K-shaped Divergence in Major Asset Pricing--Subsequent Evolution of the "Fiscal Risk Premium"

K-shaped Divergence in Major Asset Pricing--Subsequent Evolution of the "Fiscal Risk Premium"

The current market is at an extremely dangerous and divided moment.

According to Wind-Chasing Trading Desk, on December 4, Southwest Securities Research shows that since 2023, global major asset pricing has entered a brand-new “fiscal dominance” stage, and the traditional macroeconomic transmission logic has basically failed. The market exhibits severe "K-shaped divergence": US stocks continue to rise regardless of employment pullback, gold hits new highs in a high real interest rate environment, and "fiscal risk premium" is widely embedded across asset pricing.

The core risk does not come from the economic cycle itself, but from temporarily hidden fiscal pressure. Calculations show the current system implies a massive 600bp interest rate gap; before macro instability emerges, fiscal risk is temporarily concealed in gold’s sharp rally. The future release and closing of this risk tension will mainly rely on the path of “falling gold, rising copper, and lower interest rates” for marginal mitigation.

This means investors need to pay attention to the relative changes in gold, copper, and interest rates, and use them as key indicators to measure systemic risk release. Asset prices now show a "dual consistency" structure: On one hand, US stocks and gold jointly hedge fiat credit risk; on the other hand, the mild divergence between stocks and bonds reflects the cost and gains of fiscal expansion.

The Old Order Collapse: Major Pricing Paradigm Migration After 2023

Since 2023, the market has completely broken the pricing logic of 2000-2022. Southwest Securities believes traditional macro anchoring has failed:

1. US stocks decouple from the economy: The S&P 500 continues to hit new highs, even as job openings (JOLTS) keep falling. The market is now desensitized to recession signals.



2. Gold decouples from interest rates: Gold completely ignores the suppression from high real interest rates and even diverges from TIPS (inflation-protected bonds).



3. Copper decouples from inflation: As a proxy variable for inflation expectations, copper prices no longer closely follow the traditional inflation logic.

This divergence is not temporary market noise, but a fundamental change in the underlying logic: The core anchor of market pricing has shifted from “economic fundamentals and monetary cycles” to “debt sustainability and fiscal risk.” Every asset price now has no choice but to include a hefty “fiscal risk premium.”

Quantitative “Madness”: Extreme Deviations Up to 400%

Data doesn’t lie. Southwest Securities conducted regressions and backtests using old framework models to precisely quantify the current market distortions:

Copper: Relatively moderate deviation (about 44%).

Gold: Shows the most extreme “de-anchoring”, with deviation exceeding 400%.

US stocks and interest rates: Their deviation from the old model is strikingly consistent, around 140%-170%.

These data reveal a core fact: in the initial phase of fiscal dominance, America’s fiscal risk premium is mainly priced via gold’s extreme rally, not direct shocks to nominal rates. In other words, gold alone shoulders the responsibility of hedging US fiat credit risk.

The Hidden 600bp Gap and the Interest Rate Model

Southwest Securities decomposes the interest rate into a function of gold (implied TIPS) and copper (implied inflation expectations), and finds a startling gap.

Model calculation: Since 2022, the deviation between nominal rates and “gold-copper implied rates” has reached an extreme value of 660bp.Mechanism analysis: Every $1 rise in gold implies a 0.2bp fall in rates (fiscal risk premium rises); every $1 rise in copper only mitigates 0.0225bp of risk.Conclusion: Even if US Treasury nominal rates have not soared, fiscal risk has actually exploded. The current rate level is extremely high compared to the gold-priced framework. Mathematically, only three ways can ease this tension going forward: falling gold price, rising copper price, or a sharp drop in nominal interest rates.

“Parallel Universe” Under the Gold Coordinate System: US Stocks Have Become Gold-Like

Southwest Securities points out that if we abandon the dollar perspective and enter the “gold coordinate system,” the world returns to “normal”:

US stocks return to rationality: US stocks priced in gold (“stock-gold ratio”) has not actually deviated from employment data (R2 up to 77%), and the gap closes significantly.Dual consistency: US stocks and gold both show extreme deviations of about 430% compared to the TIPS model. This proves that US stocks have actually mutated into “gold-like” assets to counter fiat currency depreciation, and the market is using tech-heavy US stocks as long-duration assets to hedge fiscal risk.Stock-bond tacit understanding: Stock and bond deviations of about 150% are a form of profit distribution—interest rate side bears the cost of fiscal expansion, while the stock market side enjoys the nominal profit gains of fiscal expansion.

Three Possible Future Evolution Paths

Implied fiscal risk premium will not disappear into thin air; it will only migrate between assets. Possible macro paths going forward:

Moderate recovery (short-term probability highest): The market remains in the “gold coordinate system” illusion. As long as inflation expectations are suppressed, US stocks rely on AI narrative support, gold, stocks, and rates maintain K-shaped divergence, waiting for a copper rally to close the gap.Recession-induced clearance (liquidity crisis): If employment data deteriorates and triggers recession trades, we may see a global liquidity squeeze similar to yen carry trade reversals. But under fiscal dominance, the safe haven attribute of US Treasuries weakens marginally, limiting rate cuts, and we may see a dual hit to both equities and commodities.

Inflation out of control (political shock): If a “affordability crisis” leads to political pressure (e.g. Trump administration forced to do tariff rebates or cash giveaways), inflation rises again. This will force fiscal risk to move from hidden to explicit—the result is rate hikes, dollar depreciation, gold pricing moves up a notch, while risk assets come under pressure.

In addition, the strength of the US dollar does not come from US fiscal health, but because non-US economies (such as France and the UK) exposed their fiscal risks earlier, which is a structurally strong phenomenon under a "race to the bottom".

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The above wonderful content is from Wind-Chasing Trading Desk.

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