Judging from the various economic data released by the U.S. government, the U.S. economy is currently in excellent shape—exceptionally and classically strong.

Yet, against this backdrop, overnight, from U.S. stocks to gold, from the Nikkei to commodities, and down to the cryptocurrency market we know best, almost all assets seemed to have coordinated a synchronized plunge. This indiscriminate, all-encompassing crash instantly brought many back to those days dominated by panic.

What exactly happened? Has the Middle East conflict finally ignited the financial markets? Did Trump once again utter something shocking? Or has a long-brewing perfect storm finally arrived?

The Surface: Geopolitical Conflict, Trump’s “Rhetoric,” and the Trust Crisis in the MAG7

Whenever the market falls, the first scapegoat people think of is geopolitics. Recent tensions in the Middle East are certainly a key factor affecting market sentiment. After all, war means uncertainty, and uncertainty is the natural enemy of capital. Gold and silver, as traditional safe-haven assets, hit new highs just before the crash, which itself reflects market risk-aversion sentiment.

Another person who immediately comes to mind is Trump. The former president recently began commenting on the U.S. dollar again, publicly stating that he “wouldn’t mind a weaker dollar.” Upon hearing this, the U.S. Dollar Index promptly fell, hitting a nearly 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 were merely geopolitical conflict, why would even safe-haven assets like gold plummet? If it were just a single remark from Trump, wouldn’t the market reaction be a bit too extreme?

Just like in a suspense movie, the culprit is often not the first character introduced or the one who looks most like a villain. The real “mastermind” is hidden deeper.

X user @sun_xinjin raised an interesting point, noting that he observed something intriguing: the forward P/E ratios of the MAG7 (the seven major U.S. tech stocks) have begun to decline.

This may seem like a minor detail, but it reflects a larger shift—the market is starting to cast a vote of no confidence in the massive capital expenditures of these tech giants. During the latest earnings season, the market has become exceptionally “picky.” Beating expectations now equals merely meeting expectations before, while significantly exceeding expectations now equals merely beating expectations before. If there’s even the slightest unfavorable aspect in an earnings report, the stock price plummets sharply.

This has caused the MAG7, along with the broader Nasdaq index, to consolidate at high levels for months. Some say this signals the fading of the epic rally that began with the MAG7 in May 2023. The market’s main focus has temporarily shifted away from the MAG7 toward “storage, semiconductor equipment, commodities like gold, silver, and copper, and energy.”

The Paradox of Bank Liquidity and Quantitative Tightening

Simultaneously, @sun_xinjin also pointed out another deeper issue: bank reserves remain low, and SOFR and IORB are not easing.

SOFR is the Secured Overnight Financing Rate, and IORB is the Interest on Reserve Balances. The spread between these two indicators reflects the liquidity conditions in the banking system. When this spread widens, it indicates tightening liquidity in the banking system.

Currently, this spread is not easing, and such tightness reduces the likelihood of seeing the new Federal Reserve Vice Chair Kevin Warsh advance his quantitative tightening plan. Because, with bank reserves already low, further quantitative tightening would be like draining water from an already depleted pool, further exacerbating liquidity tightness.

But this is precisely the problem. Market expectations of quantitative tightening themselves are pushing up long-term bond yields, which in turn raises mortgage rates, thereby freezing the real estate market.

This is also why, when facing a liquidity crisis, global capital chooses to indiscriminately sell off all risk assets. This is not merely a “dollar carry trade” unwinding but a broader liquidity crisis.

It’s not that there’s no money in the market; rather, all money is fleeing risk assets and rushing into the U.S. dollar and cash. Everyone is selling everything just to exchange it for U.S. dollar cash and liquidity. This is the true core of this global asset crash—a shift in global risk appetite and a deleveraging process triggered by the narrative of fiscal unsustainability.

Will 312/519 Repeat?

Could this be a new “312” or “519”?

Let’s review history:

312 (2020): At that time, the global outbreak of COVID-19 triggered an unprecedented global liquidity crisis. Investors sold off all assets to obtain U.S. dollars, and Bitcoin plummeted over 50% within 24 hours. This is most similar in underlying logic to the liquidity crisis we are experiencing now—both stem from extreme demand for U.S. dollar liquidity due to external macro factors.

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, the situation we face now more resembles 312. Macro liquidity is tightening. Global capital is withdrawing from risk assets to fill liquidity gaps. In such a scenario, cryptocurrencies, as the “peripheral nerves” of risk assets, naturally bear the brunt of the impact.

However, the current cryptocurrency bull market owes much to policy friendliness following Trump’s inauguration. Yet, none of us can predict what Trump will say tomorrow. In an already fragile market structure, even a relatively unfriendly remark could unleash destructive power akin to 519.

The Impact of the AI Bubble

Returning to the initial question. What is the real reason behind the global asset crash?

It’s not geopolitical conflict, not Trump’s remarks, nor some “dollar carry trade,” but a paradigm shift in the market.

The epic rally that began in May 2023 was built on the narratives of the “AI revolution” and “invincible tech stocks.” But now, these narratives are being questioned. The market is starting to ask: Can these massive capital expenditures truly generate corresponding returns?

Meanwhile, the long-term bond market is sending us signals: fiscal unsustainability is no longer a theoretical issue but a practical one. The market doesn’t believe rate cuts can solve this problem because the root cause lies not in interest rates but in fiscal policy. The market has already begun preparing for a “post-optimism era,” and it has realized that the current economic environment with impressive data may already be the peak of this cycle.

Against this backdrop, cryptocurrencies, as representatives of risk assets, are the first to be sold off, but this is just the beginning.

Finally, this may be an opportunity to reassess asset allocation. When everyone is panic-selling, true value opportunities emerge. But the prerequisite is having enough ammunition to survive until then.