For years, extraordinary money supply growth and negative real rates have pushed asset prices to unwarranted levels. The resulting “everything bubble” spread across real estate, private equity, bonds, and stocks. Now, it is bursting.

The process begins when cheap and elevated liquidity, which is the assumption underpinning inflated valuations, suddenly evaporates. Fiscal deterioration pushes up sovereign borrowing costs, the energy shock squeezes purchasing power, and monetary tightening exacerbates both. Tech stocks are the high-profile victims. However, the deeper danger lies in the repricing of the entire financial system’s foundation.

We are living through an abrupt tightening of financial conditions driven by the slump in confidence of the alleged lowest-risk asset, sovereign debt. And it is directly affecting the stocks that benefit the most from excessive liquidity, namely tech names. These companies have the highest net present value effect from monetary inflation, thanks to their high short-term growth and high margins. They also suffer the sudden tightening faster and more aggressively.

France was the cautionary tale, but only the tip of the iceberg. Its ten-year government yield topped 5.14% in October, the highest since 2002. Allianz estimates that public debt exceeded 119% of GDP in the second quarter, with the deficit approaching 5.4%. However, France is just another warning sign added to Japan, the UK, and most of the euro area government bonds, including Italy and Spain. Behind the political turbulence there is a market demanding compensation for fiscal irresponsibility that governments refuse to confront.

Since the Hormuz crisis began, ten-year yields have risen 150 basis points in France, compared with 115 in America and 83 in Germany. Borrowers therefore face an energy shock and a sovereign-risk shock simultaneously. Governments promising protection have made financing more expensive. Furthermore, the divergence between sovereign markets is significant. Treasury and Bund yields subsequently fell as investors sought safety, and the US dollar returned as the safest asset, while French debt remained under pressure. This has created a sudden stop in many markets, as the US dollar and Treasuries absorb global liquidity, and capital flies from government bonds and growth stocks at the same time.

What is happening is that the asset base of the entire financial system is being repriced as the allegedly safest assets, sovereign bonds, become part of the riskiest ones, and fund managers need to hoard cash as margin calls rise at higher rates.

That is why gold and silver also decline in a risk-off environment. It is more than risk-off; it is liquidity-off, and the US dollar is the only real haven.

Liquidity is evaporating quickly, forcing investors to sell the assets where they have made positive returns in the past two-three years.

Meanwhile, the Fed and the ECB made the mistake of raising rates before keeping them unchanged in October. The major central banks assumed that the rate hikes would not derail liquidity, but it did. It was like pulling the rug from under the feet of markets at a moment when investors were navigating high energy costs and geopolitical risks, added to a weak global economy, where only the US is showing any sign of strength among its developed peers. Their assessment weakens the overheating argument, as underlying inflation remained broadly stable, while credit demand and wages showed little response to the energy shock.

Higher rates did not create barrels of oil or expand refining capacity, but their immediate effect was to restrain investment and demand… This is catching markets in the middle of an enormous multi-trillion maturity wall. This means $9.7 trillion maturing in the United States in 2026 and $14 trillion in refinancing requirements across OECD governments, including the United States.  

All the sovereign debt that is maturing is being refinanced at much higher rates and absorbing all the available liquidity that the rest of the market requires, while higher rates have made margin calls rise faster than what most analysts feared. Furthermore, leverage has rebuilt on a striking scale. FINRA data show that U.S. margin debt reached $1.48 trillion in September 2026, approximately 77% above its level immediately before the Federal Reserve began raising rates in March 2022.

Borrowing initially contracted during the tightening cycle, but the subsequent expansion has left a much larger stock of debt exposed to falling asset prices. As collateral values decline, brokers demand additional equity or liquidate positions. Thus, a valuation correction can become a forced-selling spiral, as leveraged investors sell assets to meet demands for cash, putting further pressure on prices.

The combination of monetary tightening and an adverse supply shock has created an unwarranted squeeze on the productive economy, the asset base of banks, and the real available liquidity in the market, while the maturity wall of sovereign debt has drained access to capital for investors.

The tech correction adds to the slump in sovereign bonds and, therefore, is more the result of a sudden and aggressive monetary tightening than collapsing earnings.

Microsoft’s September-quarter revenue reached $92.3 billion, up 19%, while operating income rose 21% to $45.9 billion. Adjusted earnings per share, excluding OpenAI investment effects, increased 18%.

Meta reported revenue of $64.6 billion, up 26%. However, strong sales cannot insulate valuations when infrastructure spending absorbs cash and investors demand faster returns.

Company-specific concerns also matter. Alphabet’s revenue increased 25%, while net income fell 25% and capital expenditure created a large impact on cash generation. Strong underlying growth is perfectly compatible with steep share-price declines when discount rates and required risk premiums rise. Equities represent claims on future cash flows. As required returns increase, those future dollars become worth a lot less today. The massive net present value impact of past monetary expansion also leads to an enormous net present value impact from monetary tightening, especially when it is unwarranted in the middle of an external energy shock. Longer-dated expected profits are especially sensitive to this impact.

Thus, the correction extends beyond earnings, as financing costs and valuation compression come with doubts about capital-intensive AI investment.

The contagion mechanism is immediate. Falling sovereign prices weaken collateral values and generate losses at the most exposed institutions. Banks will likely react by reducing risk and tightening lending. Weaker activity then undermines credit quality, which increases the pressure on markets and the real economy.

Although unrealized bond losses do not immediately reduce regulatory capital, banks react anyway while delayed recognition leaves economic exposure and funding risk intact.

Europe is particularly vulnerable because businesses depend heavily on banks. The ECB research shows that firms representing roughly 80% of euro-area corporate assets require bank funding, while even large listed firms obtained an average of 58% of external funding through bank loans. The squeeze is already evident. In the ECB’s October survey, a net 5% of firms reported declining bank loan availability.

America’s deeper capital markets offer alternative funding channels, and only 20% of businesses rely on the banking channel for financing. However, falling asset prices raise equity-financing costs, while wider credit spreads make refinancing more challenging. Access to capital disappears quickly even when banking relationships remain strong.

Fiscal dominance is the greatest challenge and may lead to another round of massive easing and QE. The question is when. Excessive government spending and borrowing make central bank tightening increasingly difficult, and higher rates destabilize sovereign finances and the pension funds and institutions holding sovereign debt.

Central banks may still talk of tightening, but the market reaction is saying something different. The economic and political costs rise with every rate increase, worsening the instability of financial markets and the impact on the real economy.

This is why I expect escalating stress to trigger an extraordinary easing cycle, potentially unprecedented in its combination of liquidity support, asset purchases, and explicit market backstops. As I said before, the question is when. Central banks will act because the governments’ fiscal dominance is impossible to avoid. However, it may be too late to limit the damage in markets and the productive economy.

Additionally, central banks are caught between a rock and a hard place, as this intervention would socialize losses while leaving fiscal insolvency and energy constraints unresolved.

Governments overspend, markets collapse, and central banks face mounting pressure to suppress the warning signal. Thus, the likely response to this tightening is another monetary tsunami, one that may salvage financial valuations while a renewed burst of inflationary policy makes the affordability crisis worse. This is the devil’s alternative that central banks face: Engineer a financial and economic crisis of unprecedented levels or perpetuate the inflationary burst they created. This is what happens when you inflate the bubble of everything to disguise governments’ irresponsibility. Governments continue to spend like drunken sailors and ignore all their limits, and the central bank cannot limit the inflation they create without demolishing the real economy and financial markets. Once you start, you cannot stop inflating the bubble.