Zhang Jiawei from Dongwu Macro: Don't rush to go short, the US stock AI rally may be even crazier next year.

Zhang Jiawei from Dongwu Macro: Don't rush to go short, the US stock AI rally may be even crazier next year.

```

Global flash crash, AI leads the decline, U.S. stocks are experiencing a "catalyst-free crash." Let's understand the real logic behind this sudden market turmoil. Click for the replay → Overseas market "flash crash": Who is the culprit?

Key TakeawaysThere is no single culprit for this "flash crash". Emotions and policy disturbances combined—AI bubble debate, FOMC hawkish signals, government shutdown, IEEPA ruling uncertainty—all together triggered short-term market panic.AI bubble is not at its peak yet. It is still at the "PE ratio" stage, not the "dream ratio" frenzy; the AI rally is entering an even crazier phase, not ending.Trump’s election year will continue the easing cycle. To secure midterm election votes, Trump is highly likely to push "fiscal + monetary double easing", meaning the AI bubble will not be allowed to burst.U.S. dollar liquidity tightening is temporary. The government shutdown created "passive fiscal tightening", but as the Treasury releases more funds and the Fed stops balance sheet reduction and cuts rates in December, liquidity will improve at the margin.The government shutdown has limited impact. The shutdown leads to short-term consumption drop and data gaps, but post-recovery, catch-up effects will occur and the economy will return to normal.IEEPA ruling does not change the trade direction. Even if Trump is found to have abused tariffs illegally, remedies exist (delay, replacements, new legislation), bringing more uncertainty than crash risk in the short-term.Main asset theme for next year: Gold +AI. Rate cuts exceeding expectations and declining US dollar credit make gold and AI the most certain "twin engines".Dollar weakest, gold strongest. In a low interest, weak dollar environment, gold leads the rally, AI continues, commodities benefit, US Treasuries fluctuate, the dollar index weakens.

Q1: Why did the market have this obvious correction? What triggered the overseas "flash crash"?

Zhang Jiawei: I’ve been asked this repeatedly, because this time there’s no clear catalyst, so everyone’s looking for a "culprit." I think there are four main factors:

First, AI bubble sentiment shock. There’s been a lot of this recently, like Michael Burry from "The Big Short" shorting Nvidia and buying many puts, which is an emotional blow to market confidence.

Second, last week’s FOMC meeting’s continued hawkishness. Powell emphasized at the meeting that "there is no promise to cut rates in December," which threw cold water on the market and sharply reduced rate cut expectations. Current market pricing gives about a 70% probability of rate cuts.

Third, is the continued impact of the government shutdown. Because the government is closed, much official data cannot be updated, but from some high-frequency data, the US economy in Q4 is indeed weakening.

Fourth, is the uncertainty of Trump’s IEEPA ruling. The market is watching this closely. Many of Trump’s tariff actions this year were based on IEEPA, like fentanyl tariffs and reciprocal tariffs on April 2. Democrats consider this "overreach" and now the Supreme Court will have oral arguments. This legal uncertainty has made some funds stay on the sidelines or exit early.

Overall, it’s sentiment plus policy disturbance: AI bubble theory + FOMC hawkish tone + government shutdown + IEEPA ruling, coming together in this correction.

Zhang Jiawei: These are two phenomena people tend to connect, but I think they are more like parallel tracks without a strong causal link.

The recent worsening of dollar liquidity is mainly due to two reasons:

Short-term, "passive fiscal tightening" from the government shutdown. The shutdown means civil servants and military payrolls can’t be paid—the money is collected by the Treasury but not spent, so market liquidity is temporarily drawn out. The Treasury’s TGA account balance has already risen from $850bn to $1tn, all stuck on account.

Medium-term, it’s the Fed’s ongoing balance sheet reduction and monetary tightening. Although the policy rate dropped from 5.25–5.5% to 3.75–4%, it’s still above neutral and remains tight. Balance sheet reduction has not stopped. Only at the just-ended October FOMC did Powell announce that run-off would stop December 1, so up to that point, the restricted dollar liquidity has persisted.

Additionally, reverse repo balances are close to zero, meaning there’s little excess cash in the system. As TGA rises, dual pressure weighs on banks’ reserves—this looks a lot like the periods of liquidity tightening in 2018–19 and 2022.

Simply put: when the Fed is shrinking assets and the Treasury is absorbing liquidity, dollar funding will be tight. This is a key background to this market swing.

Q3: The US government shutdown has entered nearly a month. Will it end soon? How large is its impact on the market?

Zhang Jiawei: Consensus is that there’s over a 90% chance of it ending this month, unlikely to last the full two months. But whether it’s mid or late November is still uncertain.

Let’s look at the political dimension: This is the longest shutdown in US history, with both parties locked in stalemate. Democrats think a longer shutdown damages Republican’s image; Trump’s camp wants to use the shutdown to "downsize government." Both think they’re right and are holding firm.

Next, economic dimension: During the shutdown, civil servants and military don’t get paid (1st and 15th each month), consumption falls immediately. Americans’ savings rate is low, 60% of their income is from wages and 80% goes to consumption. No wages means short-term fiscal tightening and consumption falls. Current analyst forecasts for US Q4 GDP growth are just 1.1%, and high-frequency consumption data has clearly dropped since early October.

Finally, liquidity dimension: Shutdown pushes Treasury cash balances up (from $850bn to $1tn), but once the government resumes in late November and money is released, liquidity rebounds. So, it’s a "tight first, loose later" disturbance, suppressing the economy and markets short-term, but upon ending, a one-off economic repair follows.

Q4: What do you think of the recent "AI bubble burst" talk? Many well-known investors are already shorting—should we be worried?

Zhang Jiawei: I think it’s "worth watching," but not time to panic. You can compare it to Michael Burry shorting subprime in 2006—he waited over a year for the crisis. There is indeed bubble behavior in AI, but not the craziest stage yet.

Unlike the 2000 internet bubble, the market is now valuing on PE rather than just on hope; valuations are expensive but haven’t totally disconnected from earnings logic. We think the AI story is still in the "acceleration phase," not the end.

Next year is Trump’s midterm elections, and he will likely push fiscal and monetary easing to keep the economy up, so the policy won’t allow the AI bubble to "pop." In other words—AI may get crazier, not burst. Next year’s market will likely see valuation further expand, not bubble collapse.

Q5: So you think next year theAI bubble will continue, with little chance of a real burst?

Zhang Jiawei: Yes, our judgment is AI momentum continues next year, possibly even crazier. The key is how the bubble is "digested":

One way is earnings catch up, using EPS to absorb valuations;

The other is fiscal and monetary easing to push up liquidity and keep the bubble afloat.

The real risk of pricking the bubble is if the latter triggers inflation and forces the Fed to hike again—then we might replay 2021–22. But from the timeline, we think at least Q1–Q3 next year is relatively safe.

Q6: Can you summarize how US dollar liquidity, government shutdown, AI bubble, etc. will eventually play out?

Zhang Jiawei: It comes down to three main themes:

First, AI: only two outcomes in the end—either earnings catch up or the bubble bursts. In the short term, Q1–Q3 next year still looks like continued bubble process, with the "arms race" in AI infrastructure still accelerating.

Second, government shutdown: Consensus is it ends in mid/late November. Then the Treasury injects liquidity, issues back pay, resumes spending, and the economy and consumption heal for a period. Data quality may lag in October and November due to missing data, but after reopening, the economy bounces back quickly.

Third, dollar liquidity: End of the shutdown + Fed ending balance sheet reduction in December + rate cuts will all improve liquidity. Reverse repo balances down, SRF usage low—all signal liquidity is still manageable. We think dollar funding is at a "warning but not out-of-control" phase, unlikely to repeat the repo crisis of September 2019.

Q7: Tonight, the Supreme Court will hear arguments on Trump’s IEEPA tariff bill. What impact will this have?

Zhang Jiawei: This is an extremely uncertain event. Betting sites predict a 60–70% chance of ruling Trump’s IEEPA use illegal, but even though the justices are mostly Republicans, they might rule neutrally for institutional independence.

Key is, even if ruled illegal, Trump still has room to maneuver:

Delay execution to buy time;

Find alternative clauses (like Section 201, 301, 232, etc.);

Push Congress to pass new laws to legitimize tariffs.

Thus, this event will most likely see a "smooth transition". In trading logic, if IEEPA is ruled illegal, theoretically it’s positive for USD and US stocks, negative for gold; but because the timeline is vague with many alternatives, in the short-term, the market reaction will be more about waiting and emotion.

Q8: Overall, how would you rank global major assets for next year?

Zhang Jiawei: Our overall assessment—Trump will push full-scale fiscal and monetary easing for midterms. This means:

Gold first. Surprising rate cuts, weaker dollar credit, lower rates—all create double benefits for gold.

AI/US stocks second. Twin easing supports further valuation expansion, can be paired with gold trades, "AI in one hand, gold in the other."

Commodities third. Easing leads to economic overheating, boosting hard asset valuations.

Short-term US Treasuries (2Y) fourth. Rate cut expectations push prices higher, but room is limited.

Long-term US Treasuries (10Y) fifth. Limited benefit from rate cuts, fiscal deficit and term premium cap upside.

Dollar Index weakest. Lower rates and damaged credit will keep USD weak.

Note: timing and structure are not synchronized. In Q1 2026, if Powell does not cut rates, the dollar may rebound briefly, but the full-year trend is still weak. Strategy needs to stay flexible and adapt through phases.

 

The above contents are from the [Jianwen Masterclass Annual Membership] livestream column "Experts Meeting Room"

To know more about Masterclass membership benefits, click here or the image below

Risk Warning: Masterclass features vetted third-party compliance professionals as lecturers on investment research theory. The content does not constitute any specific product buy/sell or investment advice. Opinions expressed in platform courses are for learning and reference only, do not represent Wallstreetcn opinions or views, and do not address users' individual investment objectives, financial situations, or needs. Markets are volatile and uncertain; the platform will not be responsible for any losses you incur from relying on course viewpoints or information. Investing carries risks—make investment decisions cautiously. ```