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It Was The Liquidity! It Always Is
It's the liquidity! It always is.
Last year was remarkable for a number of reasons, not least of which was the "unusual combination of higher rates and equity valuations in the context of weak earnings growth," as Morgan Stanley's Mike Wilson put it this week.
You'll recall that the US did experience a shallow profit recession. Suffice to say stocks, to the extent they priced it in at all, did so preemptively, in 2022, when rising rates and a dramatically bad year for bonds undercut equities.
What is your view of the importance of US M2’s unprecedented stagnation?
Interesting question! +1
From the lower panel of the chart, it seems like from Mar 2023 to now about $1TR of liquidity was added.
How does that compare with the $6TR of cash in MMF? Suppose that $2TR of that is money that normally lives in bank deposit accounts, and investors are carrying cash 2X normal levels. Thus suppose up to $2TR of cash in MMF are available to move back into longer-duration investments.
Does that imply there is significant additional liquidity potentially available? Maybe not using the strict definition of liquidity, but in the sense that there is cash that can flow into markets without coming from bank reserves.
I was, by the way, surprised to see that bank deposits are only down about -$0.3TR since Mar 2023 https://fred.stlouisfed.org/graph/fredgraph.png?g=1dU1o