Plenty of liquidity in the market + more liquidity to come?

5월 7일

We still have distortions from the monetary liquidity introduced during the pandemic.

The bottom indicator is the 12-month rate of change. We can see an extreme expansion in M2 and subsequent contraction.

On the other hand, we can see that the M2 line still shows a big stock of liquidity compared to the standard deviations. Each standard deviation on the chart represents 2 trillion dollars. This shows that liquidity is abundant in the market, as the M2 is currently 2 to 3 standard deviations from its 10-year average.

In other words, the M2 standard deviations show around $5 trillion in excess liquidity compared to the 10-year average, indicating that the money supply remains significantly elevated despite the recent contraction in the 12-month rate of change.

This excess liquidity in the system may continue to impact asset prices and inflation and fuel a bull market.

Finally, considering the fragility created by high interest rates in the banking industry, the FED might be forced to ease monetary policy and lower interest rates further to stabilize the financial system.

This is another reason to be bullish or... in case the FED doesn't ease the monetary policy, to be bearish!