As Tom McClellan so eloquently summarized, only two things
matter for pricing markets:
1) How much money is available in the system
2) What percentage of that money is allocated towards specific
markets
This has been the single best guide since 2020 bar none and also
the reason the markets have rallied so much since 2009 as the FED
balance sheet has gone up drastically along with deficit spending.
This is what I term Stealth QE .
Chart1: August 10: Reserve balances w/ Fed banks: $3.348T
August 16:
$SPX4325 June 7: Reserve balances w/ Fed banks: $3.349T June 9:
$SPX4323 (Northman Trader)
Zero net liquidity change in as shown on the chart below
(Liabilities and Capital).
If anyone still has any doubt about liquidity driving
everything, up or down, just look at the directional flows below,
the only variables are the relative capital allocations in which
sectors and stocks. All bull/bear narratives are just reflections
of price driven sentiment at any given time. Money began
flowing into Mega Tech back in January and accelerated as the AI
boom took center stage with ChatGPT (MSFT) and NVDA amongst others.
The result being the magnificent 7 of the SPX combined for
gains exceeding 40% while the other 493 SPX components collectively
have gained very little (just above the flat line). The
charts help us identify and measure such flows. My feeling is
that we have started to see some rotation from big tech into other
areas.
When did everything tech bottom? January 4th. When did reserve
balances bottom? Same day. Nearly half a trillion dollars in
liquidity added since and notice the massive ramp during the
banking crisis. Liquidity is the driver and everything else
is just a narrative to justify what has unfolded up and down.
The gains have nothing whatsoever to do with improving macro
fundamentals as the Leading Indicators portray a recession along
with the inverted yield curve. It's all about Liquidity and
then doing your best to attract such funds towards your company vs
others.
Chart 2: Since inception, the FED had planned to reduce
their balance sheet (termed QT) by $750 Billon by this date
but the end result has actually been $100 Billion QE instead.
This is one reason inflation has remained sticky (the rate of
change has come down for sure) but still well above their stated 2
percent target.
Chart 3: What has aided this inflation decline is the dramatic
drop in M2 (money supply) after an unprecedented two year expansion
during Covid.
Posted by DigiNomad on 12th of Jun 2023 at 02:27 pm
Agree, but this seems to be mostly about the blunt instrument
(monetary policy). There is also out of control fiscal policy still
driving this train higher (too bad the investments weren't well
thought out). Student loans alone represent 5 billion per month in
additional debt to pay the interest (so much for executive branch
not controlling purse strings). The "inflation reduction act" is
also massively increasing prices in certain secotrs due to it's
size...and it's just getting started. So we have both QE +
very aggressive fiscal policy in play. The FED / monetary
policy gets stuck with most of the blame, but fiscal seems just as
important, if not more (which is the way it's typically taught in
academic econ). When the treasury ran out of money during
the pandemic, the Fed was forced to support congresses bailout
bills by printing money and buying debt from Treasury. They
didn't really have a choice once Congress passed the various
bills.
Posted by highroller on 12th of Jun 2023 at 03:02 pm
Some reads on the issue. Nobody trusts the gov't anymore,
the bond market is 10 times greater in size than the stock market
and that money will flow into hard assets.
Posted by rmoore100 on 10th of Jun 2023 at 01:11 pm
Thanks Steve for posting this......some great information.
Where would you suggest is the best place to obtain
this data, more in real time, regarding liquidity, in order for us
to get a better macro view of what's coming. And what
charts do you feel are the most important.
Thanks Again !!!!
rmoore100- regarding your question about where to find
information on the liquidity, first off you can track that data
from the FRED website, I just created the graph, here you go. Best
to bookmark this and check it weekly for updates
on that FRED graph, would be nice to be able to add some
indicators to that Liability's and Capital data - such as some sort
of moving average or ATR or something that signals a reversal when
broken. You might be able to, I haven't had time to play around
with it that much. I know you could download the data and input
into Stockcharts, but I haven't had time to try that. Anyway best
to save that URL of the chart I created for you guys
Are you aware that the SPX over the past several months has had
a positive correlation with yields? Yield has been the single
best predictor of the SPX diretion for traders during this time.
This is not a constant relationship.
All other factors widely portrayed are simply measurements and
guidepost of such flows. What matters is Liquidity Period!
Charting helps to guide us to where the money flows and departs
(for example last year Energy and this year Mega Tech) but
the overall market is dependent upon Liquidity and
sectors/stocks/commodities/bonds are dependent upon where
such funds are allocated (dynamic as it's constantly
changing)
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LIQUIDITY - Take time to Review Closely
Posted by steve on 10th of Jun 2023 at 10:39 am
As Tom McClellan so eloquently summarized, only two things matter for pricing markets:
1) How much money is available in the system
2) What percentage of that money is allocated towards specific markets
This has been the single best guide since 2020 bar none and also the reason the markets have rallied so much since 2009 as the FED balance sheet has gone up drastically along with deficit spending. This is what I term Stealth QE .
Chart1: August 10: Reserve balances w/ Fed banks: $3.348T August 16: $SPX4325 June 7: Reserve balances w/ Fed banks: $3.349T June 9: $SPX4323 (Northman Trader)
Zero net liquidity change in as shown on the chart below (Liabilities and Capital).
If anyone still has any doubt about liquidity driving everything, up or down, just look at the directional flows below, the only variables are the relative capital allocations in which sectors and stocks. All bull/bear narratives are just reflections of price driven sentiment at any given time. Money began flowing into Mega Tech back in January and accelerated as the AI boom took center stage with ChatGPT (MSFT) and NVDA amongst others. The result being the magnificent 7 of the SPX combined for gains exceeding 40% while the other 493 SPX components collectively have gained very little (just above the flat line). The charts help us identify and measure such flows. My feeling is that we have started to see some rotation from big tech into other areas.
When did everything tech bottom? January 4th. When did reserve balances bottom? Same day. Nearly half a trillion dollars in liquidity added since and notice the massive ramp during the banking crisis. Liquidity is the driver and everything else is just a narrative to justify what has unfolded up and down. The gains have nothing whatsoever to do with improving macro fundamentals as the Leading Indicators portray a recession along with the inverted yield curve. It's all about Liquidity and then doing your best to attract such funds towards your company vs others.
Chart 2: Since inception, the FED had planned to reduce their balance sheet (termed QT) by $750 Billon by this date but the end result has actually been $100 Billion QE instead. This is one reason inflation has remained sticky (the rate of change has come down for sure) but still well above their stated 2 percent target.
Chart 3: What has aided this inflation decline is the dramatic drop in M2 (money supply) after an unprecedented two year expansion during Covid.
Agree, but this seems to
Posted by DigiNomad on 12th of Jun 2023 at 02:27 pm
Agree, but this seems to be mostly about the blunt instrument (monetary policy). There is also out of control fiscal policy still driving this train higher (too bad the investments weren't well thought out). Student loans alone represent 5 billion per month in additional debt to pay the interest (so much for executive branch not controlling purse strings). The "inflation reduction act" is also massively increasing prices in certain secotrs due to it's size...and it's just getting started. So we have both QE + very aggressive fiscal policy in play. The FED / monetary policy gets stuck with most of the blame, but fiscal seems just as important, if not more (which is the way it's typically taught in academic econ). When the treasury ran out of money during the pandemic, the Fed was forced to support congresses bailout bills by printing money and buying debt from Treasury. They didn't really have a choice once Congress passed the various bills.
Some reads on the issue.
Posted by highroller on 12th of Jun 2023 at 03:02 pm
Some reads on the issue. Nobody trusts the gov't anymore, the bond market is 10 times greater in size than the stock market and that money will flow into hard assets.
https://www.armstrongeconomics.com/armstrongeconomics101/economics/the-coming-liquidity-crisis/
https://www.armstrongeconomics.com/product/the-liquidity-crisis/
armstrongeconomics.com
Armstrong Economics
QUESTION: Marty, You were named hedge fund manager of the year in 1998 for producing the highest return during the Long Term Capital Management collapse over the Russian bond crisis. At the WEC in Orlando, you said in 2019 that we were facing a liquidity crisis that would be similar to that event. Well, the
Thanks Steve for posting this......some
Posted by rmoore100 on 10th of Jun 2023 at 01:11 pm
Thanks Steve for posting this......some great information. Where would you suggest is the best place to obtain this data, more in real time, regarding liquidity, in order for us to get a better macro view of what's coming. And what charts do you feel are the most important. Thanks Again !!!!
rmoore100- regarding your question about
Posted by matt on 12th of Jun 2023 at 10:01 am
rmoore100- regarding your question about where to find information on the liquidity, first off you can track that data from the FRED website, I just created the graph, here you go. Best to bookmark this and check it weekly for updates
https://fred.stlouisfed.org/graph/?g=1659M
and this Twitter guy also discusses liquidity, https://twitter.com/NorthmanTrader/status/1667255526877548580/photo/1
fred.stlouisfed.org
Liabilities and Capital: Other Factors Draining Reserve Balances: Reserve Balances with Federal Reserve Banks: Week Average | FRED | St. Louis Fed
Graph and download economic data for Liabilities and Capital: Other Factors Draining Reserve Balances: Reserve Balances with Federal Reserve Banks: Week Average from 1984-01-04 to 2023-06-09 about balance, reserves, banks, depository institutions, USA, stock market, and indexes.
on that FRED graph, would
Posted by matt on 12th of Jun 2023 at 10:05 am
on that FRED graph, would be nice to be able to add some indicators to that Liability's and Capital data - such as some sort of moving average or ATR or something that signals a reversal when broken. You might be able to, I haven't had time to play around with it that much. I know you could download the data and input into Stockcharts, but I haven't had time to try that. Anyway best to save that URL of the chart I created for you guys
https://fred.stlouisfed.org/graph/?g=1659M
fred.stlouisfed.org
Liabilities and Capital: Other Factors Draining Reserve Balances: Reserve Balances with Federal Reserve Banks: Week Average | FRED | St. Louis Fed
Graph and download economic data for Liabilities and Capital: Other Factors Draining Reserve Balances: Reserve Balances with Federal Reserve Banks: Week Average from 1984-01-04 to 2023-06-09 about balance, reserves, banks, depository institutions, USA, stock market, and indexes.
Are you aware that the
Posted by steve on 10th of Jun 2023 at 11:00 am
Are you aware that the SPX over the past several months has had a positive correlation with yields? Yield has been the single best predictor of the SPX diretion for traders during this time. This is not a constant relationship.
All other factors widely portrayed
Posted by steve on 10th of Jun 2023 at 10:46 am
All other factors widely portrayed are simply measurements and guidepost of such flows. What matters is Liquidity Period!
Charting helps to guide us to where the money flows and departs (for example last year Energy and this year Mega Tech) but the overall market is dependent upon Liquidity and sectors/stocks/commodities/bonds are dependent upon where such funds are allocated (dynamic as it's constantly changing)