Beware of the three L's: leverage, liquidity, and lunacy
About a decade ago, journalist and 'Billions' creator Andrew Ross Sorkin began researching the 1929 crash.
This week, with the storm around tech stocks and the AI bubble at its peak, he finally published his conclusions.
“I was lucky,” he said, but anyone looking at the market today knows that luck is not always on the investors' side.
As Sorkin points out, every period of extreme prosperity conceals three recurring factors: leverage, liquidity, and lunacy.
Liquidity – when money flows too fast. Ostensibly, the market suffers from a lack of liquidity. Repo rates are soaring, and the Federal Reserve has halted quantitative tightening (QT).
But behind the scenes, a decade of quantitative easing, zero interest rates, and credit expansion has injected dangerous excess liquidity into the market.
Matt King, founder of Satori Insights, warns: “When the Fed stops tightening and eases again, the market becomes frothy, and investors lose vigilance.”
Leverage – when credit becomes fuel. Household debts are stable, but the debts of AI entrepreneurs and Western governments are soaring.
Margin trading is spreading, and passive funds are increasing momentum. Again, liquidity turns into leverage, and leverage into accumulated risk.
Lunacy – when passion replaces judgment. Palantir trades at a multiple of around 230 times future earnings, and 10 unprofitable AI companies are together worth almost $1 trillion.
Cases like the collapse of First Brands, where $2 billion disappeared from a $12 billion debt, highlight how “rating shopping” and financial manipulations can bring back old ghosts.
Sorkin mentions there is no reason to fear a repeat of 1929. Central banks will continue to inject liquidity in an emergency, as they did in 2008 and 2020. But even this could ignite a new monetary bubble.
Some conservative investors, like Curtis Yarvin, are already fleeing to gold and crypto, seeing the dollar itself as the next bubble.
Bubbles do not burst in one day.
They inflate quietly until the lunacy is revealed only in hindsight. Therefore, if there are three metrics always worth tracking, they are leverage, liquidity, and lunacy.
Because in market history, the players change, the big question is whether the script is the same.