GM, this is Milk Road Macro PRO, the newsletter that jams its finger down on the ‘zoom out’ button so you can see the full picture.
We’re in the middle of a key turning point in the macro picture.
Key turning points only occur maybe once or twice a year.
A number of variables are pointing towards a positive medium-term picture for risk assets like stocks and bitcoin.
And to celebrate Milk Road All Access launching next week, we’ve decided to share a sneak peak of the very first Milk Road Macro PRO Report ever created.
We’re talking 30+ charts from across the macro landscape!
Everything from liquidity to the business cycle to sentiment and positioning.
The purpose is to zoom out and think bigger picture about where the market is and where things might be going over the coming months.
Ongoing news events like the Middle East war and trade deals often distract us from the bigger picture.
Today, we'll remove the distractions and look at what the data is telling us in terms of where asset markets might be heading next.
Let's start with the biggest driver of markets, liquidity.
LIQUIDITY
Liquidity remains very constructive across the board.
The dollar has weakened considerably since the start of 2025.
This is liquidity positive (I explained why here) and generally leads risk assets by 1 to 4 months.
This leading inverse relationship is still signalling higher prices to come for US stocks, if the correlation holds.
And it’s the same picture for Bitcoin.
Gold, on the other hand, generally moves coincident with the dollar.
Gold moved strongly upwards earlier this year at the same time as the dollar was tumbling.
But it then stopped rising when the dollar stopped plunging in late April.
This dollar weakening has caused popular dollar-denominated “global M2 money supply” measures to increase further.
With risk assets following along on a lag (so far).
The long-term dollar-denominated “Global M2 money supply” cycle is now also picking up due to the recent dollar weakness.
Below you can see it overlaid with the S&P 500 year-on-year (YoY) percentage change.
And here it is overlaid with Bitcoin YoY percentage change.
A note on the dollar:
Positioning has swung violently from ultra-long in early 2025 to ultra-short currently.
Everybody is now bearish on the dollar.
I would think this is likely to be a contrarian indicator.
The dollar may be due for at least a correction upwards, or a period of consolidation, in the coming weeks - now that everybody is short.
Due to the inverse correlation with risk assets discussed above, this could then feed in to become a headwind for risk assets in a few months time.
Bank of America analysis shows Fund Managers are the most underweight the dollar since 2005.
Goldman Sachs analysis indicates dollar short positioning is extreme.
Only matched by one other occasion since 2014.
That was early 2018, which marked a multi-year low in the dollar.
Switching to central bank liquidity, Federal Reserve Liquidity has essentially been largely flat over the past few years.
This is because the Fed’s ongoing Quantitative Tightening has been “negated” by various “stealth QE” measures, including more than $2 trillion moving out of the Fed’s Reverse Repo facility (more information here).
We are currently in a small localised “upswing” that started on January 1 2025 (roughly +$470bn so far) - which is generally supportive for risk assets.
This is being caused by a draining of the Treasury General Account (TGA) as the US Government has hit its debt ceiling.
The Government is using its “savings” (TGA) to fund spending, pushing “new” liquidity into the market and pushing up bank reserves.
This current Fed Liquidity “upswing” will continue until a new debt ceiling agreement is reached, which will likely be some time between July and September.
Net Federal Reserve Liquidity will then start falling as the Treasury “refills” the TGA.
This TGA rebuild process could become a headwind for risk asset markets, as the Treasury floods the market with hundreds of billions of dollars of new debt to replenish the TGA.
The TGA rebuild process could also put upward pressure on long-term US Treasury yields.
But “liquidity boosting tools” are being prepared, including a likely adjustment to the Supplementary Leverage Ratio (I explained the TGA rebuild and the SLR in more detail here).
The People’s Bank of China (PBoC) aka: the central bank of China - has also been injecting liquidity into Chinese money markets.
In December 2024, the PBoC made a rare move in officially changing its monetary policy stance from "prudent" to "moderately loose".
Since then, the PBoC has injected more than 8 trillion RMB (more than $1 trillion) into Chinese money markets, according to Crossborder Capital.
The PBoC should have “breathing room” to continue injecting liquidity as the dollar has weakened so rapidly.
China was likely curtailed from adding liquidity in 2024 due to the strength of the dollar and the need to keep its currency strong.
China needs to stimulate, because its economy is faltering and is verging on deflation.
China is integral to the global economy - so Chinese stimulus is good news for the world economy as a whole.
Back in the US, private liquidity creation is also expanding.
Bank credit is flowing at the fastest rate since early 2023.
Liquidity is also still being bolstered on an ongoing basis by a continuation of “Yellen-omics”.
This is a technical subject, but I will do my best to explain it.
Previous Treasury Secretary Janet Yellen leaned heavily on a special trick to funnel liquidity into markets.
She dramatically shifted the Government’s “debt issuance mix” away from longer-term debt and towards short-term Treasuries (T-bills).
This type of “bill financing” is generally stimulative to the economy and asset markets.
It is thought of as a textbook “debasement” tactic.
Heavy T-bill issuance can at times resemble a form of light “debt monetization” or “money printing”, because bills are often financed through balance sheet expansion by financial institutions.
This tactic also means issuing less long-term debt, which crimps the supply, suppressing long-term yields.
Current Treasury Secretary Scott Bessent previously hammered Yellen for her controversial debt issuance switch, directly accusing her of “stimulating markets” in the run-up to the 2024 election.
But since taking office earlier this year, he has continued with her tactic of leaning on short-term debt.
The next “forward guidance” we will receive on this debt issuance strategy will be the Treasury’s Quarterly Refunding Announcement in mid-July.
I expect it’s likely that this stimulative “heavy bill financing” will continue.
In a recent interview, President Trump said:
“What I’m going to do, is I’m going to go very short-term - like six months.”
“Wait until this guy [Powell] gets out, get the rates way down, and then go long-term.”
What he’s telling you here is that the plan appears to be to continue issuing lots of very short-term debt, or T-bills, (liquidity positive) until Fed Chair Jerome Powell’s term ends in May 2026.
And then appoint a dovish Fed Chair who will lower rates quickly, allowing the Government to begin to “term out the debt” and issue more long-term debt.
FINANCIAL CONDITIONS
Financial conditions tightened considerably through March and early April as the tariff war intensified.
My financial conditions index rose (tightened) to its highest level since the 2020 pandemic disruption.
But it has since fallen (loosened) significantly.
It’s now officially back to “loose” (green: below zero) again.
Although, we haven’t yet reached the same levels of “looseness” that we saw through large parts of 2023 and 2024.
Here’s a deeper look showing the four separate components (VIX [red], MOVE [green], credit spreads [orange and purple]).
The ongoing Middle East conflict barely made a dent in financial conditions - compared to the huge “tariff spike” we saw in April.
If we can remain “loose” over the coming weeks and months, it bodes well for more upside price action for the S&P 500.
And it also bodes well for more upside price action for Bitcoin.
WHERE ARE WE IN THE BUSINESS CYCLE?
Many people believe we are still in the same cycle that started in early 2023.
This is largely due to business survey measures such as the ISM Manufacturing PMI.
The lowest recent reading on the PMI was June 2023 and we’ve been grinding upwards ever since - but largely remaining in “contraction” (below 50).
This is now one of the longest periods of time spent below 52 in history.
But maybe there’s another explanation.
Uh, Oh… 😧 The rest of this report is exclusive to Milk Road PRO members!
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WHAT’S LEFT INSIDE? 👀
- Where are we in the business cycle?
- What happens when the 90 day pause on tariffs ends?
- What could happen if bond yields hit 4.5%?
- Is this a good environment for risk assets?
And remember, starting August, Macro PRO will be a paid subscription.
But if you upgrade to Crypto PRO this week, you’ll be automatically upgraded to PRO All Access, unlocking Crypto, Degen and Macro PRO all for the price of one subscription ($25/month $250/year)
After July 1, it’ll be $100/month (ouch!). So this weekend is your final shot to lock in 3 PRO subscriptions for the price of one.
Already a PRO member? Log in here.
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