Goldman Sachs Chief Macro Researcher Paolo Schiavone warns that current markets are repeating 1970s patterns, with the dollar's persistent devaluation against real assets, central banks' eroding trust in government debt, and the "liquidity narrative" dominating everything—all reminiscent of the period before the Bretton Woods system collapse.

Schiavone points out a key structural signal: for the first time in thirty years, foreign central banks hold more gold than US treasuries, evoking memories of the late 1960s before the Bretton Woods collapse, when European central banks questioned the dollar's status and flocked to gold. This shift directly reflects the erosion of market confidence in US government debt.

(For the first time in 30 years, foreign central banks hold more gold than US treasuries)

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

However, loose liquidity and systemic distrust are playing out simultaneously in markets. Schiavone emphasizes that while liquidity overwhelms everything in the short term, the real question is whether long-term rates can remain stable. If the long-end bond market suddenly breaks, it will force policymakers to confront the financial system's fragility, and the entire cycle's end may not stem from economic weakness but from loss of trust.

Easing Expectations Extend Cycle, Markets Repeat the "90s"?

History shows that Fed rate cuts during non-recession periods often fuel stock markets.

In 1984, 1995, and 2019, similar rate cut measures successfully drove stocks higher, predicated on market belief that economic weakness was temporary. Schiavone argues:

Current conditions are even more favorable, as the Fed's rate cuts are partly to correct previous measurement errors in the labor market, meaning stocks enjoy lower discount rates without needing to downgrade growth expectations.

In this scenario, only rate markets care about data revisions, while equity markets enjoy valuation improvements. Goldman Sachs Global Investment Research also believes this view will be reinforced as long as the labor market slows rather than deteriorates.

Rise of Gold and Crypto, Trust is Eroding

Markets thrive in euphoria or chaos, and today we have both.

Paolo Schiavone notes that the rise of assets represented by cryptocurrencies is essentially similar to gold in the 1970s, serving as hedges against inflation, distrust, and political disorder.

Today's gold rally also recalls 2008-2011, when quantitative easing policies shook confidence in fiat currencies, driving investors into hard assets.

This distrust stems from systemic factors. Rising populism and inequality have created cracks in society's trust in existing systems.

This resembles the 1930s, when elites hoarded gold and capital sought overseas refuge; today, investors are diversifying into various risk assets to escape fiat currency devaluation. The Fed's dovish stance further reinforces this trend.

Dollar Devaluation and Long Bond Risk Under Liquidity Cover

"Liquidity narrative drives everything, liquidity trumps fundamentals" is Paolo Schiavone's core assessment of current markets.

Even with fundamental concerns, such as fiscal projections resembling "fantasy," markets only focus on short-term liquidity abundance. This resembles the "conundrum" Greenspan posed in the 2000s, when despite Fed tightening, global capital flows still compressed long-term yields.

Against this backdrop, the dollar has been experiencing a covert devaluation since 2009. It's not weakening against other currencies, but losing purchasing power against real assets—stocks, real estate, cryptocurrencies.

This mirrors the 1970s when dollar value transferred to gold, oil, and real estate. Paolo Schiavone believes bonds may now be on the same path.

Long-term, due to increasing fiscal dominance, long-term bonds are experiencing a structural bear market, with their "risk-free" label eroded—conditions potentially worse than the 1940s-1950s.

Long-End Rate Stability is Key, Real Risk is 1979 Repeat

Paolo Schiavone concludes that current market optimism depends entirely on long-term bond yields remaining stable.

If yields stay low, abundant liquidity and dovish central banks will continue providing upward momentum for risk assets.

However, structural distortions are laying groundwork for future fragility, such as America's unprecedented "mortgage lock-in" problem in real estate markets, making policy easing difficult to transmit effectively to housing—similar to 1990s Japan.

(Outstanding US loan actual mortgage rates at 4.11%, new 30-year mortgage rates exceeding 6.43%)

The real risk isn't a typical economic recession, but a repeat of the "1979 moment"—sudden collapse of long-term bond markets, forcing policymakers to confront fragility and adopt radical measures.

Paolo Schiavone warns this cycle may end similarly, not from economic weakness but from loss of trust.

Before then, structural themes like defense, nuclear energy, and artificial intelligence, plus market-forgotten commodities like copper and oil, may still become focal points under liquidity-driven conditions.

(Compared to gold hitting new highs, copper and oil positions remain at low levels)