Why are gold, US stocks, and Bitcoin all falling?

Written by: c00k1e , BlockBeats

Judging from the various economic data released by the US government, the US economy is currently doing very well, in a very standard way.

Against this backdrop, overnight, from US stocks to gold, from the Nikkei to commodities, and even the cryptocurrencies we are most familiar with, almost all assets seemed to have conspired to collectively plunge. This indiscriminate and all-encompassing crash instantly brought many people back to those days dominated by panic.

What exactly happened? Has the flames of war in the Middle East finally reached the financial markets? Or did Trump say something shocking again? Or perhaps, a long-brewing, perfect storm has finally arrived?

Superficial Manifestations: Geopolitical Conflicts, Trump's "Verbal Prowess," and the MAG7's Crisis of Trust

Whenever the market crashes, geopolitics is often the first scapegoat that comes to mind. The recent tensions in the Middle East are certainly a significant factor influencing market sentiment. After all, war means uncertainty, and uncertainty is the enemy of capital. Gold and silver, as traditional safe-haven assets, had reached new highs before the crash, which in itself reflects the market's risk-averse sentiment.

Another person who immediately comes to mind is Trump. The former president has recently resumed his pronouncements on the dollar, publicly stating that he "doesn't mind a weaker dollar." This statement immediately caused the dollar index to fall, hitting a near two-year low. For a global financial system accustomed to a "strong dollar," this is undoubtedly a heavy blow.

But the question is, is this the whole truth? If it's just a geopolitical conflict, why did even safe-haven assets like gold plummet? If it's just a single statement from Trump, isn't the market's reaction a bit too extreme?

Just like when you watch a suspense movie, the murderer is often not the first one to appear or the one who looks most like the bad guy. The real "mastermind" is much more hidden.

User X, @sun_xinjin, mentioned an interesting observation: the forward PE ratios of the MAG7 (the seven major US tech stocks) have begun to decline.

This may seem like a small detail, but it reflects a larger shift—the market is beginning to cast a vote of no confidence in the massive capital expenditures of these tech giants. In the latest earnings season, the market became unusually "picky." Exceeding expectations was equivalent to meeting expectations before, and significantly exceeding expectations was equivalent to exceeding expectations before. If there was even the slightest unpleasant element in the earnings report, the stock price would plummet.

This led to the MAG7 index, along with the Nasdaq, consolidating at high levels for several months. Some say this is a sign that the epic rally that began in May 2023, initiated by the MAG7, is starting to fade. The market's main focus has also temporarily shifted away from the MAG7, turning to "storage, semiconductor equipment, commodities such as gold, silver, and copper, and energy."

The Paradox of Bank Liquidity and Balance Sheet Shrinking

@sun_xinjin also mentioned another deeper issue: bank reserves remain low, and SOFR and IORB are not loose.

SOFR is the overnight funding rate, and IORB is the interest rate on bank reserves. The difference between these two indicators reflects the liquidity condition of the banking system. When this difference widens, it means that liquidity in the banking system is tightening.

The current situation is that this difference is not lenient, and this lenientness reduces the likelihood that we will see the new Vice Chairman of the Federal Reserve, Kevin Warsh, proceed with his balance sheet reduction plan. This is because, with bank reserves already low, further reducing the balance sheet is like continuing to drain water from an already dry pool, which will further exacerbate liquidity tensions.

But that's precisely the problem. Market expectations of quantitative tightening are pushing up long-term bond yields, which in turn push up mortgage rates, ultimately freezing the real estate market.

This is why, when faced with a liquidity crisis, global funds choose to indiscriminately sell off all risky assets. This is not merely the unwinding of a "dollar carry trade," but a broader liquidity crisis.

It's not that there's no money in the market; rather, all the money is fleeing risky assets and flowing into dollars and cash. Everyone is selling everything just to get dollars, cash, and liquidity. This is the true core of this global asset crash—a global shift in risk appetite and deleveraging process triggered by the narrative of fiscal unsustainability.

Will the 312/519 event repeat itself?

Will this be a new "312" or "519"?

Let's take a look back at history:

312 (2020): At that time, the COVID-19 pandemic broke out globally, triggering an unprecedented global liquidity crisis. Investors sold all assets for US dollars, and Bitcoin plummeted by more than 50% within 24 hours. This is most similar in underlying logic to the liquidity crisis we are experiencing now, both caused by external macroeconomic factors leading to an extreme thirst for US dollar liquidity.

519 (2021): Primarily triggered by Chinese regulatory policies. This was a typical crash driven by a single, forceful regulatory action, with its impact relatively concentrated within the crypto industry.

In comparison, our current situation is more like the March 12th earthquake. Macroeconomic liquidity is tightening. Global funds are withdrawing from risky assets to fill liquidity gaps. In this situation, cryptocurrencies, as the "peripheral nerves" of risky assets, will naturally be the most severely impacted.

However, the favorable policies implemented after Trump took office have played a significant role in this round of cryptocurrency bull market. Nevertheless, none of us can predict what Trump will say tomorrow. In an already fragile market structure, even a relatively unfriendly remark could have the destructive power of the May 19th crash.

The impact of the AI ​​bubble

Let's return to the original question. What is the real reason for the global asset price crash?

It's not a geopolitical conflict, not Trump's rhetoric, and not some "dollar carry trade," but a paradigm shift in the market.

The epic bull market that began in May 2023 was built on the narrative of an "AI revolution" and the "invincibility of tech stocks." But now, this narrative is being questioned. The market is starting to ask: Will these massive capital expenditures truly generate corresponding returns?

Meanwhile, the long-term bond market is signaling that fiscal unsustainability is no longer a theoretical issue, but a real one. The market doesn't believe interest rate cuts can solve this problem because the root cause lies not in interest rates, but in fiscal policy. The market has begun preparing for a "post-optimistic era," and it has realized that the current strong economic data may represent the peak of this cycle.

Against this backdrop, cryptocurrencies, as representatives of risky assets, were the first to be sold off, but this was just the beginning.

Finally, this could be an opportunity to re-evaluate asset allocation. True value opportunities only emerge when everyone is panic-selling. But the prerequisite is that you have enough capital to survive until then.