🫧Bubbling on Top of a Cracking Foundation

⚠️ 0DTE Dominance — A Sign of Bubble Behavior

While the bedrock shows cracks, equity markets are displaying late‑cycle mania:
📈 0DTE (zero‑days‑to‑expiration) options now make up over 60% of all S&P 500 options volume.
👉 That means the majority of volume is in ultra‑short‑term, speculative bets — not hedging or long‑term positioning.
👉 Historically, this concentration of leveraged short‑term speculation appears near market tops, when participants are conditioned to expect quick wins and sell volatility.
👉 It’s a signal of complacency and reflexive leverage layered on top of already fragile funding markets.

🌍 A Narrower Buyer Base, a More Fragile Base Layer

The latest Treasury’s TIC data confirms increasing base layer fragility we’ve been warning about:
✅ The U.S. Treasury market — the bedrock collateral of the global system — is funded more and more so by a shrinking pool of private European buyers.
✅ Central bank buying has been declining since the 2008 financial crisis and dropped sharply after the 2022 seizure of Russian reserves.
✅ Asian official participation has waned, and “de‑dollarization” in practice has been a slow trimming of exposure, not an overnight exodus.

The structural risk is clear:
👉 Fewer, more return‑sensitive hands are holding up the base layer of financial markets.
👉 If Europe hesitates, or if U.S.–EU trade tensions (e.g. Trump’s floated 30% tariffs) escalate, the foundation of funding for U.S. deficits shakes.
👉 A smaller buyer base means greater price sensitivity and volatility in long‑dated Treasuries — precisely what we’re seeing with the U.S. 30‑year oscillating near 5% and Japan’s 30‑year near 3.07%.

The higher U.S. 30‑year and Japan’s 30‑year yields go, the more pressure it puts on global equities.

The linkage to Japan:
Japan remains the second pillar of this base layer, holding more Treasuries than any other nation while its own bond market comes under greater and greater pressure.
👉 Every tick higher in JGB yields tightens global liquidity and pushes Japan closer to a choice: defend bonds or defend the yen.
👉 Either path reverberates through Treasuries, swap spreads, and repo markets.

✨ The Takeaway

We are in a Minsky cycle era — not waiting for one particular life changing liquidity event but enduring repeated, escalating ones:

• Shrinking breadth of Treasury demand,

• Interconnected stress between JGBs and Treasuries,

• Rising reliance on overnight funding,

• Persistent warning lights in swap and OIS spreads.

All while the pressure release valve for five plus decades of debt fueled distortions across asset classes (silver’s) borrow markets scream pressure and COMEX data shows a structural squeeze in the works.

⚡ Retail Mania + 0DTE Frenzy = Late‑Cycle Leverage on a Cracked Foundation

🔹 Retail investors now make up 14% of single‑stock trading volume — an all‑time record.
That exceeds the 12% seen at the peak of the meme‑stock frenzy in 2021, when GameStop and AMC were catapulted into history books by chatroom‑coordinated short squeezes.
For years, retail share hovered closer to ~10%. This jump is not a blip — it’s a behavioral shift.

🔹 Pair that with the fact that 0DTE (zero‑days‑to‑expiration) options now account for over 60% of S&P 500 options volume.
These are hyper‑short‑term bets, often levered to the hilt, designed to capture quick moves… or blow up spectacularly.

They are not about hedging or long‑term positioning. They are about adrenaline and instant gratification.

🧩 What does that tell us about the market?

✅ The market is being driven more than ever by short‑termism and speculative flows.
Retail traders chasing momentum + institutional desks monetizing that demand through ultra‑short‑dated options = a reflexive loop.

✅ This is classic late‑cycle behavior.
When the foundation of the system (Treasuries, JGBs, repo plumbing) is wobbling, but asset prices are still climbing, the psychology of “make hay while the sun shines” takes over.
Retail traders see a market that hasn’t punished risk in years. They crowd in. They push volume records. They fuel a self‑reinforcing melt‑up.

✅ But look beneath: the base layer is stressed.
– 10‑Year swap spreads deeply negative (≈ –30 bps)
– 3‑Year SOFR‑OIS spreads still elevated (≈ 26 bps)
– SOFRVOL trending toward $2.74 T
– Foreign demand for Treasuries narrowing, JGB yields creeping higher

All of that means the collateral plumbing under the market is increasingly fragile — yet we’re seeing more speculative leverage layered on top than ever.

🔥 Enter China’s Liquidity Surge — and Its Quiet Pivot to Gold

Layer this spark on top of yesterday’s backdrop:
China’s M1 money supply — the most pro‑cyclical gauge of liquidity — is now surging, up 4.6% YoY from only 0.4% earlier this year.
China’s M1 isn’t small; it’s larger than U.S. M1 (ex‑savings) and ≈ a third of all G10 liquidity.
History shows: when Chinese M1 accelerates, global liquidity and inflationary pressures follow within months.

✅ More liquidity → more inflation pressure → higher sovereign yields → stress on Treasuries & JGBs
✅ More stress → heavier reliance on repo markets → more stealth QE → more currency debasement

But here’s where it gets even more revealing (credit to The Kobeissi Letter):

🇨🇳 Chinese gold demand is exploding:
• Chinese gold ETF demand hit a record 45 tonnes in Q2 2025, up from 18 tonnes in Q1.
• Total H1 2025 ETF demand is 63 tonnes — an all‑time high.
• Total ETF holdings are up 74% YoY to 200 tonnes.
• The PBoC added +2 tonnes in June, lifting official reserves to a record 2,299 tonnes.
• Goldman Sachs estimates China unofficially bought 15 tonnes in May on the London market — 8× the officially reported figure.

At the same time:
⚠️ China is quietly trimming Treasuries:
Their holdings declined $900M in May to $756.3B — the lowest in 16 years.

On the surface, stepping back from Treasuries while the system is still debt‑anchored to U.S. debt might look reckless…
👉 Unless you assume they’re quietly building a different foundation.

And that’s the intrigue:
Beijing appears to be stacking far more gold than officially reported — offsetting the risk of slowly decoupling from the current base layer (U.S. Treasuries) as it injects more and more liquidity at home.

💡 The takeaway:
China is not just fueling the system with liquidity…
It’s simultaneously re‑anchoring to hard collateral.
In a world where the base layer (Treasuries & JGBs) is wobbling, we do not want to find out the hard way that China has more gold than us.

🏦 And Who’s Buying the Debt?

The breadth of foreign Treasury buyers is thinning.
Official central bank buying has faded since the GFC and the 2022 Russia‑reserve shock.
Private demand is increasingly concentrated in Europe, while Asia trims exposure.
China, once a reliable holder, has quietly cut its reported Treasury holdings to $756B (16‑year low) — even as Belgium’s custodial accounts (where much of China’s off‑book holdings likely sit) tick higher.

👉 That only makes sense if Beijing is quietly anchoring elsewhere — stacking far more gold than officially listed to offset the risk of decoupling from the current base layer and their needs for greater and greater QE.

✨ What This Means

While retail is bidding up tech and flipping 0‑DTEs like lottery tickets, the real story is underneath:

🧩 The U.S. Treasury market — the bedrock collateral — is wobbling.
🧩 JGBs — the second pillar — are showing the same cracks.
🧩 China is stoking liquidity even as it trims U.S. debt, likely anchoring deeper and deeper into gold.

Every “mini‑Minsky” event (each liquidity flare‑up) requires ever‑larger interventions to patch the system.
Each patch = more debasement… and more incentive for capital to seek assets outside the system’s control.

📉 Rising U.S. & Japanese Bond Yields — Why Higher Yields Pressure Global Equities

Higher yields mean higher discount rates on future cash flows:

• This hits high-duration assets the hardest (like tech/growth stocks).

• When the 30Y U.S. Treasury yields 5%, equity risk premiums compress — making equities less attractive unless earnings can grow dramatically (which is less likely during tightening cycles or yield spikes).

🏦 Cost of Capital Rises Across the Board

• Corporates borrow at a spread above sovereigns.

• As sovereign yields rise, corporate debt becomes more expensive.

• Margins get squeezed, buybacks slow, and leveraged strategies (including private equity and M&A) become less viable.

💥 Financial System Fragility Increases

• Sovereign debt = base layer collateral.

• Rising yields = falling bond prices = collateral haircut increases.

• This tightens liquidity and forces deleveraging in risk assets (like equities).

• Repo markets become more volatile, and equity drawdowns follow (as seen in 2018, March 2020, and 2022).

🌍 Global Yield Shock = Broad Risk Repricing

• Japan’s 30Y rising past 3% and the U.S. 30Y breaching 5% is a global repricing of the "risk-free" curve.

• This impacts European, EM, and corporate debt yields.

• A synchronized rise in global sovereign yields = synchronized pressure on global equities.

🥇 Gold is quietly reclaiming its role as the ultimate base layer.
🥈 Silver — sidelined and undervalued — is the pressure‑release valve for five plus decades of debt fueled distortions across asset classes.

🥇 Gold & Silver: The Old Base Layer Waiting To Be Reclaimed
For 54 years we’ve lived in the greatest fiat experiment in recorded history.
As the current base layer (debt) wobbles, capital will continue to rotate into what worked for millennia:
✅ Gold — quietly rising on central bank balance sheets.
✅ Silver — the lagging pressure release valve, increasingly signaling a structural squeeze as SLV borrow rates surge (now ≈ 2.54% with only 100k shares available to borrow while COMEX short position remains near record high).

If you’re not yet positioned, or want to diversify into fully insured, allocated physical - I can help.
Through my referral partnerships with major precious metals dealers, you can get fully insured delivery to your door or secure vault storage where you hold a true 1:1 ownership claim on metals that are audited daily — no numismatics or gimmicks, just the most practical forms for liquidity and long‑term allocation.

📩 Reply anytime if you’d like an introduction or guidance.

The cracks are spreading. Don’t wait for a headline moment — position into the old base layer now.

Luke Lovett
📲 Cell: 704.497.7324
🌐 Undervalued Assets | Sovereign Signal
📧 Email: [email protected]

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