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

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Torsten Slok reports, “The amount of money in passive investing continues to grow… There are three consequences of this development: 1) Reduced market efficiency and price discovery 2) Increased market concentration and volatility 3) Growing correlation and systemic risk.”

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As the inelastic markets hypothesis posits, much of the stock market’s performance in recent years can be simply be attributed to inflows into these sorts of vehicles. “I don’t think passive investments create volatility. But they might create these long-term — I don’t know if we should call them bubbles — upward trends that persist and give people a sense that it is going to last for ever,” explains Jean-Philippe Bouchard.

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However, stock market valuations have reached some truly rarified air. The Shiller cyclically adjusted price-to-earnings ratio is hovering around 37.5. And, as David Rosenberg points out, Over 35 is, “the only cutoff point where every single time [the forward return] is negative.”

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With the breadth of overvaluation so elevated, there may be few places to hide. “Similar to 1999, investors are once again crowding into quality stocks—attempting to participate in another bubble without looking reckless. While quality stocks may feel comfortable, their valuations indicate investors are assuming considerable risks,” writes Eric Cinnamond.

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Of course, the greatest concentration and correlation in the market today centers around AI, which represents a serious risk on its own. As GQG Partners writes, “Investors are seemingly making a one-way bet on the AI mania while appearing to ignore alarming fundamental issues. We believe the consequences of the current AI boom could be worse than those of the dotcom era…”

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