It’s Not The Economy, It’s The Liquidity, Stupid.

I’d be inclined to say US equities (if not necessarily risk assets more generally) will be under pressure in the new week, but I suppose the same “don’t bet against a liquidity-driven market” caveat still applies, especially went there’s ample scope for key investor cohorts to get pulled into the “melt-up”.

Domestic unrest is roiling America, and there are multiple direct channels through which the societal tumult could impact markets.

Most obviously, street protests, violent clashes with police and generalized chaos aren’t conducive to economic activity. Part of US equities’ trek higher from the March lows is predicated on optimism that the world’s largest economy can recover after being waylaid by virus lockdown protocol. It’s fair to say that the unrest (to the extent it continues) will impede progress along the road to reopening, while property damage could add insult to injury for businesses which just lifted the shutters after weeks in lockdown mode.

And that’s to say nothing of the possibility that the virus spreads among protesters who are, by definition, not observing social distancing, even if they are wearing masks.

We’ll get the May jobs report Friday and it won’t be pretty. Consensus has the unemployment rate surging to 20%, and economists see the US shedding another 8 million jobs on top of May’s historic 20.5 million loss.

The problem (and “problem” is a wholly inadequate adjective) is that even if the unemployment rate falls to, say, 10% by the election, that would still be on par with levels seen during the financial crisis.

I’m not an incorrigible pessimist, but I continue to believe that even if we were to get a miraculous “V-shaped” recovery, structural damage has already been done and likely won’t be reversed for decades.

You’re likely to see a scramble to on-shore (to mitigate supply chain risks exposed by the pandemic), which ostensibly could create new domestic jobs, but only if it’s not accompanied by permanently depressed aggregate demand and/or an offsetting automation push as companies accelerate plans to replace humans with robots which cannot get sick and, more importantly, cannot sue.

In any event, you could very plausibly argue that another apocalyptic jobs report will be dismissed by equities (which are looking ahead to hopefully better days), but any dampening of reopening optimism due to nationwide protests could contribute to investor angst, as could worsening US-China relations which the market has so far shrugged off.

And yet, even if it’s “the economy, stupid”, that matters for politicians, if there’s anything we probably should have learned post-2008, it’s that “it’s the liquidity, stupid”, that matters for markets.

On that score, the Fed’s balance sheet has ballooned by almost $3 trillion during the COVID panic, a liquidity impulse that dwarfs anything seen previously.

Bloomberg’s Sarah Ponczek quotes Tom Essaye, from “The Sevens Report”. “If past is prologue, the lesson is that we need to admit that this amount of liquidity means that asset inflation will likely be unleashed on the economy in coming years”, he said. “That’s something we need to consider even in a slow-growth environment”.

Yes, indeed.

And that harkens back to a crucial point I try to reiterate whenever the opportunity presents itself, which is quite often these days.

The following two lines are taken directly from “Against The Gods: ‘Historically A Losing Proposition’” and they’ll continue to resonate in a world defined by what some analysts are now unabashedly calling “administered markets”.

Bearish arguments which lean heavily on the idea that equities and credit have for years been artificially propped up by central bank largesse always suffered from a fatal flaw — namely, that the premise undermines the conclusion.

If you say asset prices have been artificially inflated by the benefactors with the printing presses, and you can’t point to any evidence to suggest those policies are likely to be abandoned, then the only way to explain a habitually bearish bent is by reference to masochism, insanity or some occupation which doesn’t require you to ever be correct.