Capital Flows
· Capital Flows
· May 20, 2026 at 17:34
· ⏱ 9 min read
| Read on Substack ↗
Summary
The article argues that AI and excess liquidity are compressing volatility and desensitizing investors to massive systemic risks building across equities, interest rates, and FX markets, while index concentration and normalized gambling create a fragile structure. This convergence of psychological manipulation, record valuations, and policy errors sets up a potential black swan event that most market participants are ignoring.
•AI is retooling reality and converging with surplus liquidity, speeding up the system and creating disorientation that itself becomes a form of liquidity.
•CEOs and fund managers actively create 'psychological distortion fields' around shareholders to generate premiums, using narratives that dismiss negative data as short-termism.
•The SPY/RSP ratio shows extreme concentration: the top stocks are lifting the index far above the broad market, mirroring 2021 melt-up dynamics.
•Price-to-sales ratios for the Russell 3000 and Topix are at all-time highs, indicating pervasive overvaluation beyond just AI-exposed sectors.
•Central banks are keeping short-end real rates negative despite surging government spending, with the Fed pausing into an oil shock and pushing long-end rates higher.
•Long-end rates across every major country are moving in lockstep due to cross-collateralized global trade, forcing central banks to track the Fed to maintain export competitiveness.