While it continues to drain your blood.

In addition, government TGA accounts in the past three months
The $700 billion that was frantically sucked away,

Let's do the math:
The liquidity stimulus effect of interest rate cuts is relatively indirect.
The main purpose is to reduce capital costs.
The liquidity withdrawal caused by balance sheet reduction is direct.
$38.5 billion per month
Approximately $115.5 billion over three months.
In addition, $700 billion was directly withdrawn from the TGA account.

🚩The net result of these three forces is:
Market liquidity contracted sharply by more than $800 billion.

This perfectly explains why the market fell instead of rising after the interest rate cut.
—The extent of the "quantitative easing" through interest rate cuts,
It's far from enough to offset the drain on revenue from table reduction and TGA's "blood-sucking" tactics.
It's like when you fill a bathtub with water,
Even after removing the plug, they were still using a water pump to draw water.
The water level is certainly not going to rise.

🚩A turning point is coming: Three reversal signals
That's the bad news, now for the good news.

This "vampire operation" is nearing its end.
A major reversal in liquidity may be imminent.

⚠There are three key signals worth noting:
Signal 1: The government's coffers are full, and it's starting to spend money.
As of November 8th,
TGA account balance has exceeded $1 trillion.
Not only did it achieve the target of 850 billion,
They even exceeded their targets.
This means that the government no longer needs to extract funds from the market.

More importantly,
The US government has just ended its shutdown.
Normal operation has resumed.
As the year draws to a close, holiday subsidies and year-end settlements are on the horizon.
With the new fiscal year budget underway, government spending will increase significantly.

According to forecasts, TGA accounts may decline by approximately $150 billion in November.
It decreased by approximately $180 billion in December.
It is projected to decline by $1,000 to $1,500 per month by the first quarter of 2025.

This is equivalent to the government frantically saving money for three months.
Now it's finally time to start spending.
When the government spends money
The funding chain is reversed.
—TGA accounts decreased.
Bank reserves increased.
Market liquidity has been replenished.
It's like a pool that was previously drained.
Now we're starting to refill the tank.

Signal 2: The reduction of the table has completely stopped.
The Federal Reserve officially announced that
Quantitative tightening will be completely stopped on December 1, 2025.
This means that the $38.5 billion monthly liquidity pump will stop operating.

More importantly, historical experience shows that
Stopping the shrinking of the table is often a prelude to restarting the expansion of the table (QE).
Analysts have already made public predictions.
If economic data continues to deteriorate
The Federal Reserve may restart its bond-buying program in the first quarter of 2025.
Injecting liquidity directly into the market.
This is like not only stopping the pumping but also preparing to actively release the water.

Signal 3: The interest rate cut cycle continues
The market generally expects that
The Federal Reserve may cut interest rates by another 25 basis points at its policy meeting on December 18.
If this expectation is realized...
This will be the third interest rate cut this year.
The cumulative interest rate cuts reached 75 basis points.

When these three "faucets" are turned on at the same time
——
Government spending money (TGA release),
Stop pumping (stop water level reduction)
Continue cutting interest rates (to reduce water pressure)
Market liquidity will see a significant improvement.

Let's compare July to November with December.
Subsequent changes in liquidity.
During the three months from July to November,
The TGA account withdrew $700 billion from the market.
The Federal Reserve's balance sheet reduction has withdrawn approximately $115.5 billion.
Although interest rate cuts provide indirect support
However, net liquidity remains significantly negative.
Starting in December, the situation will be completely reversed.
TGA accounts are starting to be released.
It could release around $150 billion per month.
The impact of quantitative tightening is reduced to zero.
In addition to a possible 25 basis point rate cut,
Net liquidity will turn significantly positive.
This shift from large negative values ​​to significant positive values
This is what we call the "major liquidity reversal".

⚠Risk Warning: Three Uncertain Factors
Of course, there is never any certainty in investing.
Although the conditions for a liquidity reversal are already in place

However, three risk factors still need to be noted:
⚠Risk 1: The government may not spend money according to plan.
If the Treasury, for some reason, chooses to continue hoarding cash instead of spending as expected, the release of funds from the TGA account could slow significantly, delaying any improvement in liquidity. It's like having enough money in your wallet, but the owner is unwilling to spend it, and the market still doesn't receive a replenishment of liquidity.

⚠Risk 2: Debt ceiling controversy resurfaces
In March 2026, the US Congress will again discuss the debt ceiling issue. The US federal debt has ballooned rapidly in recent years, making the debt ceiling a focal point of political maneuvering. If Congress remains deadlocked, it could lead to another government shutdown, impacting spending plans. This political uncertainty could disrupt our expectations at any time.

⚠Risk 3: Geopolitical Black Swan Events
Escalating conflicts in the Middle East, worsening trade tensions between the US and China, and the escalation of the Russia-Ukraine war—any of these black swan events could trigger market panic and offset the positive effects of improved liquidity. In today's globalized world, geopolitical risks remain a Damocles' sword hanging over markets.

⚠What should we pay attention to?
Having understood the above logic,
We can then develop a clear observation strategy.

The following three time points and corresponding indicators deserve close monitoring:
Key Date 1: December 1, 2024
To observe whether the Federal Reserve has completely stopped shrinking its balance sheet as scheduled, this can be verified through the Fed's weekly balance sheet report released every Thursday. This report details the size of the Fed's holdings of Treasury securities and mortgage-backed securities (MBS). If the size no longer declines, it indicates that the balance sheet reduction has indeed stopped.

Key Date 2: December 18, 2024
The Federal Reserve's policy meeting will confirm whether it will cut interest rates by another 25 basis points. Attention will also be focused on the meeting statement and Powell's remarks at the press conference regarding the future policy path. Every word from the Fed can influence market expectations, especially its statements on the pace of rate cuts in 2025.

Key Time Point 3: First Quarter of 2025
Track the trend of TGA account balance changes. If the balance declines rapidly, it means the government is spending on a large scale, and at the same time bank reserves are rising, confirming that a liquidity reversal is taking place. This process requires continuous observation and cannot be based on data from just one day.

Regarding core monitoring indicators,
There are four data sources that need to be checked regularly.

The first is the TGA account balance.
You can check the website of the U.S. Treasury Department daily.

The second is the size of bank reserves.
Accessible through the Federal Reserve's H.4.1 report, released every Thursday.

Third is the size of the Federal Reserve's balance sheet.
Also from the H.4.1 report.
Fourth is the target range for the federal funds rate.
It will be released after the FOMC meeting.

In addition, there are some other warning signs that deserve attention.
Although we won't go into detail today, they are equally important.
For example, changes in the balance of reverse repurchase agreements (RRPs),
Money market fund fund flows
Changes in corporate bond credit spreads, etc.
These are all barometers of liquidity conditions.

Returning to our initial question:
Why did the market fall instead of rise after the Federal Reserve cut interest rates so drastically?

The answer is now clear:
It's not that interest rate cuts are ineffective.
Instead, there is a more powerful force offsetting the effects of interest rate cuts.
In order to enrich its own coffers, the US government
The government withdrew nearly $700 billion in liquidity from the market by issuing government bonds.
Meanwhile, the Federal Reserve continues to shrink its balance sheet.
With dual pumping,
The stimulative effect of the interest rate cut was completely overshadowed.

This case teaches us the following lesson:
Understanding the economy and the market
You can't just look at a single variable.

Interest rate cuts are just one of many influencing factors.
Different tools of fiscal and monetary policy
They will interact with each other and cancel each other out.
What truly determines the market's direction is...
It is the result of the combined force of these forces.

The deeper revelation is:
Liquidity is the lifeline of asset prices.
Whether it's stocks, bonds, or cryptocurrencies,
The fundamental driver of rising prices is abundant liquidity.
When market liquidity is ample
Funds will actively seek investment targets.
Drive up asset prices;
When liquidity tightens
Even with favorable policies like interest rate cuts...
Assets are unlikely to rise significantly.

Looking ahead, if the three aforementioned reversal signals materialize as expected,
We are likely to see a significant improvement in the liquidity environment in the first half of 2025.
This will create a good foundation for the rise of risky assets.
However, investors still need to remain vigilant.
Closely monitor changes in relevant indicators.
Because any variable in policy implementation can alter the expected trajectory.

Ultimately, the essence of investing is a probabilistic judgment about the future.
We can never eliminate uncertainty.
However, by gaining a deeper understanding of the economic operating mechanism,
Improve the accuracy of judgment.
While others are still simply using the linear thinking that "interest rate cuts equal good news,"
Having grasped the full picture of the liquidity cycle, you've already taken a significant step forward.

Remember, the market won't rise just because you expect it.
It only fluctuates due to actual changes in liquidity.
Over the past three months,
We have witnessed how government coffers drain the market's lifeblood;
In the following months,
Let's observe together how this blood flows back into the market.
And what opportunities this will bring to our portfolio.

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⚠️Disclaimer
All content represents personal opinions only and is not financial advice.
Please conduct your own research based on your individual circumstances!