Editor's Note: While the market continues to debate whether a "recession is coming," this article shifts the perspective forward, focusing on the underlying structural constraints. Currently, the interplay between energy shocks, geopolitics, and monetary policy is reshaping a more complex macroeconomic environment. In this environment, central banks no longer possess a clear reaction function; traditional paths of interest rate hikes or cuts are simultaneously failing, and policy space is "locked."

The article redefines recession from an "economic outcome" to a "strategic state." It not only compresses growth and employment but also weakens a country's negotiating power, capital attractiveness, and external credibility, thereby causing it to lose initiative in global competition. Precisely because of this, governments are resorting to fiscal, diplomatic, and even geopolitical means to replace monetary tools, essentially buying time for the economic slowdown and avoiding being forced to negotiate during a recession.

Under this framework, the core market focus is no longer the interest rate path itself, but rather "who can escape the constraints and who remains trapped." This difference is first reflected in the foreign exchange and interest rate markets and then transmitted further to asset prices and capital flows. When valuations continue to rise amid slowing growth, it may not be due to improved fundamentals but rather expectations of policies that "will not allow a recession to happen."

As energy, capital, and power become intertwined again, macroeconomic issues are no longer just economic problems but a systemic game spanning policy boundaries.

Below is the original text:

This report is not making a prediction but attempting to还原 a possible structure: if the current energy shock continues to spill over and evolves into a global recession, what structure would this process present?

This recession likely will not unfold along the familiar path but in a way lacking clear historical reference, transmitting layer by layer through the financial system and gradually amplifying. It is important to emphasize that "predicting whether it will happen" and "understanding how it happens" are two completely different things, and this article is concerned with the latter.

It should also be noted that I do not believe this scenario is inevitable. Frankly, I am not one of those "smart money" that went long crude oil and short stocks over the past month and held on all the way to realize gains. My largest risk exposure is actually in the Hyperliquid ecosystem—it has quietly benefited from geopolitical fluctuations and is one of the few assets that has still recorded positive returns this year, while the "Magnificent Seven" US stocks and Bitcoin are overall in a correction phase.

I mention this only to illustrate: the most dangerous thing in the market is never judging the direction, but rather having a position first and then building a framework to explain the world in reverse.

The Problem Is, This System Itself Presupposes Everything

Supply shocks are one of the few variables that break conventional economic relationships. In most cases, growth and inflation move in the same direction: the hotter the economy, the higher the prices; the cooler the economy, the lower the inflation. Macroeconomic policies are designed around this relationship, and the underlying logic of the modern central banking system is built on this assumption.

The Fed's statement is typical: "Our dual mandate is to achieve maximum employment and price stability."

Behind this definition lies an implicit premise—that growth and inflation are largely compatible. This premise holds true in the vast majority of situations. But in one specific scenario, they begin to counteract each other. Once this state is entered, the "dual mandate" is no longer an operable policy tool but more like an invisible constraint.

This "constraint" is not a theoretical assumption. Since the late 1990s, pricing environments with stagflation characteristics have accounted for less than 10% of the time in the market. Among the several economic states listed in the table below, it is the rarest one, but it corresponds to the worst asset return performance—especially for those mainstream assets held by most people.

This is precisely the moment we are in now. The reason the current volatility is so intense and people are so panicked is not because a recession is a foregone conclusion, but because we are in the only scenario where any action the Fed takes will solve one problem while exacerbating another.

Transmission Chain

The chart below shows the nominal and actual changes in food and energy-related expenditures in the economy. In other words, it reflects both "how much money US consumers actually spent" (quantity) and "how much they were charged" (price).

When growth and inflation rise simultaneously, higher prices do not immediately destroy demand; people choose to bear it, complain while seeking raises, and continue consuming. This was the case in 2022, which is why the Fed was able to continue raising rates in that environment without immediately causing an economic collapse. The actual consumption growth rate was nearly 8% year-on-year at that time, and the economy itself had the capacity to withstand the shock.

Our current actual expenditure growth rate is about 2% year-on-year (whereas during the previous energy shock in 2022, this number was close to 8%).

In 2022, the Fed was raising interest rates in an economic environment that had enough momentum to withstand the tightening of financial conditions. Now, that buffer has disappeared. If another round of inflation shock occurs at this time—for example, food CPI has historically tended to rise with a lag of three to six months after an energy shock—the Fed will face a policy environment with almost no "graceful exit path": continuing to raise rates against a backdrop of actual consumption growth of only about 2% could directly crush consumers; choosing to stand pat and let inflation resurge would be tantamount to confirming that it is trapped in a "cage."

The Atlanta Fed's GDPNow forecast just fell below 2%.

Geopolitics

There is an analytical path that stops at commodity prices themselves: oil prices rise, input costs increase, central banks are constrained, growth slows. For many portfolios, this framework is complete enough. But it must at least be admitted that energy shocks do not occur in a vacuum.

Over the past two years, the US has been systematically tightening China's access to low-priced energy sources, including Iranian crude oil and Venezuelan crude oil, resources that previously flowed through "shadow networks" at prices far below market rates. Whether "Operation Epic Fury" has such strategic considerations or merely accelerated an already occurring trend is not within my ability to judge. What I can observe is the overall structure presented around this process.

Reports surrounding Jared Kushner mostly focus on an "ethical narrative": on the one hand, he served as Trump's chief negotiator in the Middle East, and on the other hand, he raised $5 billion from Gulf sovereign wealth funds, funds that came from the very governments he was negotiating with.

But compared to ethical issues, I am more concerned with the operational logic reflected by this behavior. Kushner did not act rashly, nor was his team hastily assembled. When the "transaction layer" operates at such a high frequency and density in a short period, it often implies a clear structural arrangement behind it: this administration is treating military action, economic leverage, and capital flows as interconnected tools within the same system.

In other words, this is not a random operation but an action sequence that has been designed and is being advanced.

For the discussion in this article, the more critical point is: this round of oil price shock is not a random "weather event"; it has its promoters and its beneficiaries. This point will directly affect your judgment on its duration and policy responses.

Recession as a Strategic Vulnerability

The traditional understanding of recession is economic: output contraction, rising unemployment, central bank intervention. But the framework used here is different—it incorporates the incentive structure of geopolitics alongside economic logic.

Recession is not just an economic state but also a reallocation of negotiating power among nations.

The mechanism is not complicated: once a country falls into recession, its fiscal space, political capital, and external credibility simultaneously shrink. The government cannot mobilize non-existent resources, and the central bank also finds it difficult to normalize policy without exacerbating the contraction. Its negotiating counterparts in trade, security, capital markets, and other areas will recognize this and factor it into their negotiation terms.

Conversely, countries that can avoid recession, or merely "fall into recession later," are on the other end of the scale: they can dictate rules, attract capital flowing out of contracting economies, and accumulate strategic leverage that would otherwise need to be consumed by opponents to maintain operations.

This is not some fresh insight but the oldest logic in state governance. The uniqueness of the current moment lies in the fact that this mechanism is operating in a special environment: the central banks of major importing economies are already constrained by the "cage" we mentioned earlier.

In such an environment, the G10 is not a homogeneous whole but is differentiated by energy structure. The US, Canada, and Norway are net oil producers; when oil prices rise, their energy sectors expand, and the inflation structure their central banks face is fundamentally different from that of other countries. Relatively speaking, Japan, the UK, Germany, France, Italy, and most eurozone countries are net importers; every rise in oil prices is directly transmitted to their production costs, trade balances, and overall inflation levels. In a world where oil is used as a geopolitical tool, they are essentially "short energy."

The placement of this "cage" is also截然不同 between the two types of countries. For net exporters, even facing global stagflation pressures, they can still rely on energy revenues and related employment as a buffer; for net importers, however, they bear the inflation shock without an income hedge. Their central banks can neither ease (because inflation has not subsided) nor tighten further (because growth is already fragile). Structurally, this constraint puts far more pressure on energy net importers than the constraints on Washington.

Geopolitics, Economics, and Central Bank Constraints, and the Incentive Mechanisms Throughout

At the geopolitical level, the key is not the competition among various importing economies themselves, but their relationship with the forces that benefit from their weakness. A country in recession becomes a more "accommodating" trade partner, a less reliable security guarantor, and also an easier target for the kind of patient, long-term渗透型 influence—and China, in particular, has shown a willingness to adopt this strategy. China does not need to actively "strike" a weakening economy; it only needs to wait, provide financing, lock in supply relationships, and gradually gain structural dependence during the negotiation process as the other party transitions from strong to weak. Recession is precisely the condition that makes all this possible. Therefore, avoiding recession is not only an economic goal but also a strategic one. All governments in the energy net-import camp understand this, though they may not necessarily articulate it this way.

At the economic level, the core incentive is to "buy time" before further growth恶化 forces a more disorderly policy response. Lock in costs through supply agreements before the next inflation data release; attract capital that might otherwise flow out due to expectations of economic contraction through investment commitments; replace the already malfunctioning price mechanism through trade arrangements. These methods can hardly be called "clean" solutions, but they are superior to the alternative—being forced to the negotiating table during a recession.

At the central bank level, the constraints are most explicit and最难化解. Cutting rates rashly before inflation has subsided could further entrench inflation; standing pat while growth continues to weaken could trigger a demand collapse, making the next round of easing more expensive. For energy net importers, the situation is more complex: their inflation path depends to some extent on the Fed's decisions, not entirely on domestic policy. As interest rate differentials change, the local currency fluctuates against the dollar, and imported inflation adjusts accordingly, making the tightness of this "policy cage" partly dependent on choices made in Washington, not Frankfurt, Tokyo, or London.

Integrating the above framework, a clear environment emerges: traditional central bank reaction functions have failed, governments are replacing monetary policy with fiscal and diplomatic means, and the resulting capital flows are no longer driven solely by interest rate differentials but also by which economies have successfully escaped the constraints and which remain trapped. This distinction—"who is inside the cage, who has found an exit"—is first reflected in the foreign exchange market. The forex market essentially prices a gap: the distance between where policy "should go" and where it is "actually allowed to go." And when this gap widens simultaneously across multiple major importing economies, cross-border capital allocation is no longer a secondary issue but a core one.

Connecting All the Clues

The question truly worth pondering is not whether a recession will come, but whether the governments and central banks of major importing economies will "allow" a recession to happen. The last time a demand shock of similar magnitude opened a window, China seized the opportunity. The 2020 recession was a key node for China to establish its dominant position in global goods exports. This position was not achieved through coercion, but because China was executing a clear strategy while other countries were busy dealing with the crisis.

The central banks currently trapped in the "policy cage" are well aware of this history. Therefore, the more pertinent question is not whether they will continue to raise interest rates amid supply shocks, thus risking triggering a recession, but whether they will, without explicitly stating so, loosen liquidity conditions, tolerate rising financial asset prices, allow valuation expansion, to avoid bearing the political and strategic costs of economic contraction.

This equity valuation chart can be interpreted as one way to read this choice. In a sense, the market may already be pricing in this answer.

I believe that once a market consensus forms, and macro commentators in the media realize they "cannot see the forest for the trees," the market will experience a violent repricing: first impacting the foreign exchange and interest rate markets, then spreading into an aggressive pursuit of gold and silver. At that point, the central banks' "inaction" will carry more weight than any statement they make at press conferences.

In my view, we are entering the final stage of this "endgame" of macroeconomics and geopolitics.

Tomorrow, Part Two. Foreign exchange and interest rates are precisely the core tools for pricing the aforementioned constraints and incentives. The premiums and discounts implied in these markets are the most direct signals for judging which economies global capital believes are "exiting the cage" and which remain trapped. Next, we will proceed from here.