Liquidity’s Late-Phase Law

2025-11-07

At bubble altitude, prices stop pricing fundamentals and start competing for the same oxygen: liquidity. When that oxygen isn't rising, the regime flips from "everything floats" to a lifeboat with too few seats.

Law: the market can inflate anything, but not everything—at least not at the same time.

What to watch (simple, not plumbing)

• M2 trend = the money tide. Think of M2 as broad money in circulation.

  • Rising M2 → broad lifts stay possible.
  • Flat/falling M2 → simultaneous highs get fragile; expect relay rallies, not an "everything" melt-up.
  • Check YoY and a 3–6-month annualized look for turns.

• Sanity check: keep one eye on financial conditions (looser vs tighter) to filter noise, and remember liquidity can be global—the "anything" may migrate across assets and regions.

How it shows up

• Relay rallies: one pocket rips while another rests; leadership rotates faster.
• Narrow breadth: index highs on a few shoulders while the median stock lags.
• Brittle momentum: sharper reversals; winners take turns, not the field.

How to operate

• Trade the handoff, not the parade: position for rotations, not universal levitation.
• Treat strength as flow-dependent: if M2 isn't climbing (and conditions aren't easing), durability drops.
• Respect liquidity gravity: stories fly only while the tide rises.

Bottom line: In late-phase bubbles, liquidity is the binding constraint. It will levitate something—just not everything.