It’s time for your weekly liquidity warning.
Late last month, I walked back through a familiar thesis which said the rebound in equities from the October lows was attributable in part to an upturn in global liquidity. More recently, gains for stocks were written off by some bears to a false optic dynamic tied to Fed balance sheet expansion in the wake of SVB’s collapse. If you were so inclined, you could even suggest an abatement in the liquidity squeeze which accompanied last year’s policy tightening helped set the stage for 2023’s A.I.-fueled equity frenzy.
Now, though, liquidity will become a headwind due in large part to T-bill issuance following the debt ceiling deal, exacerbated by ECB QT and the resumption of student loan payments in the US.
How onerous will that headwind ultimately be? Well, that’s impossible to answer because much depends on the composition of the buyer base for the coming deluge of bills from Janet Yellen. But according to BofA’s Michael Hartnett, global liquidity is poised to “collapse” in fairly short order.
“Monetary policy remains the ‘big dog’ and it’s set to tighten in coming months [which is] the biggest reason we are not capitulating into risk despite the price action,” Hartnett said.
He elaborated. In 2020, global liquidity expanded nearly $9 trillion. In 2021, that figure was $4.3 trillion. In 2022, liquidity contracted by $1.1 trillion, but thanks to the BoJ’s efforts to defend the YCC cap (among other things) and measures aimed at ringfencing regional banking stress in the US, liquidity expanded $170 billion during the first four months of 2023, according to BofA.
But, liquidity subsequently contracted by $50 billion in May, and over the next three to four months, markets will contend with $100 billion of QT from the Fed, ECB, BoE, BoC, RBA and RBNZ per month, in addition to the above-mentioned $1 trillion tsunami of T-bills.
Ultimately, Hartnett said, the liquidity drain “could approach” $1.5 trillion between now and fall. (But remember: Shorting bubbles is perilous.)
Shorting bubbles IS perilous..Being impatient is arguing with reality- watchful waiting is the order of the day…we know where this will end up, but we don’t know what the path there looks like and we don’t know when the change in direction will come.
It seems to me that the Fed can influence the size of the liquidity drain, by holding the RRP rate above [below] bill yields which could make bill purchases more [less] likely to be funded from reserves.