What I Learned This Week

The systemic risks facing markets and economies as QE transitions to QT.

Over the past year, we have written 13 articles analyzing QE-driven market distortions that could backfire as financial conditions tighten. The lowest interest rates in history incentivized capital to concentrate in particular assets and strategies, thus reshaping market dynamics and structures. As QT progresses, the key question is whether QE’s “new normal” can unwind without collapsing. The volatility-driven flash crash in early February was a clear warning of systemic weakness. Will the next market trauma prove contagious? The following are some of the key vulnerabilities that we are watching closely: Will deteriorating liquidity cause the next crisis? Flash crashes are increasing in…

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