<div id="readability-page-1"><div><div><p><span><img src="https://imageproxy.pbkrs.com/https://img.jinse.com.cn/7467445_image3.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" width="600" height="335" original-src="https://imageproxy.pbkrs.com/https://img.jinse.com.cn/7467445_image3.png"/></span></p><p><span>Author: Ding Ping</span></p><p><span>Wash is not the storm itself, but he may make the market realize that when the storm comes, the Federal Reserve is no longer in the same position as before.</span></p><p><span>In the past two years, tech giants such as Nvidia, Microsoft, and Meta have continuously broken market capitalization records. AI has almost redefined the risk appetite of the entire market, and the S&amp;P 500 and Nasdaq have also been driven up all the way.</span></p><p><span> However, if we break down this market rally, AI is merely the story in the background. What truly supports US stock valuations is another, more crucial premise: long-term interest rates will eventually come down. Only when this premise holds true can the market continue to pay high premiums for long-term earnings, continuously discount the growth narratives of a few leading tech companies to today's levels, and continue chasing valuations at 30, 40, or even higher times earnings. But now, this premise is becoming unstable. The 30-year US Treasury yield continues to rise, recently breaking through the 5% mark. For a highly concentrated, expensively valued US stock market that heavily relies on long-term earnings narratives, the longer long-term interest rates remain high, the more fragile the valuation system becomes. More troubling is that this pressure may intensify. On May 15th, Jerome Powell, who had served as Federal Reserve Chairman for eight years, officially stepped down, and Kevin Warsh became his successor. Compared to Powell, Warsh may be more tolerant of market pressure, more committed to quantitative tightening, and reduce the Fed's implicit support for the financial markets. Once long-term interest rates continue to rise, and the Fed no longer responds as quickly as it has in the past to appease the market, the logic behind the past high valuations of US stocks may begin to lose its foundation. The current fragility of US stocks stems from the inability to suppress long-term interest rates. For some time, the market has focused excessively on whether the Federal Reserve will cut interest rates, ignoring the fact that long-term interest rates are no longer following monetary policy. Theoretically, central bank rate cuts directly lower short-term interest rates, and if the market believes that interest rates will remain low in the future, long-term interest rates should follow suit. However, an unexpected situation has arisen: even though the Federal Reserve has not raised interest rates, the 30-year US Treasury yield continues to rise, reaching a high of 5.13% on May 15th. This indicates that the market does not believe that long-term risks in the US will decrease, and therefore demands higher risk compensation. This is precisely where the US stock market is most vulnerable right now. There are at least three reasons why long-term interest rates remain high. First, inflation has not fallen as smoothly as the market expected. Latest data shows that the US CPI rose 3.8% year-on-year in April, a near three-year high, while the core CPI rose to 2.8%. More problematic is that the risk of conflict between the US and Iran has not truly been resolved, and persistently high oil prices are constantly reinforcing market concerns about imported inflation. As long as inflation expectations cannot be completely suppressed, long-term interest rates will find it difficult to fall smoothly. Secondly, the US fiscal problems are also weakening market confidence in its long-term fiscal constraints. In October 2025, US national debt reached the $38 trillion mark; in just five months, this figure exceeded $39 trillion. Behind this lies a long-term fiscal deficit (high military and social welfare spending). The U.S. Treasury repays maturing debt by issuing new bonds, which in turn leads to higher interest payments, thus plunging the U.S. into a Ponzi scheme of fiscal debt, requiring ever-expanding debt to maintain the stability of the existing system. Third, the supply and demand structure of US Treasury bonds is deteriorating. On one hand, the Treasury continues to increase bond issuance; on the other hand, overseas entities are reducing their holdings because of global de-dollarization. Foreign official departments are reducing their holdings of US Treasury bonds, and the proportion of US Treasury bonds in global reserve assets is declining, currently at 24%. Supply is increasing, but buying power is weakening, making it increasingly difficult to suppress long-term interest rates. When these risks are not mitigated, US Treasuries will no longer be considered safe assets, and investors will naturally demand higher risk compensation. This is particularly dangerous for US stocks. This is because the current US stock market is not a generally undervalued market that gradually realizes its value through performance, but rather a highly concentrated market supported by a few leading companies and extremely sensitive to discount rates. Once long-term interest rates remain high, the discounting of long-term cash flows will become significantly more aggressive, and the tolerance range for valuations will narrow rapidly. At that point, the companies most affected will not necessarily be those with the worst fundamentals, but rather those with the best fundamentals whose valuations have already been driven to their maximum. Bank of America's Hartnett also stated that once the 30-year Treasury yield rises above 5%, market financing costs will increase, risk appetite will decline, and highly valued US tech stocks will be the first to be affected. This was already demonstrated in October 2023. At that time, the 30-year Treasury yield briefly broke through 5%, and the Nasdaq index cumulatively corrected by about 10% within a few months. At that time, investors still believed that if financial conditions continued to deteriorate, the Federal Reserve would eventually release reassuring signals. However, if this expectation begins to loosen after Warsh takes office, then the market's response to the same long-term interest rate shock will be completely different. Many people like to compare 2007 with today, but what's truly worth learning from isn't that interest rates were high back then, but rather that the damage high interest rates inflict on the financial system is never instantaneous. It's more like a slow erosion: first, it suppresses financing, then valuations, then balance sheets, finally forcing out the most vulnerable link in the system. In 2007, what truly collapsed were real estate, subprime mortgages, and shadow banking; today, what's more dangerous is that high fiscal deficits are pushing up the supply of long-term debt, making it impossible to suppress long-term interest rates. Bank losses, tail risks in commercial real estate, and the dependence of risky assets on liquidity will all be gradually forced to surface. Therefore, once long-term interest rates fail to fall, the valuation basis of this round of AI bull market in US stocks begins to loosen. This problem will be even more serious in the Warsh era. Why should the market be wary of Warsh? Because Warsh tends to reduce the balance sheet, which will further push up the 30-year US Treasury yield and amplify the vulnerability of US stocks. How to understand this? The Federal Reserve's balance sheet reduction means shrinking the size of its balance sheet. Previously, to stimulate the economy, the Fed purchased a large amount of Treasury bonds, mortgage-backed securities (MBS), and other assets; purchasing these assets was equivalent to injecting a large amount of funds into the market. Balance sheet reduction means reducing these assets, gradually withdrawing liquidity from the market. We can also simply understand this as the Fed no longer accepting newly issued or maturing Treasury bonds, and may even sell its own holdings. As mentioned above, the US Treasury is currently increasing its bond issuance, while overseas entities are reducing their holdings. If the Fed also reduces its balance sheet, then new and maturing US Treasury bonds can only flow into the market, where interest rates will be determined by the market, resulting in a continuous rise in US Treasury yields. This would also lead to an increasingly heavy interest burden on the government, which is extremely dangerous for a system that relies on issuing new debt to repay old debt. Once interest costs become unsustainable, a US debt crisis would occur. Former US Treasury Secretary Paulson also warned that once US Treasury bonds begin to lose market buyers, the &#34;risk-free anchor&#34; of the entire financial system would be shaken. Given such serious consequences, why did Warsh still favor quantitative tightening? This requires looking at his resume. Warsh served as a Federal Reserve Governor from 2006 to 2011, and this experience is key to understanding his policy inclinations. He witnessed the entire process of the last round of credit expansion before the financial crisis, the 2008 global financial crisis, and the onset of zero interest rates and QE (quantitative easing). He wasn't one to completely deny crisis relief; on the contrary, at the height of systemic risk, he supported the Federal Reserve acting as lender of last resort and acknowledged the necessity of unconventional tools. However, he later increasingly questioned whether long-term QE after the crisis should continue. From his perspective, the US economy didn't recover to the same extent as asset prices after the crisis. The real economy's recovery was weak, and productivity improvement was limited, but financial asset prices rebounded rapidly, even far exceeding pre-crisis levels, driven by liquidity. This leads Warsh to a very typical judgment: QE may be very good at raising financial asset prices, but it may not be as good at repairing the real economy. Once the market begins to assume that &#34;the Fed will eventually support asset prices,&#34; the financial system will become increasingly dependent on liquidity, risk appetite will be suppressed for a long time, and asset bubbles and mismatches will become more and more serious. Therefore, in his logic, if the Fed maintains a huge balance sheet and suppresses term premiums for a long time, the market will eventually become increasingly unable to operate independently of central bank liquidity. In his view, balance sheet reduction is not only about withdrawing liquidity, but also the Fed actively withdrawing from its role as a &#34;financial conditions stabilizer.&#34; This is also why Warsh is more inclined than Powell to promote QT (quantitative tightening). Therefore, after Warsh takes office, the high-interest-rate environment will become even more severe, and the Federal Reserve may not intervene as quickly as it has in the past. Once this expectation takes hold, the already fragile high valuation system of US stocks will face further pressure. The AI ​​narrative also cannot absorb high interest rates. Of course, the high yield on 30-year US Treasury bonds is not necessarily a negative factor for US stocks. If the US economy continues to strengthen beyond expectations, corporate profits are continuously revised upwards, and especially if AI can truly and quickly translate into widespread productivity gains, then even with long-term high interest rates, risky assets may not be unable to withstand the pressure. Ultimately, what truly determines whether the market can absorb high interest rates is economic growth itself. The continued rise of US stocks, especially tech stocks, over the past year in a high-interest-rate environment has largely relied on the optimistic assessment that AI will significantly improve corporate profits, boost productivity, and open up new growth opportunities for the US economy. However, the problem is that the AI ​​narrative is currently concentrated in a few leading companies and the capital market, and has not yet been fully proven to quickly and broadly translate into fundamental improvements in the entire economy. Taking Nvidia as an example, it has indeed generated astonishing returns on capital and market imagination. However, such companies share common characteristics: high technological barriers, high profit concentration, and limited job creation capacity (as of fiscal year 2026, Nvidia's total global workforce was only 42,000). Therefore, its spillover effects on the overall economy are not as strong as market sentiment suggests. In other words, AI can boost the valuations of companies like Nvidia and Microsoft in the short term, but it may not be able to support broader employment, investment, and expansion of the real economy in the same short time. More realistically, the United States currently faces problems with insufficient electricity, infrastructure, and industrial support. The faster the AI ​​industry expands, the more easily it will attract capital, energy, and talent to leading technology sectors, further concentrating the already uneven allocation of resources towards these sectors. This isn't to say AI is bad, but rather to emphasize that it hasn't expanded fast enough to offset the valuation pressure from persistently high long-term interest rates. In other words, while the market thinks it's trading in AI, it's actually trading in something else entirely: low long-term interest rates and the Federal Reserve's support. As long as these two premises remain, high valuations can continue; once these premises begin to loosen, even the strongest AI will only delay the revaluation, not cancel it. Warsh isn't the source of the risk, but he may be the one making this situation even more difficult to reverse. In short, while Warsh won't intentionally create a crisis, he may have made the market truly accept for the first time that the old logic of high valuations supported by low long-term interest rates and Fed intervention is no longer so stable.</span></p></div></div></div>

GOVT

<p>The appointment of Kevin Warsh as the new Federal Reserve Chairman raises concerns about the stability of US stock valuations, which have been heavily reliant on the assumption that long-term interest rates will decrease. With the 30-year US Treasury yield surpassing 5%, the market's confidence is shaken. Factors such as persistent inflation, rising national debt, and deteriorating demand for US Treasury bonds contribute to the fragility of the stock market, making it vulnerable to high long-term interest rates.</p>

The Warsh Storm is Coming