The Status Quo Cannot Last

Below are some of the most interesting things I came across this week.

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Ruchir Sharma writes, “By keeping real rates near zero, the Fed is in effect accommodating the deficit, adding fuel to both consumer and asset price inflation. The longer this goes on, the greater the risks to the system.”

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However, Charles Goodhart and Manoj Pradhan tell Peter Thal Larsen, “the status quo cannot last… Ageing populations, indebted governments and geopolitical splits undermine price stability. That leaves independent central banks unanchored.”

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At the same time, “Enthusiasm for anything related to AI has made investors too relaxed and trusting about the financial activities of the leading companies involved in the technology revolution,” writes Edward Chancellor.

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That enthusiasm is readily apparent in the amount of investor leverage now employed in the markets. “Margin Debt as a percentage of nominal GDP shot up 9% in May, reaching a new all-time high,” reports InvesTech Research.

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Meanwhile, Simon White points out, “It’s a trend now impossible to ignore. In sum, liquidity is getting unequivocally squeezed, and rates are becoming more restrictive, posing an increasingly formidable headwind for stocks and other risk assets.”