Market Analysis

Peak Liquidity

The amount of liquidity pumped into the markets and the economy in the last year dwarfs anything we’ve seen in history. Markets certainly have reacted to it with exuberance and the bounce currently seen in the economy is highly encouraging. Enjoy it while it lasts for markets and the economy will soon have to contend with a new concept and that is: Relative tightening. No, not in the form of Fed tapering or rate increases. Those won’t happen no matter what the data says, central banks have already made that clear. To even discuss it would cause havoc in financial markets.

No, relative tightening is going to occur no matter what happens as the amount of liquidity having been injected won’t be repeated. The fiscal and political appetites won’t permit it. And while we may still see an infrastructure bill in some form this year everything that happens will be incrementally less.

Recognize that the amount money pumped into markets is simply unfathomable:

In the US alone 55% of GDP, $12.3 trillion in just 13 months. There is no precedence for this. None. And consider the context: By the end of this year US debt will stand at $30 trillion up from $10 trillion in 2008. 66% of the US’s entire historical debt load will have been added in just 13 years. $20 trillion or 90% of GDP of debt expansion in just 13 years.
Keep dreaming it’s all consequence free.

To full grasp the enormity of the cumulative size of the most recent intervention amounts: Did you enjoy your $1,400 stimulus check? Yea? What happened to the other $36,100? You didn’t get those? No? Cause for $12.3 trillion the total actually comes to $37,500 for every man, woman and child in the US (population 328M).

That’s how much was just injected into the economy and financial markets over the past 13 months.

You know it takes real effort to make rich really rich:

Another way of looking  at this chart above: Since just before the financial crisis the top 1% have added $20 trillion to their assets while the bottom 50% have added a mere $1.5 trillion between them.

With an asset appreciation of $21.5T between the 2 groups the top 1% took 93% of the gain. This is the result of a monetary system that is entirely focused on managing the economy with asset prices, the very assets that are owned predominately but the top 1%.

It’s been my contention that they’ve totally overdone it on the intervention front and as a result we’re staring at the largest asset bubble ever.

Yes the economy got hit, and yes intervention was needed in some form, but imagine the world has previously gone through shocks, even pandemics, and has managed to recover without all such intervention methods:

But these are different times where policy makers have apparently zero confidence in the ability of an economy to heal itself without massive interventions, after all constant intervention has been the name of the game since 2009.

Now one could argue this period of peak liquidity is going to make way toward a healthy transition as the economy will recover with strong growth offsetting the relative less stimulus coming in and that process would then somehow justify the historic 200% market cap to GDP we are currently seeing. Maybe. But I submit that nobody knows what the organic economy looks like. But I can tell you it’s a lot lower as it is now. Take the stimulus checks away and spending will drop like a brick.

Same goes for all these fabulous earnings reports we will now see. Next year’s earnings growth will collapse on a relative basis. Perhaps not on an absolute basis but these year over year comparisons will start sucking wind and then this market which has lived on multiple expansion for 3 years straight will have to contend with reality. Question is when it will start thinking about it all.

In addition the notion that creating $12.3 trillion out of thin air is consequence free is a complete fantasy. And while the theoretical consequences of all this debt creation is just that for the moment, theoretical, the real life consequences in prices accelerating vertically is already all around us.

Indeed we can stare at lumber in awe as an example:

But it’s not only lumber is it?

We live in the age of universal vertical price acceleration where even an intended joke can reach a $50B market cap. Yes I’m talking Dogecoin.

Who knew one could ever craft a tweet that puts these asset classes together yet everyone gets the joke:

This is the vertical casino you get when you flood a system with too much excessive liquidity.

The most vertical pile in into margin debt ever:

Courtesy the loosest financial conditions ever:

I maintain the Fed is playing with fire and in their arrogance they are way too confident with their talk of “tools” to be able to contain inflation.

This entire market is so vertically bloated with excess across all asset classes and filled with speculative frenzy I see it as incredibly dangerous and this relentless drift higher in recent weeks and artificially produced calm could make way to something very sinister at some point. Nobody will ring a bell at a top and I certainly will not aim to make such a folly attempt, but I keep looking at market structures and charts and something is brewing:

This was posted last week as markets made new all time highs.

Timing unknown. Indeed this structure could chop for months to come. But like its predecessors it looks to lead toward a major volatility event to come. And by major I mean major drop your jaw volatility.

Notable here is that this week’s weakness in markets saw the structure firming with the bounce right off the trend line:

I’m not saying the chart suggests volatility is ready to blast off into high gear yet, it may take months, but it’s clearly building and as such it has room to move higher and continue to build out the pattern which also does not preclude new lows in $VIX yet to come this year either. These structures take time to build as we’ve seen in the prior years.

But what this chart tells me is that the loosest financial conditions ever won’t remain so, and that markets soaked with peak liquidity will have to contend with relative tightening at a point where expectations, valuations, margin debt and optimism have never been higher leaving room for major reversion risk.

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Categories: Market Analysis, Opinion

29 replies »

  1. It’s all coming to climax soon Sven. The markets everywhere will implode. Paper wealth will evaporate. The Covid jabs, since it’s not a true vaccine, will be disabling and killing hundreds of millions of people later this year. Just look at India right now. Ivermectin in short supply and the jabs taking over. Now India is exploding with Covid-19 deaths. Draw your own conclusions here. The world today is a broken toxic evil mess.

  2. I’ve long proposed, as many now already know, that devaluation driven markets only know 2 states; Panic & Euphoria. Rapid currency expansion w/o any fundamentals creates the fragile environments that lead to panics. And the continuation of that currency expansion leads to the next euphoria.

    But all of the major currencies have been eerily subdued amid this. It now seems inevitable that a Dollar crisis is near. Given the expansion rate, wouldn’t it seem highly probably that while such a crisis may not be the cause of the next panic, it will almost certainly be at epicenter of the following one?

    And, if so, here’s my unconventional solution I believe the Fed will employ: Quarter point rate hikes while ‘at the same time’ QE and direct market index monetization. Laugh if you will but tell me how this doesn’t maintain a floor under the Dollar while continuing to send markets to new all-time-highs? It’s not a stretch to envision that a rapidly growing Fed balance sheet can become as trivial to investors as the trade deficit. The distortions this will create will make today’s market dysfunction look sane by comparison but it won’t matter because it is (and always was) only about protecting the rich and systemic enterprises.

  3. Given rising inflation, stagnant wages, no job opportunities and zero chance at ever owning a home, how could Dogecoin possibly ‘not’ have been the giant flashing neon sign for a young generation of Central Bank refugees to throw a spare $100 into as a last ditch Hail Mary?

    At $0.05 I loaded up but, unlike every other pump and dump coin, consider this…that TINA has finally arrived in the crypto space. And it won’t come in the form of owning 0.0434 ETH or 0.0018 BTC. No. Generation Bubble knows that percent gains always trump price and store of value. This is why $1 is the opening bid for Doge. Anyone unfortunate enough to sell there is likely to suffer from a severe bout of FOMO for which the only cure will be to panic back in above $100.

    Imagine having laughed at and ridiculed Bitcoin for years only to feel morally obligated to repeat those same bubble denouncments all over again for Dogecoin.

  4. I’m sorry, but this makes too much sense to be taken seriously….I’d rather listen to JPow who comforts me with pronouncements that, ‘there isn’t a strong link between (low) interest rates and asset price inflation’, ‘the Fed absolutely hasn’t contributed to wealth inequality’, or now, ‘low inflation hurts American families’…..

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  7. Stock buybacks are also driving this market higher. For decades stock buybacks were illegal because they were considered to be a form of stock market manipulation. They were legalized in 1982 by the SEC and since then have become a tool for companies and management to boost share prices.
    This is where I remind you it is major investors that sit on the board or hold executive positions and the same CEOs and other top managers who have received much of their compensation over the years in stock options. Yes, these are often the shareholders in the company that have reaped the largest benefits of QE over the years and added to inequality. More on this subject in the article below.


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