The Setup

Four things are happening simultaneously that, taken together, create one of the more asymmetric macro environments in recent memory:

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The Liquidity Regime

The broad global liquidity composite—which aggregates central bank balance sheets, credit creation, FX reserves, and sovereign wealth flows—is at an all-time high near $177 trillion. This is the single most important macro variable for risk assets.

Key components:

• The Fed ended quantitative tightening in December 2025 and is now running $40B/month in T-bill purchases. This is not QE in name, but it is balance sheet expansion in practice.
• The PBoC is at all-time highs (47.3 trillion yuan) and has adopted a "moderately loose" monetary stance—the most dovish language since 2008. RRR cuts and rate cuts are both on the table for 2026. Realistic expansion estimates range from $400–700 billion, though some models project up to $1 trillion.
• Caveat: The ECB and Bank of Japan are still shrinking their balance sheets. Narrow central bank aggregates are not at ATH—broad liquidity is doing the heavy lifting here.

The liquidity cycle is expanding and likely has room to run through mid-2026 before peaking. Historically, risk assets follow this cycle with a lag of 6–12 weeks.

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The Everything Disconnect

Bitcoin is at $78,000. It peaked at $126,000 on October 6, 2025. That's a 38% drawdown. Meanwhile, nearly every asset that has historically moved in lockstep with Bitcoin is at or near all-time highs:

• Copper: Record high at $13,238/ton
• High-yield credit: Spreads at 277bps—multi-decade tights
• Small caps: Russell 2000 outperformed the S&P for 14 consecutive sessions
• NASDAQ: Up significantly from its April 2025 low

This is the widest divergence between Bitcoin and its correlated asset basket in history. A few catalysts explain the disconnect:

• The October 10 liquidation cascade: $19.5 billion in leveraged positions were wiped out in a single event, creating forced selling that broke the correlation.
• Hawkish Fed signaling: The Kevin Warsh nomination for Fed Chair spooked crypto markets specifically.
• ETF outflows: $4.57 billion in net outflows from November–December, plus another $1.61 billion in January 2026.
• Quantum FUD: Overblown concerns about quantum computing threats to cryptographic security.

The technicals are extreme. Bitcoin's RSI sits at 22.79 (deeply oversold) and the Fear & Greed Index is at 14 (extreme fear). Multiple independent valuation models place fair value between $92,000 and $222,000 based on liquidity fundamentals, on-chain metrics, and cycle positioning.

Bottom line: Either every correlated asset is wrong, or Bitcoin is deeply mispriced. History strongly favors the latter.

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Dollar Dynamics

The DXY is at approximately 96.5, down roughly 9% in 2025 and another 2% in January 2026. The trajectory matches the 2017–2018 analogue almost perfectly: an initial surge on policy euphoria (tax cuts then, tariff rhetoric now), followed by a sustained decline as the sugar high fades and growth differentials reassert.

The "dollar smile" framework is useful here. The dollar strengthens in two scenarios: U.S. exceptionalism (strong growth) or global panic (flight to safety). In between, the dollar weakens. We are firmly in the middle of the smile right now:

• U.S. growth is decelerating toward 2.0–2.6%, while emerging markets are running at 4%+.
• The Fed has ended QT and is effectively easing at the margin.
• Global capital is diversifying away from dollar-denominated assets as the multipolar shift accelerates.

A weaker dollar is rocket fuel for commodities, emerging markets, and crypto. It loosens global financial conditions (since most global debt is dollar-denominated) and mechanically boosts dollar-priced assets.

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The Business Cycle Turns

The ISM Manufacturing Index surged to 52.6 in January 2026—the highest reading since August 2022 and a decisive break above the 50 expansion threshold. After nearly two years of contraction, this is a significant inflection.

Corroborating signals:

• Financial conditions are very loose. The Chicago Fed National Financial Conditions Index sits at -0.60, indicating accommodative conditions across credit, equity, and funding markets.
• Credit spreads are at multi-decade tights. High-yield spreads at 277bps signal that the credit market sees no recession on the horizon.
• Small caps are outperforming. The Russell 2000's extended run of outperformance versus the S&P 500 is a classic early-cycle signal.

One caveat: The copper rally (record highs) may be partially contaminated by tariff-related stockpiling rather than pure demand. Watch for follow-through in the February and March ISM prints to confirm the cycle turn is durable.

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Silver & Commodities

Silver briefly touched $120/oz before crashing 26% in a single day to the $78–80 range. The volatility was extreme, but the structural story remains intact:

• Fifth consecutive supply deficit of approximately 95–120 million ounces. Above-ground inventories are being depleted.
• Solar demand now represents 17% of total silver consumption and is growing structurally as the energy transition accelerates.
• Central banks are buying. Russia, Saudi Arabia, and India have all increased silver reserves—a relatively new development that adds a sovereign bid beneath the market.
• Copper at record highs ($13,238/ton) confirms the broader industrial metals thesis. Electrification, AI infrastructure, and defense spending are all copper-intensive.

The supply-demand imbalance in silver is structural, not cyclical. Even with the recent correction, the setup for a sustained move higher remains compelling as long as the dollar stays weak and industrial demand grows.

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The Geopolitical Shift

Davos 2026 made it explicit: the post-WWII unipolar order is over. Canada's Mark Carney called it a "rupture, not a transition." This isn't abstract—it has direct investment implications:

• European defense spending is surging. Defense ETFs were up 73%+ in 2025. Individual names like Kratos (+196%) and AeroVironment (+60%) reflect a secular shift in European military spending that is just getting started.
• The Board of Peace (20 countries) represents a new diplomatic framework that could reshape alliance structures and trade flows.
• Dollar hegemony is fragmenting. More bilateral trade is being settled outside the dollar system, which reinforces the structural bear case for DXY.
• U.S. government shutdown occurred after January 30 but market impact was minimal, as is historically typical. The minibus approach (6 of 12 spending bills already enacted) diluted the disruption.

The geopolitical realignment is not a risk to be hedged—it's a secular theme to be positioned for. European defense, commodity-producing nations, and non-dollar assets are the primary beneficiaries.

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Actionable Themes

Based on the convergence of liquidity expansion, dollar weakness, cycle turn, and geopolitical realignment, here are the themes with the strongest risk/reward:

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What Could Go Wrong

No macro view is complete without the bear case. Here's what to watch for that would challenge this thesis:

• ISM fails to follow through. One month above 50 is not a trend. If February and March fall back below 50, the cycle turn narrative weakens significantly.
• Dollar reverses higher. A global risk event or a hawkish Fed surprise could push the dollar back into the "panic" side of the smile, which would pressure everything else.
• PBoC disappoints. If China's easing is smaller or slower than expected, the liquidity expansion thesis loses its second-largest engine.
• Bitcoin correlation stays broken. The BTC-liquidity correlation broke in October 2025. If it doesn't re-couple within the next quarter, the "disconnection" may reflect a structural regime change rather than a temporary dislocation.
• Tariff escalation. Aggressive tariff implementation could tighten financial conditions, disrupt supply chains, and create stagflationary pressures that undermine the cycle turn.

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