What’s the difference between explaining something and explaining something away?

Not much, in my experience. Often (too often, depending on the context), explanations are tantamount to excuses.

That’s certainly the case when it comes to equity rallies and the people who miss them. Wall Street’s bears, when you find one, can always (always) explain why stocks rose, and almost invariably, the accompanying expositions are an effort to write off a bull market as somehow illegitimate.

I’m not suggesting JPMorgan’s Nikolaos Panigirtzoglou was engaged in such an effort in the latest installment of his once popular Flows & Liquidity series (generally speaking, Panigirtzoglou’s analysis is even-handed), but I will say that writing off a rally to liquidity provision is one of the oldest tricks in the book. It works precisely because there’s a lot of truth to it, and yet in the end, liquidity-based excuses usually come across as nebulous, unsatisfying and anyway an exercise in question-begging. Hold that latter thought.

Panigirtzoglou proxies liquidity by rolling up commercial bank deposits and money market fund balances, which together expanded by $2.12 trillion from May of 2023 (when the last major debt ceiling standoff was resolved) to end-2024, a near 10% increase.

That’s nothing to sneeze at. Indeed, that was “faster than nominal GDP,” Panigirtzoglou remarked, on the way to suggesting that all that money creation “has likely been a significant factor in propagating US equities.”

If you’re curious as to the mechanics, Panigirtzoglou walked through the progression and the math. “Cumulatively from May 2023 to end-2023, the US Treasury flooded the financial system with T-bills, inducing MMFs to reduce their reverse repos by $1.6 trillion,” he began, adding that,

This massive injection of liquidity more than offset the ~$600 billion liquidity contraction from the Fed’s QT, allowing the stock of deposits in the US banking system to expand rather than shrink over the same period. This expansion in US bank deposits took place despite continued deposit shift to US MMFs, not only helping the US banking system to avert a liquidity crisis post-SVB but also helping US money supply to increase by $1 trillion from May 2023 to end-2023. The $1.2 trillion increase in US money supply during 2024 was not solely driven by the $600 billion decline in the Fed’s reverse repo facility, especially if one takes into account that during 2024, QT caused around $700 billion of liquidity contraction. In other words, liquidity-boosting factors [like credit creation via bank lending and purchases of bonds by US commercial banks] worth $1.9 trillion were at play over the past year to offset the $700 billion of Fed QT.

Can it continue? In a word, “yes.” According to JPMorgan, anyway. Although the RRP facility’s all but drained, “US money creation is not dependent on only one or two factors [and will likely] continue to rise strongly this year, especially if the Fed ends QT,” Panigirtzoglou went on.

So, if you look up six or 12 months from now and equities are higher, you can probably “blame” liquidity if you need an excuse. Just don’t make the mistake of suggesting, tacitly or otherwise, that a liquidity-driven rally is a “fake” rally. Because what’s more “fundamental” than liquidity?