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Good morning:
We start today with a liquidity picture. I recommended that you watch the interview between Chris Snook and Michael Howell for a reason.
Howell just said that we have seen liquidity hit record highs. It’s now over $190 trillion. The issue is that it’s slowing. His view is that we’ve reached peak liquidity.
It’s up because of a weaker dollar and improving collateral values. What is capping it is thin central bank support and rising bond volatility. Bond volatility squeezes what is called the collateral multiplier. That is a fancy way of saying: when bonds get volatile, banks get nervous about accepting them as collateral, which tightens the system even when headline liquidity looks okay.
We’ve seen a collapse in volatility everywhere. In bonds, in the MOVE index, in the VIX… Why does that matter? It’s a macro regime signal. It tells you capital is moving out the risk curve across every asset class at the same time.
This creates a mechanical consequence.
Funds that target specific volatility levels have to lever up… They can hold more, so they buy more. And that lowers volatility.
And it’s a great signal… until it’s not anymore.
This happens while passive flows push things higher.
Capital Flows says that one dollar of passive index flow lifts the market by roughly five dollars. Again, passive investors buy and never sell. The top seven stocks in the S&P now control a massive portion of the index.
Every dollar of passive flow gets concentrated into those same seven names.
That’s why the equal-weight S&P is still below all-time highs while the cap-weighted index is at highs. And why our signal is behaving the way that it is…
Next, you have the carry trade. It’s strong… The issue is that this could implode at any moment like it did back in August 2024 or November 2025… It could unwind every carry trade, vol target, CTA trend-following position. All at once.
CTAs remain insanely long at the same time, while capital is now punishing anyone NOT taking risk. As Capital Flows explains on the risk side… if you bought quality, you’re getting punished. People buying all the junk are winning…
That’s now how markets are supposed to work.
But it’s how THIS one does.
The market is in a melt-up driven by collapsing volatility, passive flow concentration, max-long trend-following, extreme carry trades, and a specific AI narrative.
Every one of those forces pushes prices higher today.
And every one of those forces creates the conditions for a violent reversal if something breaks.
