Commentary
You have heard me say in the past that in the short term, I think that liquidity and sentiment are what drive stock prices.
The main controller of liquidity in the US is the central bank. They have the liquidity “bazooka”; they can lower rates and engage in QE. Because the markets have become financialized, it is essential to understand when the FED is loading up and ready to fire the liquidity bazooka.
Another way to think about the US economy is that it is a plane that can never land. As soon as you lower power on the plane’s engines (raise rates and tighten liquidity), the plane (economy descends). Restrict liquidity too much and too long, and the plane (economy) will eventually crash.
Conversely, as the plane descends and loses altitude, the pilot must increase the power of the engines (cut rates and increase liquidity) to allow the plane (economy) to ascend and not crash.
The problem is that the constant ascending and descending get progressively more erratic over time. After each cycle, this requires more power (debt and money printing) to keep the plane from crashing.
This is why I am trying to nowcast the US financial data. If economic data indicates a recession is likely, it behooves one to try and position oneself to take advantage of the FED cutting rates and increasing liquidity in the system. When rates are cut or QE is instituted, this can tremendously affect various asset markets.
Money supply and credit must accelerate to sustain economic progress in a credit and asset-price-driven economy.
Notice the emphasis by many investors on trying to forecast what the FED will do next. Years ago, investors focused on sales, earnings, profits, and cash flow. Because the FED has become so prominent in the market, investors must pay attention to when these central planners will fire their liquidity bazooka.
The problem is that when the central bank lowers rates and/or prints money, it is impossible to predict precisely where it will go. The way the system is currently set up, the liquidity mostly flows to the already wealthy and to financial institutions that buy financial assets and become even more wealthy. This is because these institutions and people are the closest to the newly created money.