Wall Street had a split personality on Tuesday (21st). The Dow Jones Industrial Average hit a record high thanks to strong earnings from General Motors and Coca-Cola, while the S&P 500 edged closer to its own peak. But in the background, the fixed income and commodity markets were flashing warning lights.
The loudest alarm came from Danielle DiMartino Booth, a former advisor to the Federal Reserve Bank of Dallas and now CEO of QI Research. Her message? The U.S. financial system is running out of liquidity, and the Fed may soon be forced to abandon its anti-inflation stance—not because inflation is conquered, but because the plumbing of the system is breaking down.
Gold Takes a Beating
Gold, the classic safe-haven asset, had its worst single-day drop in five years. After touching a record $4,380 per ounce on Monday, COMEX December futures plunged more than 6% to $4,125.
Booth argued this wasn’t a rejection of gold’s value but a "flight to cash"—investors selling their most liquid and profitable assets to cover margin calls, much like the chaos of March 2020. "No one wants to see gold trade like a meme stock," she warned.
The Liquidity Squeeze
At the heart of the problem is the Fed’s ongoing quantitative tightening (QT), which drains up to $95 billion a month from the system as Treasuries and mortgage-backed securities mature. Booth says the system is "rapidly running out of ample liquidity," and the Fed will eventually have to step aside.
This echoes broader concerns. The Bank of England’s Andrew Bailey has compared U.S. private credit risks to the 2007 subprime mortgage crisis, while both the IMF and the Fed itself have flagged the opaque growth of the $1.7 trillion private lending market as a systemic risk.
Private Credit and "Cockroaches"
Booth pointed to rising defaults in private lending, where underwriting standards were loosened during years of near-zero rates. This ties back to JPMorgan CEO Jamie Dimon’s infamous "cockroaches in the financial system" warning—if you see one, there are probably more hiding.
The collateralized loan obligation (CLO) market is the canary in the coal mine. Lower-rated tranches are already showing stress, and Booth cautioned that if spreads on top-rated CLOs widen, it would mean private-sector credit events are spilling into the public markets.
Households Feeling the Pinch
Meanwhile, the real economy isn’t exactly humming. U.S. household debt has hit a record $18.4 trillion, with credit card and auto loan delinquencies now above pre-pandemic levels. A joint report from Vanguard and Amberworth found that 401(k) hardship withdrawals are at a two-year high, driven in part by the resumption of student loan payments.
Booth argues this paints a much weaker picture than the Atlanta Fed’s 4% GDPNow forecast suggests.
The Bottom Line
From gold’s sudden nosedive to stress in private credit and ballooning household debt, Booth’s warning is clear: the Fed’s balancing act between fighting inflation and keeping the financial system stable is getting trickier by the day.
For now, the stock market may be celebrating record highs, but under the hood, liquidity is draining fast. And as Booth put it, when investors start selling gold just to raise cash, it’s less a victory lap and more a cry for help.