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Posted in Lee's Free Thinking, Liquidity Trader, Professional Edition

Liquidity Is Bullish Is All

Those who don’t know me well have sometimes accused me of being a permabear. Those of you who do know me via these reports know that I always strive to be just like Faux News, “fair and balanced.” I think this week’s report exemplifies that high ideal. It’s as bullish as I’ve ever been, and yes maybe I should be faded when I start “pounding the table” like this. But I’m only pounding on what the indicators are showing. There’s certainly no personal bias in this direction. My bias is only to follow the indicators, regardless of what mayhem or foolishness they may be pointing toward.

I don’t like this, but it is what it is. The world financial system is an over manipulated piece of excrement. But sometimes manipulation works; sometimes it has unintended consequences that benefit one party over another; and sometimes the US gets the roses while the rest of the world sinks into the sludge that most of the pundits and government manipulators are worried about. This is one of those times, and herein is its story.

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  1. Lee Adler

    This question came in from a subscriber- PB-

    In your last Fed report (“Liquidity is Bullish is All”) you indicate – my reading, correct me if I am wrong – that US markets are currently benefitting from increased liquidity (very factual), and increased deposit flows into the US banking system, apparently coming from Europe, have been the “lead bullish sled dog” in this context. Your note, again as I perceive it, suggests that US markets may be rallying more than (or at the expense of other) global markets.

    However, the recent performance of European stock markets seems to contradict the latter. European markets seem to be benefitting from increased liquidity as much as (or slightly more than) US markets. As an example, over the past month FTSE, DAX and CAC outperformed the S&P 500. Shouldn’t all this actually be framed as a global flow of such excess liquidity (now coming from Europe) into riskier, relatively cheaper assets as stocks? In other words, as Europe and US markets seem to have benefitted from excess liquidity associated with Fed’s QE1 and QE2 in 2009-2011, wouldn’t these markets be now benefitting from the excess liquidity associated with the recent ECB actions? If so, wouldn’t global markets be poised to climb as long as this last source of liquidity remains in place? And would it be reasonable to assume that while global liquidity is “driven” (in the lack of a better term…) by the ECB no QE3 shall be expected from the Fed?

  2. Lee Adler

    My response-

    Interesting and logical. I don’t pay enough attention to non-US markets. My impression had been that they had been much weaker than the S&P, so the observation you’ve made suggests that yes, they are disproportionately benefitting from these flows. Last year when the market was weak I speculated frequently that stocks (US stocks) might be seen as the new safe haven. But it would seem that that thinking is applicable across the world. I think it was Mark Faber who made a similar point recently and someone else referred to the big corporations having built fortress balance sheets. This thinking can be a rationale that lasts a while. The fallacy behind it is, of course, that these companies aren’t really holding cash, they are holding paper, and the question is whether they will be able to access 100% of it should the need ever arise. But for now, it’s a rationale that makes sense.

    The US is rallying not at the expense of European equities, but at the expense of cash flowing out of some European institutions into the US. To the degree that the panic in Europe has lessened since December 21 (the big LTRO), this will cost the US in relative terms. That may be what we are seeing here.

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