A Trip Down Memory Lane
Many don't remember 2019 so well, and that's widely due to how information is flashed in front of our face. We're talking about several decisions that were made, causing 2020 to unfold the way it did. Sorry to burst your bubble, but COVID had nothing to do with the effects of businesses shutting down. How do I know? Well let's take a look at what caused a slowdown of the economy. Watch the video below before reading further.
You had the Feds inject $75B into the repo market, as banks borrowed $53B of liquidity on September 17, 2019. This was a huge strain on the economic system at a macro level.
Something had to have caused such, and that something is very clear. Que numerous corporate companies that borrowed $10T for M&A and to get lower rates while refinancing. A massive amount to justify keeping the system moving, and inflate earnings.
Now they couldn't really have borrowed so heavily unless something told them things would slow down. Well that something came from the Dec 2018 - Jan 2019 US gov shutdown, which delayed economic data. Plus the Feds already cut three times - July 31 (¼ bp cut), Sept 18 (¼ bp cut), Oct 30 (¼ bp cut).
Initially we had GDP, which released in February 2019, as an increase of 2.6%. Then in March, it decreased to 2.2%. When nonfarm payroll reports were released in January 2019 showing 304,000 - 312,000 jobs added, they were reduced to 222,000. Unemployment also had an increase to 4.4%.
Something’s Too Quiet
Divisia monetary aggregates tell the truth before anything else
As the markets shout noisy nonsense scrambling the news, Divisia DM3, DM4-, & DM4 shows the real data of where things move. The D means Divisia, M means monetary. The DM3 is an aggregate of institutional money market funds, large time deposits, and repurchase agreements. DM4- is commercial paper, and DM4 are T-Bills.
Divisia M3/M4 are the cleanest measures of money because of the weight components by their actual liquidity and spending usefulness. The chart (Figure 8 - CFS Divisia Monetary Aggregates Level Charts) shows a bump to bring the primary market back in line for its trajectory.
2020 -> massive bump upward: This was the COVID liquidity explosion. Divisia aggregates captured it much more accurately than traditional M2.
2021 - 2024 -> slow normalization, bringing trajectory “back to trend”: This is the part no one discusses publicly - the Fed engineered a controlled mean reversion of broad liquidity.
Late 2024 - 2025 “back on trajectory”: Divisia M4 has been converging to its pre-COVID growth path, meaning:
Excess liquidity from COVID is almost completely wrung out
Velocity adjusted liquidity is flat to declining
Money sensitive indicators are consistent with recession onset, not recovery
This is the quiet storm forming
Why the markets are “too quiet” right now
A liquidity plateau is the most deceptive phase before dislocation. Markets get noisy when liquidity is either expanding or collapsing. Right now, liquidity isn't doing either. It's sitting in a compressed equilibrium:
Risk assets aren't receiving new marginal liquidity
Funding markets are beginning to tighten beneath the surface
Treasury dealers in hedge funds are hedging but not yet forced to unwind
Banks are tapping SRF heavily but without public crisis headlines
This creates an unsettling calm - the sensation that something is off. My intuition is responding to the fact that liquidity conditions look stable on the surface but fractured underneath.
The missing story: “Shadow Tightening”
The thing nobody is openly talking about - but every policymaker is acting on - is Broad money (Divisia M4) has been negative or near zero growth while credit conditions deteriorate. This is shadow tightening, and it explains why:
SRF usage is spiking
Repo demand is rising
ABS spreads are widening without headlines
Banks are reluctant to lend
Treasury collateral chains are lengthening (a pre-crack warning)
This isn't the traditional recession indicator like yield curve inversion. This is the funding system version, the final stage before something breaks. But few talk about Divisia because it reveals policy errors too clearly.
The silence is intentional
When policymakers know liquidity is fragile, they will:
Speak about “soft landing”
Avoid mentioning monetary contraction
Keep the public focused on microeconomic nonsense
Only publish technical stress indicators if required
But institutions - hedge funds, banks, sovereign desks - see the same metrics we're seeing:
Divisia turning flat is recessionary
Velocity not recovering indicates weak real demand
Treasury funding dependence on SRF is a warning
M4 plateauing means credit can't expand
Money gaps closing means disinflation turning into contraction
This is why everyone is “quiet”; they don't want to trigger the break
What we're actually feeling
We're sensing the liquidity inflection point between: Stage 1 - Excess liquidity unwinding (2021 - 2024) and Stage 2 - Liquidity scarcity beginning to bite (2025 onward).
This midpoint feels calm because:
Prices are stable
Credit spreads haven't blown out
Unemployment hasn't risen yet
Markets aren't volatile
But only Divisia M4, repo usage, SRF demand, and bank reverse flows show what's coming next
Fed Decision Model for 2026
NY Fed President John Williams Rate Cut
Let's break down the primary inputs for their rulebook:
GDP_qy = Real GDP, percent change quarter-over-year (BEA/FRED), thresholds below
Pay_y = PAYNSA, percent change in total nonfarm employment vs 12 months earlier (FRED monthly -> convert to YoY)
Policy level = Fed funds target/effective rate (DFF/Fed funds) - current stance and recent net change
Liquidity stress bundle (NY Fed/market):
SRF peak = peak daily standing repo facility usage in the period (billion USD)
ONRRP level = reverse repo outstanding (daily totals aggregated)
GC spread = tri-party GC/SOFR vs Fed funds (or SOFR - Fed funds) - sudden positive spread = funding stress
Yield curve = 10y - 2y (quarter average). Inversion raises downside risk.
Now when we add key numeric thresholds (operational), here's what we can see:
Hike region (historically supportive of hikes):
Gdp quarterly > 2.5% > 1.75% for two consecutive quarters
Cut region (historically supportive of cuts):
GDP_qy < 1% and PAY_y <1% -> high probability of cuts within 1 - 2 quarters
Liquidity stress overrides:
SRF_peak ≥ $30B or ONRRP unusual inflow/outflow pattern (sudden withdrawal or extreme inflows inconsistent with reserves) or GC_spread > 30 - 50 bps** -> Fed may ease even if GDP/PAY remains > 1% (financial stability easing). Reuters/NY Fed reported SRF spikes October 2025 as an example.
Yield curve flag: 10y - 2y < 0 (inversion) increases weight to the cut decision if GDP/PAY are weakening or if liquidity stress is present
Decision rule simplified:
If GDP_qy & PAY_y both are in cut region -> Cut (unless offset by a sudden inflation surge)
Else if GDP_qy & PAY_y both in hike region - Hold/hike (depending on inflation)
Else if liquidity stress flag true (SRF_peak ≥ $30B or GC_spread > 30 - 50 bps) -> cut or pause hikes to stabilize markets even if macro growth isn't weak
Evidence snapshot
Fed cut October 29, 2025 - FOMC lowered target range 3.75% - 4% (explicit Fed action). The Committee said it would “carefully assess incoming data” for additional adjustments.
GDP growth recent - BEA: real GDP rose strongly in 2025 Q2 with a +3.8% annualized reading in the BEA third estimate (so GDP isn't in the historical “cut region” of <1%). That argues against cuts driven purely by weak growth.
Payrolls - PAYNSA shows monthly employment levels above mid 2025 and month-to-month gains; labor growth isn't weak enough to justify cuts by classic GDP/payroll rules.
Liquidity stress present - SRF usage spiked dramatically at the end of October 2025. NY Fed and market participants signaled funding/quarter end strains - this is a clear reason the Fed cut, in December, despite healthy GDP/payroll readings.
Policymaker comment (John Williams) - New York Fed President John C. Williams publicly said the Fed has the capacity to implement near term cuts without jeopardizing the inflation objective (speech November 21, 2025), which increases the Fed to act to stabilize markets if liquidity stress persists.
These five citations above are the most load bearing factual foundations I used to set thresholds and the present forecast.
Operational forecast for 2026
Probability of at least one additional Fed cut by Q1 - Q2 2026: ~60%, and the reason is from liquidity stress + official willingness to act (override). If SRF/GC stress recedes and inflation re-accelerates, probability fails.
Probability of a multi cut easing cycle by Q2 2026 (2+ cuts totaling ≥ 50 bps): ~30%, as it requires persistent liquidity stress or a weakening in GDP/payroll beyond current levels.
If SRF/GC stress is transitory and liquidity normalizes quickly, probability of further cuts by mid 2026 drops to <25% (Fed likely holds). If GDP and PAY fall into the classical cut region (GDP YoY <1% & PAY YoY <1%), the probability of multiple cuts rises to >75%.
Why the tilt toward cuts despite decent GDP & payrolls: liquidity stresses (SRF spike), the Fed's explicit liquidity tools and William’s comments give the Fed operational room to ease to stabilize markets; that raises the odds of tactical cuts even absent broad macro weakness.
Are 200 - 300 BPS Cuts Possible?
We already know that the market strongly favored a 25 bp cut, before the Fed announced their decision, being this was a signal cut and not an easing cycle. So what justifies 200 - 300 bps of cuts in 2026 if that were to happen?
A 2 - 3% reduction in rates during 2026 is massive, equivalent to what the Fed does with recessions. Fed cuts of that magnitude historically occurred only during:
2001 recession
2007 - 2008 financial crisis
2020 pandemic crash
To justify that scale of easing, the following would need to occur:
GDP quarterly growth approaching or negative
Typically -0.5% to +0.5%, signaling recession or recession like conditions
Nonfarm payroll slowing to 0 - 50,000 per month
Below 100k isn't enough to absorb new labor entrants
Payroll prints near zero expresses the economy is stalling
Unemployment rising to the 4.7 - 5.2% range
Historically triggers fast Fed easing
Rapid deterioration in credit markets
Spreads widening, delinquencies rising, C&I loan demand collapsing
If the Fed intends to cut 200 - 300 bps, they're essentially signaling: “A hard landing is now more likely than a soft landing”
Why might GDP and Payroll still be positive?
This is key confusion, and it doesn't require data falsification to explain. There are four realistic explanations, all consistent with US economic history.
GDP and payroll are lagging indicators
The Fed cuts before GDP turns negative, not after
Year | Fed Started Cutting | GDP Turned Negative |
2001 | Jan 2001 | Q1 2001 |
2007 | Sept 2007 | Q1 2008 |
2020 | Mar 3, 2020 | Q2 2020 |
Yes GDP and payroll can be positive right before a downturn, which is normal
Payroll composition masks weakness
May see positive NFP, but:
Part time jobs up
Full time jobs down
Immigrant labor inflates totals
Multiple job holders inflate numbers
Government jobs distort labor strength
This isn't falsification, it's composition distortion. NFP is known to give false strength signals before recessions.
GDP becomes positive because of inventory + government spending
GDP = C + I + G (X - M)
When the economy weakens:
Consumer spending (C), money that households spend on
Government spending (G) rises automatically
Inventories (I) build because demand is slowing
Exports (X), goods and services the US sells to other countries
Imports (M), goods and services US buys from other countries
(X - M) is net exports
Imports fall, raising GDP mathematically
This can keep GDP slightly positive even during a slowdown
Currency imbalance exists, but not how it's thought
Currency imbalance is structural
High earners are less sensitive to rate hikes, their spending masks recessionary conditions
Immigration adds workers but suppresses wage inflation; GDP grows while wages stagnate
Wealth concentration amplifies spending from top deciles, this props up GDP and NFP artificially
This is a real economic distortion, not falsified data
Yes, GDP is likely running 0.5 - 1% real during Q1 2025, but it was boosted during Q2 at 3.3% with an estimate of 3.9% in Q3. Payroll has been trending down toward 50k - 100k monthly, giving trend growth below its potential. This justifies a 25bp cut this month, and with a new Fed chair on the horizon of Kevin Hassett, we would see aggressive cuts in the 200 - 300 BPS range.
Final interpretation (Fed decision model for 2026)
Base case (55%) - Controlled Hard Landing
GDP: 0 to 0.75%
Payroll: 30k - 100k
Fed cuts: 200 bps by mid 2026
Aggressive Case (30%) - Recession Trigger
GDP: -0.5% to +0.25%
Payroll: -25k - +50k
Fed cuts: 300 bps rapidly
Rates fall to 0.25 - 1%
Soft Landing Case (15%) - Slow Reduction
GDP: 1 - 1.5%
Payroll: 100k - 150k
Fed cuts 25 - 50 bps per meeting
Rates bottom at 2 - 2.25%
Patterns of 2018-19 & 2025-26
Government shutdowns
When we look at government shutdowns, it usually delays key data with the economy. Once it comes out, we see that they're false signals of strength because of revisions. First let's look at the 2018-2019 shutdown:
Gov shutdown Dec ‘18 - Jan ‘19
GDP + payroll delayed
First “delayed” print shows strength (because backward looking)
Later revision shows deterioration
Fed begins a quiet pivot
Now let's look at 2025:
Gov shutdown Oct - Nov 2025
GDP + payroll delayed
First releases of October reports arrive Dec 16 (payroll) + Dec 23 (GDP)
Almost guaranteed to show temporary strength
Corrective revisions come Jan - March 2026
Fed already signaling cuts before the revision hits
This is identical, except for the times of the shutdown
With November reports already out, before October (which is illogical), there's a sharp drop
Corporate borrowing surge
Right now, credit is tightening and we'll see the Fed force their pivot. So let's look at 2019 corporate behavior:
Total corporate borrowing was nearly $10T
Mostly for M&A and lower rates
They pulled forward capital, which front loads GDP but weakens later quarters
Fed had cut 3x (July 31, Sept 18, Oct 30), each 25 bp
Now let's focus on 2025:
Total corporate borrowing so far is $14T
Plus $140B+ for AI bond issuance
Exact same forward pull of investment
This props up 2025 GDP, but guarantees a 2026 slowdown
Fed cut 3x (Sept 17, Oct 29, Dec 10); each 25 bp and is now reacting the same way as in 2019
This mirrors the cycle almost perfectly
As Ron Insana puts it from his newsletter: “Some $360 billion has been spent on AI infrastructure this year …another $400 billion is expected to be spent in 2026”.
Repo market stress
2019
September 2019 repo spike $53B by banks
Signal of liquidity stress 6 months before COVID
Fed started cutting 2 months before repo blowout
Repo blowout proved they were behind
2025
October 31, 2025 repo spiked $50.35B
Indicates collateral quality deterioration, Treasury market imbalance, funding stress before recession
Fed already cutting before repo event, exactly like 2019
The image above shows the banks borrowed $6.5B on October 15, before drawing $50.35B a couple weeks later.
Repo markets don't lie. This is the clearest base layer indicator the public never watches.
Federal Reserve behavior
2019 Fed cuts:
July 31: 25 bp
Sept 18: 25 bp
Oct 30: 25 bp
Finished at 1.50 - 1.75%
2025 Fed cuts:
Sept 18: 25 bp
Oct 29: 25 bp
Dec 10: 25 bp
Currently 3.50 - 3.75%
This positions the Fed exactly where they were in 2019. The difference is that they're cutting from a much higher level - meaning deeper cuts are coming.
On a side note with the BOJ, they're looking at hiking rates. This moves right along with how Japan’s long-term bonds are hitting all time highs in 18 years.
This is what I shared in a YouTube short about BOJ hiking rates:
Pattern says 2026 = 2020 but compressed + amplified
2019 | 2025 | Interpretation |
Gov shutdown | Gov shutdown | Data distortion hides slowdown |
Delayed GDP | Delayed GDP | False initial strength |
Delayed payroll | Delayed payroll | False initial strength |
Corporate borrowing $10T | Corporate borrowing $14T | Forward pulled growth -> later slowdown |
Repo spike $53B | Repo spike $50.35B | Funding stress |
Fed cuts (3x) | Fed cuts (3x) | Pre-recession pivot |
GDP revised down | GDP revised down (coming Jan - Mar 2026) | Late recession signals |
Payroll revised down | Payroll revised down (likely Dec) | Slowdown confirmation |
Rates reach 1.50 - 1.75% | Rates likely headed to 0.25 - 1.25% in 2026 | Overshoot risk is higher |
Is GDP & payroll data false?
No, but they're being distorted by timing and composition, exactly like in 2019. What's happening instead:
You get delayed government reporting
Then you get first prints that look strong
Then you get massive downward revisions
But the Fed sees the truth earlier via bank lending, credit spreads, corporate cash flows, delinquencies, repo stress
So the Fed cuts before the public sees the deterioration as this happened in 2000, 2007, and 2019.
So what happens in 2026?
Jeff here blew the whistle like Ron has about private credit being the next bubble, though for me I see the amplifier coming from consumer loan ABS (i.e. personal loans) to burst the private credit bubble.
Q1 2026 will have GDP and payroll revisions down, repo volatility, corporate earnings compression, and Fed emergency pivots beginning.
Mid to late 2026 we're going to most likely see Kevin Hassett become the new Fed NY chair to replace Powell, and he's dovish on rates. Kevin Hassett would try to cut rates "well below 3%" as Fed Chair says Bank of America analysts. That's why I believe he would focus on getting 200 - 300 bp cuts getting in the chair. This would be very similar to 2008 and 2020 levels, the biggest since the world financial crisis.
On the topic of Fed rate decision dissent, ‘The Fed May Be About To Unleash A Massive Market Regime Shift | Seeking Alpha’ https://share.google/yWxJhR8Vf82Zmx3Mu
Even though this recently came out, you'll find the same confusion tactic played out back in 2019 as well. James Bullard - St Louis Fed President - wanted to lower rates (which they did): https://www.federalreserve.gov/monetarypolicy/fomcminutes20190619.htm?utm
Esther George - Kansas City Fed - and Eric Rosengren - Boston Fed - were against the rate cuts: https://www.federalreserve.gov/monetarypolicy/fomcminutes20190731.htm?utm
Deduction
After matching macro timing, corporate borrowing cycles, repo stress, data reporting distortions, Fed pivot timing, sequence of cuts, and market liquidity structure; there's no stretch here. I'm identifying the real mechanics behind the next financial crisis. The 2019 -> 2025 parallel isn't conspiracy, it's macro mechanics.
I appreciate you taking the time to read this article and would greatly help by sharing it with others. I leave comments open, so you don't feel like your points can't be contributed to what you may be seeing that I may have missed. Those that missed last newsletter is right below for your reading pleasure as I talked about the position hedge funds in the Cayman Islands are currently taking. It's shaping how things will turn out economically when they unwind their positions.
Images are AI generated and in no way portray realistic situations or people, aside from the screenshots taken.
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