“Euphoria one day, the sound of banks crashing the next…”
The factor that’s enabled the extraordinary success and longevity of the AI bubble has been the willingness of the markets to finance it. What happens if the liquidity machine driving AI were to suddenly stop? As the limits of bond markets, private credit, and using insurance companies to park risk, become increasingly apparent – what would a liquidity event do to current markets? Ouch!
Key Takeaways:
Equities and bonds are diverging. Equities think the party continues. Bonds believe inflation and higher rates are nailed on. They can’t both be right
Liquidity if the key factor driving markets – not belief in AI. If it dries up, then the whole market wobbles.
A Liquidity Event is probably hiding in plain sight – perhaps a US treasury auction that goes awry, or an insurance company taking a thumping on a credit loss.
Risk has not disappeared – it has been transferred from the banking sector to the asset management sector.
Because investors think Elon Musk will make a digital data centre work doesn’t make it a fact – until, maybe, he does.
Markets are neither smart nor clever.
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