Warning, There Is No Debasement Trade
What will dominate in 2026: trend or cycle? In bull markets investors see only positive structural trends; in bear markets they are unexpectedly skewered by downward cycles. There are clear trends in markets today, such as the widely popular ‘Great Debasement’ trade, but we fear that they will be derailed by a nasty down-cycle as liquidity tightens in 2026.
We focus on liquidity in financial markets, which, by definition, excludes funds that feed real business activity. Our greatest concern is that a too strong World economy drains liquidity from the financial markets. We argue that strong economies do not always have strong financial markets. The lessening pressure on bond term premia may already evidence rising demand for US Treasuries as ‘safe’ assets. Safe haven demand could also help the US dollar later this year.
Latest end-2025 liquidity data slipped to an index reading of 51.6 (ex-China, range 0-100) and seem to confirm the Q3 peak (index 69.6) in the Global Liquidity cycle. This does not indicate an absolute fall in Global Liquidity, rather a distinct slowdown in growth. Nonetheless, it is not bullish.
