High but  seemingly unstoppable, markets continue to perform strongly despite a series of significant economic and geopolitical shocks. Meanwhile, academic and institutional voices warn that financial vulnerabilities are elevated at a time when policy flexibility is constrained. Not only is there is a record amount of sovereign debt outstanding, especially in the US, but the majority of  it is now held by more price-sensitive and mobile investors. Moreover, a significant cohort  amongst them  are heavily leveraged, rendering them susceptible to market corrections. If conditions were to shift abruptly, the adjustment could be challenging.

Crisis? What Crisis?Crisis? What Crisis?

Risk appetite is alive and kicking. Year to date, the S&P 500 is up 10.35% (24% annualised) and Space X has just listed  at a valuation of  USD 1.77trillion (6% of US GDP), the biggest in history. The riskier asset classes in public fixed income markets, Emerging Markets (EM) and US High Yield (HY), have also seen spreads compress to levels last seen in 2007.  So quick are markets to brush aside anything that might muffle the positive mood music, that to judge by market performance alone, would be to understate the range of macroeconomic and geopolitical risks currently in play.

The list is uncomfortably long. Unprecedented levels of advanced economy debt; questions around liquidity and valuation in private markets, the scale of AI-related investment, the biggest ever disruption to energy supply, trade disruption, the breakdown of institutions and elevated geopolitical tensions. Yet, markets rally with every announcement of a deal that may or may not incrementally improve the flow of oil through the Strait of Hormuz.



Meanwhile, in academia, the disconnect in sentiment with the market remains significant. Of late, a chorus of voices from the academic and regulatory world have issued  warnings that converge on a core theme: these risks are unfolding against a backdrop of heightened global imbalances and unprecedented financial fragility. In recent weeks alone, the IMF, the Bank of England (BoE), the G7, the G30, the Centre for Economic and Policy Research (CEPR), the Bank for International Settlements’ (BIS), Gita Gopinath, and Martin Wolf have all sounded the same alarm. There is an unparalleled build-up of risks in the global financial system.

Global Imbalances ReduxGlobal Imbalances Redux

Has King Dollar been de-throned?Has King Dollar been de-throned?

Shadow Banking of a different sortShadow Banking of a different sort

Banks are not off the hookBanks are not off the hook

Will the real EM please stand up?Will the real EM please stand up?

How to tame your dragonHow to tame your dragon

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