The Federal Reserve (FED) prone to errors, leveraged tech stocks, and angry voters

The current financial system is entering a phase of greater vulnerability than markets expect, with risks shifting from mere market volatility to systemic pressures made up of a combination of policy, credit, and political risk. This article is sourced from arndxt, AididiaoJP, and is compiled, compiled and contributed by Foresight News. (Synopsis: Bridgewater Dalio: It's too early to sell AI stocks!) Because the “bubble-piercing needle” has not yet played) (Background supplement: Bitcoin fell to kill $86,000, Ethereum once lost $2800, Huida fell more than 3% U.S. stocks all fell) Over the past few months, my stance has shifted significantly: at first, I went from bearish to bullish, thinking that the market was just in a general pessimism that usually sets the stage for a short market, but now I am really worried that the system is entering a more vulnerable phase. This is not about a single event, but rather about considering five mutually reinforcing dynamics: The risk of policy mistakes is rising. The Fed is tightening financial liquidity amid data uncertainty and visible signs of an economic slowdown. Artificial Intelligence / Giant corporate complexes are shifting from cash-rich to leveraged growth. This shifts risk from pure equity volatility to a more classic credit cycle problem. Private credit and loan valuations are starting to diverge, and early but worrying signs of model-based stress are emerging beneath the surface. Economic fragmentation is solidifying into a political issue. For a growing population, the social contract is no longer credible, and this will eventually manifest itself in policy. Market concentration has become a systemic and political vulnerability. When about 40% of the index's market capitalization is actually made up of a handful of technopolies that are geopolitically and leverage-sensitive, it becomes a national security and policy target, not just a growth story. The underlying scenario may remain that policymakers will eventually “do what they've always done”: re-inject liquidity into the system and support asset prices before the next political cycle. But the path to that outcome looks more bumpy, credit-driven, and politically volatile than standard “buy the dip” strategies assume. Overall position For most of the cycle, it is reasonable to take a “bearish but constructive” position: inflation is high but decelerating. Policies have remained largely supportive. Risk assets are overvalued, but adjustments are usually met with liquidity intervention. Today, several elements have changed: Government shutdown: We experienced a prolonged shutdown that disrupted the release and quality of key overall data. Statistical uncertainty: Senior officials themselves have acknowledged the damage to federal statistical agencies, which means less confidence in the data series themselves anchored to multi-trillion dollar positions. Turning hawkish amid weakness: Against this backdrop, the Fed has opted to shift to a more hawkish stance on both interest rate expectations and balance sheet, tightening despite worsening forward-looking indicators. In other words, the system is tightening in vague and emerging pressures, rather than moving away from them, which is a very different risk profile. Tightening policy in an uncertain environment The core concern is not just policy tightening, but where and how it is tightened: Data uncertainty: Key data (inflation, employment) is delayed, distorted, or questioned after a shutdown. The Fed's own “dashboard” became less reliable when it was needed most. Interest Rate Expectations: While forward-looking indicators point to deflation early next year, the market's implied near-term rate cut has been pulled back due to hawkish comments from Fed officials. Balance Sheet: The balance sheet's stance under quantitative tightening, and the bias that tends to push it for longer periods to the private sector, is inherently hawkish for financial conditions, even if policy rates remain unchanged. Historically, the Fed's mistake has usually been the wrong timing: raising rates too late, cutting rates too late. We risk repeating the pattern of tightening policy when growth slows and data is blurring, rather than easing it up front. AI and Big Tech Companies Become Leveraged Growth Stories The second structural shift is a change in the characteristics of giant tech companies and AI leaders: Over the past decade, the core “Big Seven” companies have actually been equity-like bonds: dominant businesses, huge free cash flow, massive share buybacks, limited net leverage. Over the past two to three years, this free cash flow has increasingly been reinvested in AI capital expenditures: data centers, chips, infrastructure. We are now entering a phase where incremental AI capital expenditures are increasingly financed through debt issuances, rather than just internally generated cash. The impact is as follows: Credit spreads and credit default swaps begin to move. As leverage rises to finance AI infrastructure, companies like Oracle are seeing credit spreads widen. Equity volatility is no longer the only risk. We now see the beginning of classic credit cycle dynamics in industries that previously felt “indestructible”. The market structure amplifies this. These same companies have a disproportionate share of the main indices; Their shift from “cash bulls” to “leveraged growth” has changed the risk profile of the index as a whole. This does not automatically mean the end of the AI “bubble”. If the returns are real and sustainable, the capital expenditure of debt financing can be justified. But it does mean that margins of error are much smaller, especially with higher interest rates and tighter policy. Early fault lines in credit and private markets Beneath the surface of the public markets, private credit is showing early signs of stress: the same loan is valued by different managers at significantly different prices (e.g., one at face value of 70 cents, the other at about 90 cents). This divergence is a typical precursor to the broader model-versus-mark-to-market controversy. This pattern is similar to the following: 2007 – Non-performing assets increase and spreads widen, while stock indices remain relatively quiet. 2008 – Markets that were once considered cash equivalents, such as auction rate securities, suddenly froze. Beyond that: The Fed's reserves are starting to fall. There is growing recognition internally that some form of balance sheet re-expansion may be needed to prevent problems in the internal workings of the financial system. None of this guarantees a crisis. But this is consistent with a systematic situation: credit is quietly tightening, and policy is still framed as “data-dependent” rather than preemptive. The repo market is where the “reserves are no longer abundant” story emerges first On this radar chart, “the proportion of repo transactions at or above the IORB rate” is the clearest indication that we are quietly exiting a truly abundant reserve system. In the third quarter of 2018 and early 2019, that line was relatively inward: ample reserves meant that most secured financing comfortably traded below the lower bound of the reserve balance rate (IORB). By September 2019, just before the repo market collapsed, that line was pushed out sharply as more and more buyback transactions were being traded at rates equal to or higher than IORB, a typical symptom of scarcity of collateral and reserves. Now look at June 2025 vs October 2025: The light blue line (June) is still safely inside, but the October 2025 red line extends outwards and is close to the contour of 2019, indicating that the proportion of repo transactions touching the lower bound of the policy rate is rising. In other words, traders and banks are pushing up quotes for overnight financing because reserves are no longer comfortably abundant. Combined with other indicators (more…