Goldman Sachs Chief Macro Researcher: "Liquidity narrative" drives everything, the decline of the dollar is strikingly similar to the "1970s", with the risk of a repeat of 1979.

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Goldman Sachs Chief Macro Researcher Paolo Schiavone warns that the current market is replaying the 1970s pattern: the ongoing devaluation of the dollar against physical assets, weakened trust in government debt by central banks, and the dominance of the “liquidity narrative” all recall the scenario before the collapse of the Bretton Woods system.

Schiavone points out that a key structural signal is that for the first time in thirty years, the gold held by foreign central banks has exceeded their holdings of US Treasuries. This is reminiscent of the late 1960s, in the eve of the Bretton Woods collapse, when European central banks questioned the status of the dollar and flocked to gold. This shift directly reflects the market’s eroding trust in US government debt.

(For the first time in 30 years, foreign central banks' holdings of gold have surpassed their holdings of US Treasuries)

Against this backdrop, the Fed’s dovish stance and expectations for rate cuts are extending the current economic cycle. The easing of financial conditions may propel the economy to reaccelerate in 2026, injecting upward momentum into risk assets. Schiavone believes that this is quite similar to the “preemptive rate cuts” by the Fed in the mid-1990s, which successfully extended economic expansion and ignited a new equity rally.

However, loose liquidity and systemic distrust are unfolding simultaneously in the market. Schiavone emphasizes that although liquidity overwhelms everything in the short term, the real question is whether long-end interest rates can remain stable. If a sudden break occurs in the long-term bond market, policymakers will be forced to confront the fragility of the financial system. The end of the cycle may not be due to economic weakness, but to a loss of trust.

Loose expectations extend the cycle; is the market replaying the “90s”?

History shows that the Fed's rate cuts during non-recessionary periods often act as a catalyst for the stock market.

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

The current situation is even more favorable. Part of the reason for the Fed’s rate cuts is the correction of previous mismeasurement of the job market, meaning that the stock market can benefit from a lower discount rate without having to lower expectations for economic growth.

In this context, only the rates market cares about data revisions, while the equity market benefits from valuation gains. 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 ebbing

Markets can only thrive in mania or chaos—and today both are present.

Paolo Schiavone points out that the rise of assets represented by cryptocurrencies is in essence similar to gold in the 1970s—tools to hedge inflation, distrust, and political disorder.

Today’s surge in gold also brings to mind 2008-2011, when quantitative easing shook confidence in fiat currencies and investors poured into hard assets.

This sense of distrust is rooted in systemic factors. The rise in populism and inequality has caused cracks in society’s trust toward the existing system.

This is similar to the 1930s, when elites hoarded gold and capital fled abroad for safety; now, investors are diversifying into various risk assets to evade the depreciation of fiat currency. The Fed’s dovish stance further reinforces this trend.

Dollar depreciation and long-bond risk veiled by liquidity

“Liquidity narrative drives everything—liquidity trumps fundamentals.” This is Paolo Schiavone’s core judgment of the current market.

Even if there are underlying concerns—such as fiscal forecasts being “fantasy”—the market focuses only on the abundance of short-term liquidity. This is reminiscent of the “conundrum” posed by Greenspan in the 2000s, when, despite Fed tightening, global capital flows kept long-term yields low.

In this context, since 2009, the dollar has been undergoing a concealed devaluation. It has not weakened against other currencies, but its purchasing power is declining against real assets—stocks, real estate, cryptocurrencies.

This mirrors the 1970s, when the dollar’s value shifted into gold, oil, and real estate. Paolo Schiavone believes that bonds may also be on this same path now.

In the long run, as fiscal dominance becomes more pronounced, long-term bonds are undergoing a structural bear market, their “risk-free” label is being eroded, and the situation may even be worse than in the 1940s-50s.

Long-end rate stability is key; the real risk is a repeat of 1979

Paolo Schiavone concludes that the market’s positive scenario depends entirely on whether long-term bond yields can stay stable.

If yields remain low, abundant liquidity and dovish central banks will continue to fuel risk assets’ upward momentum.

However, some structural distortions are sowing seeds of future fragility, such as the unprecedented “mortgage lock-in” in the US housing market, which makes it difficult for policy easing to transmit effectively to housing—reminiscent of Japan in the 1990s.

(The actual mortgage rate on outstanding US home loans is 4.11%, while new 30-year mortgage rates exceed 6.43%)

The real risk is not a conventional recession, but a repeat of the “1979 moment”—a sudden collapse in the long-term bond market, forcing policymakers to confront fragility and take drastic action.

Paolo Schiavone warns that this cycle may end in the same way—not because of economic weakness, but because of a loss of trust.

Before that, structural themes such as defense, nuclear energy, and artificial intelligence, as well as overlooked commodities like copper and oil, may still become focal points under liquidity-driven conditions.

(In contrast to new highs in gold, positions in copper and oil remain at low levels)

Risk Disclosure and DisclaimerThe market has risks, investment needs caution. This article does not constitute personal investment advice, nor does it take into account the individual investment goals, financial situation, or needs of any particular user. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investing accordingly is at your own risk. ```