Goldman Sachs Chief Macro Researcher: "Liquidity Narrative" Drives Everything, the Decline of the Dollar is Similar to the "1970s," the Risk is a Repeat of 1979

Goldman Sachs Chief Macro Strategist Paolo Schiavone warned that the current market is replaying the patterns of the 1970s, with the continuous depreciation of the dollar against physical assets, the weakening of central banks' trust in government debt, and the dominance of a "liquidity narrative" all reminiscent of the situation before the collapse of the Bretton Woods system.

Schiavone pointed out that a key structural signal is that for the first time in thirty years, foreign central banks' holdings of gold have surpassed U.S. Treasury bonds, which inevitably brings to mind the late 1960s, just before the collapse of the Bretton Woods system, when central banks in Europe began to question the dollar's status and flocked to gold. This shift directly reflects the market's eroding trust in U.S. government debt.

(For the first time in thirty years, foreign central banks' holdings of gold have surpassed U.S. Treasury bonds)

Against this backdrop, the Federal Reserve's dovish stance and expectations for interest rate cuts are extending the current economic cycle. Easing financial conditions could drive the economy to accelerate again in 2026, injecting upward momentum into risk assets. Schiavone believes that this is quite similar to the Federal Reserve's "preemptive rate cuts" in the mid-1990s, which successfully extended economic expansion and ignited a new round of stock market surges.

However, the simultaneous occurrence of loose liquidity and systemic distrust is playing out in the market. Schiavone emphasized that while liquidity dominates in the short term, the real issue is whether long-term interest rates can remain stable. A sudden break in the long-term bond market would force policymakers to confront the vulnerabilities of the financial system, and the end of the entire cycle may not stem from economic weakness, but rather from a loss of trust.

Easing Expectations Extend the Cycle, Market Replays the "90s"?

History shows that the Federal Reserve's rate cuts during non-recession periods often serve as a booster for the stock market.

In 1984, 1995, and 2019, similar rate cuts successfully pushed the stock market higher, provided that the market believed the economic weakness was only temporary. Schiavone believes:

The current situation is even more favorable, as part of the reason for the Federal Reserve's rate cuts is the correction of previous measurement errors regarding the labor market, which means that the stock market can enjoy a lower discount rate without having to lower its expectations for economic growth.

In this scenario, only the interest rate market cares about data corrections, while the stock market enjoys the benefits of valuation increases. Goldman Sachs' Global Investment Research also believes that as long as the labor market slows rather than deteriorates, this view will be reinforced.

The Rise of Gold and Cryptocurrencies, Trust is Eroding

Markets thrive in fervor or chaos, and today both are present.

Paolo Schiavone pointed out that the rise of assets represented by cryptocurrencies is fundamentally similar to gold in the 1970s, serving as a hedge against inflation, distrust, and political disorder The current rise in gold prices also reminds people of the period from 2008 to 2011, when quantitative easing policies shook people's confidence in fiat currencies, leading investors to flock to hard assets.

Behind this sense of distrust are systemic factors. The intensification of populism and inequality has caused cracks in society's trust in the existing system.

This is similar to the 1930s, when the elite hoarded gold and capital sought refuge overseas; today, investors are diversifying into various risk assets to escape the depreciation of fiat currencies. The Federal Reserve's dovish stance further reinforces this trend.

Dollar Depreciation and Long Bond Risks Hidden Under Liquidity

“Liquidity narratives drive everything, liquidity trumps fundamentals,” is Paolo Schiavone's core judgment of the current market.

Even if there are hidden concerns in the fundamentals, such as fiscal forecasts resembling “fantasies,” the market only focuses on the abundance of short-term liquidity. This is similar to the “puzzle” posed by Greenspan in the 2000s, when despite the Federal Reserve tightening policies, global capital flows still suppressed long-term yields.

In this context, the dollar has been experiencing a covert depreciation since 2009. It is not weakening against other currencies, but rather its purchasing power against real assets—stocks, real estate, cryptocurrencies—is declining.

This mirrors the situation in the 1970s when the value of the dollar shifted to gold, oil, and real estate. Paolo Schiavone believes that bonds may also be on the same path today.

In the long run, due to the increasingly prominent fiscal dominance, long-term bonds are undergoing a structural bear market, and their “risk-free” label has been eroded, potentially worse than in the 1940s and 1950s.

Stability of Long-Term Interest Rates is Key; The Real Risk is a Replay of 1979

Paolo Schiavone concludes that the positive outlook for the current market entirely depends on whether long-term bond yields can remain stable.

If yields stay low, abundant liquidity and a dovish central bank will continue to provide upward momentum for risk assets.

However, some structural distortions are laying the groundwork for future vulnerabilities, such as the unprecedented “mortgage lock-in” problem in the U.S. real estate market, which makes it difficult for policy easing to effectively transmit to real estate, resembling Japan in the 1990s.

(The actual mortgage rate for outstanding loans in the U.S. is 4.11%, while the new 30-year mortgage rate exceeds 6.43%.)

The real risk is not a typical economic recession, but a replay of the “1979 moment”—a sudden collapse of the long bond market, forcing policymakers to confront vulnerabilities and take radical measures.

Paolo Schiavone warns that this cycle may end in the same way, not due to economic weakness, but because of a loss of trust. Before this, structural themes such as defense, nuclear energy, and artificial intelligence, as well as commodities like copper and oil that have been forgotten by the market, may still become the focus driven by liquidity.

(Compared to the continuously rising gold, the positions of copper and oil remain at low points)