Everyone Is Betting On The Wrong Liquidity Trade

The liquidity illusion

Everyone is getting excited about liquidity coming back, but the more interesting question is where that liquidity actually ends up.

The post-GFC playbook was relatively straightforward. Central banks flooded the system with liquidity at a time when nominal growth was weak and the real economy had relatively little appetite for capital. With few productive places for that money to go, a huge amount ended up in financial assets. Yields fell, duration rallied and multiples expanded.