I have a love-hate relationship with liquidity-based explanations for risk-asset behavior.

It’s self-evidently the case that central bank liquidity provision post-GFC contributed mightily to risk-asset performance. And it’s not a coincidence that the world tends to be a friendlier place when the dollar’s on the back foot (dollar weakness is liquidity-positive globally).

That said, it (too) often feels as though market participants and strategists lean lazily into the top-down liquidity narrative to explain rallies (or selloffs) so they don’t have to bother with dynamics they aren’t comfortable with or don’t understand (e.g., dynamics related to modern market structure and the feedback loop between bottom-up liquidity, volatility and systematic flows).

So, while I’m a sucker for a good top-down liquidity narrative, over the years I’ve come to believe the ebb and flow of… well, of flows, and the nexus between volatility and modern market structure is far superior when it comes to explaining the price action, certainly over near-term horizons, but even over one-, two- and three-month horizons as well.

With that in mind, Morgan Stanley’s Mike Wilson on Monday suggested recent risk-asset buoyancy was attributable first to Trump trades but secondarily to top-down liquidity. The updated chart below is familiar to anyone who follows Mike’s notes.

That’s his global liquidity monitor, and it’s as good as any other, I suppose.

As you can see, liquidity contracted 5% on a YoY basis in and around September / October of 2022. That, you’ll recall, was a rough stretch. The “dollar wrecking ball” dynamic was in full effect, the gilt crisis was raging in the UK and US equities were in the process of bottoming for the cycle.

Editorializing around the most recent upturn illustrated by the second red arrow in the bottom pane, Wilson wrote that, “In addition to more dovish monetary policy from the Fed and other central banks, we have seen a [$4 trillion] rise in global Money Supply (M2) in US Dollars, which equates to 18% growth on an annualized basis.”

“This surge in global money supply growth has been driven by an outright expansion in M1 in China and Japan, as well as a weaker dollar through the end of September,” he went on, adding that “the recent strength in the US dollar may slow the pace of this money supply growth in the near-term and is an important variable to monitor going forward.”