Hi Michael, thanks again for dumbing down complex issues for us! May I ask, does your model account for Non-depository Financial Inst debt/leverage/liquidity rate of change? Read somewhere that there was a growth of 1tn in last 15mths (ie since Q423) esp in structures such as leveraged ETFs, cud that have explained why US eq were so bullish in 2024 despite liquidity model showing only 1% growth? Thanks!
How does the Fed use RRP to influence liquidity? How is RRP part of Not QE, QE? Does the Fed intentionally cap RRP to increase liquidity in the system?
RRP was a facility introduced during COVID when the impact of fiscal spending on bank deposit growth far exceeded the supply of Treasury bills. RRP was effectively a 'bill' issued by the Fed and mainly purchased by money funds. We might get into the weeds debating whether these are or are not 'liquidity' if banks buy them, but they are treated as a withdrawal or absorption of money market liquidity. Hence, when they rise banks' reserves fall, and when they fall banks reserves rise. This is one B/M of 'liquidity'. QT has been narrowly defined by the Fed as Treasuries and Agencies run-off the B/S. Hence RRP changes are different.
Absolute love your work. Best in class for a non instituional investor like me. Question: Did you read the lastest post from Conks here on Substack? This one bullet point in his Summary section really surprised me and I'm hoping to get your take? "Meanwhile, in macro markets, the sharp rise in the U.S. dollar index is not a sign of waning liquidity but the result of markets pricing in the Trump trade and relative weakness in Europe. Conks’ monitors (below) suggest “business as usual” for dollar liquidity and, thus, risk assets — i.e. up and to the right."
A potential solution could involve the Fed implementing QE by purchasing long-term Treasuries to inject liquidity, stabilize markets, and facilitate debt refinancing. However, with the Fed currently focused on inflation concerns, it may take significant market turmoil or corrections to prompt a shift toward prioritizing liquidity support. Would you agree with this view?
Yes I agree. I wonder if there is more behind the Barr resignation, insofar that JayP may be even more 'political' than we thought? Nonetheless, they have painted themselves into a corner, since markets will surely jump at any thought of 'QE' and, pace BTC, QE surely needs to come soon?
OK, Michael, I thought the idea of the Fed intervening in the market to purchase bonds amid ongoing inflationary pressures would have a disastrous media impact on the dollar. The narrative is already deeply ingrained: QE = money printing = dump the dollar and leverage into gold.
But what if central bankers took a more sly approach, similar to Draghi’s move in 2012? Back then, Draghi famously declared, “The ECB will do whatever it takes,” precisely at the peak of the gold market. It was a masterstroke: just as he wrapped up money printing, he began withdrawing liquidity. The bold rhetoric masked the policy pivot, catching markets off guard.
Why wouldn’t the Fed do something similar now? They could announce intentions for QE in the coming months, reassuring markets and talking down yields—but then quietly execute QT instead, keeping bond yields capped.
I don't understand why there is suddenly so much expectations in markets.
They are in a difficult situation because the B/S will have to increase at some stage over next few months. The only practical way is to buy Treasuries. Many will immediately cry 'QE is back'. The problem is that as debt refinancing needs rise, they may be forced to buy a lot! I agree a 'little' crisis would give cover and avoid a loss of face
hi Michael, thank you very much for the in-depth analysis - am a big fan of your work.
doesn't this warrant a big us-china big deal with USD devaluation that can bring global growth? wouldn't this benefit US as well instead of US alone being 'relatively well off' versus RoW in economic recession?
Question is devaluation against what? Devaluing $ vs gold helps reduce debt burden. Against say Euro, Yen could allow others to ease more and help US trade, but could trigger more inflation. I figure debt is bigger problem so welcome everyone raising gold price
I don't quite understand the concept of devaluing against gold (I've heard this before) is it a form of govt setting the price of gold or govt issuing a 'gold coin' and central bank buying the gold coin at a (higher) fixed price? thank you in advance
Thank you for your continued deep-dive analysis, Michael. I’d like to share some of my thoughts, which might offer additional points for deeper consideration:
I. The FED/Treasury’s goal seems clear:
A) Capitalizing on the excess confidence in U.S. markets to withdraw as much liquidity as possible, ultimately bringing bond yields down—a coming non-QT QT?
B) Dropping interest rates and financing with bills to avoid the interest rate trap—the ongoing non-YC YC.
The key question is: between A) and B), which will take precedence in determining the path of liquidity?
II. A potential U.S.-China deal
I believe we’re awaiting a U.S.-China agreement that could spark the much-anticipated commodity bull market. However, I see the ideal timing for this deal as being closer to the next U.S. election—likely no earlier than 2027. This timing would allow the real economy to strengthen gradually ahead of late 2028, avoiding overheating or inflationary pressures during 2028.
That said, we might see a sham easing before that, designed to calm bearish sentiment during the recession. There’s the possibility of another Chinese “Bazooka” fake intervention to manage the economic narrative.
Gold prices in the interim:
In the meantime, gold prices could actually decline. Perhaps we might see levels around $2,400—or even as low as $2,150?
Thanks Makes sense. It would likely force the USD higher. Help to crush inflation but the wrecking ball would be a threat to World GDP. I do believe Trump 2.0 wants a stronger USD
But again, as I noticed in a recent comment, this scenario pretty much looks like 2021 wjen they actually shrank the B/S. The only difference is the liquidity level now is much lower than it was end 2020
The drain of the combined TGA+RRP continues and is still making lower highs and lower lows since mid-2022. End of 2024 there was still over 1T of potential liquidity in the 2 facilities. The TGA was flat since October and the dollar surged higher in response to this "tightening", but it can soften from here in response to the drain. So in my opinion the markets go up from here, maybe for 3-6 months. I was wrong to be bearish in December. For how long exactly is unknown but a liquidity boost since the summer of 2024 propped the markets till year end. This can repeat itself in Q1. There are plenty of things to worry about but as the RRP is basically drained, QT has to come from bank reserves and obviously the Fed will not continue this extensively. So the Fed will end QT in 2025 and along with further rates cuts which is also bullish. However, if the TGA is drained and starts building back up this, along with the dollar halting its correction and starting to rise again, potentially breaking 2022 levels in the DXY, this could very well signal some sort of top. Because it could be the last lower low (bottom) in the combined TGA+RRP balance, breaking the pattern since 2022. On the other hand, as the USA refinances 1/3 of its debt in one year, it is not unreasonable to think that the Fed will also participate by buying bonds (restart of QE). That is also bullish for markets. So even a correction might not be as steep as the one in 2022 because the inflation problem is not as grave now as it was then, where the Fed had to remove liquidity to reduce inflation, resulting in a mini-recession of 2 quarters. As we all know the dollar is king, there are factors that are bullish for the dollar like rising interest rates but on the other hand, let's not take for granted that it will rise forever. There have been also times like in the 1980's where the markets were rising along with the dollar and also the late 1990's. There have been also times where the stock market boomed with interest rates higher than present levels, like before 2000 and before 2008. Also interest rates can find a ceiling at some point and soften as they have done multiple times since 2022. Yes the dollar can go higher from here and send everything lower, but the other side of the coin is, if the markets were going up at rapid pace even when the dollar was rising, what will they do if the dollar stops rising and corrects? Higher. At least for some time.
Hi Michael, thanks for providing such great content. Question for you - you mentioned that you project 5% growth in Fed / broad monetary base liquidity, assuming a few conditions. By comparison, what was the growth in those liquidity elements in 2024? And do you anticipate that growth won't be enough to satisfy the upcoming refinancing demands if it were to materialize as projected?
If you look in Part 2 you will see the chart if Hidden Stimulus IE Nor-QE, QE and Nit-YCC, YCC. This is the benchmark. Assuming US domestic liquidity is around $40 tr then the peak boost was US$6 tr or 15%. Also liquidity leads, so the 1% figure cited comprises a rise then fall.
Hi Michael, thanks again for dumbing down complex issues for us! May I ask, does your model account for Non-depository Financial Inst debt/leverage/liquidity rate of change? Read somewhere that there was a growth of 1tn in last 15mths (ie since Q423) esp in structures such as leveraged ETFs, cud that have explained why US eq were so bullish in 2024 despite liquidity model showing only 1% growth? Thanks!
Appreciate the article:
How does the Fed use RRP to influence liquidity? How is RRP part of Not QE, QE? Does the Fed intentionally cap RRP to increase liquidity in the system?
RRP was a facility introduced during COVID when the impact of fiscal spending on bank deposit growth far exceeded the supply of Treasury bills. RRP was effectively a 'bill' issued by the Fed and mainly purchased by money funds. We might get into the weeds debating whether these are or are not 'liquidity' if banks buy them, but they are treated as a withdrawal or absorption of money market liquidity. Hence, when they rise banks' reserves fall, and when they fall banks reserves rise. This is one B/M of 'liquidity'. QT has been narrowly defined by the Fed as Treasuries and Agencies run-off the B/S. Hence RRP changes are different.
Absolute love your work. Best in class for a non instituional investor like me. Question: Did you read the lastest post from Conks here on Substack? This one bullet point in his Summary section really surprised me and I'm hoping to get your take? "Meanwhile, in macro markets, the sharp rise in the U.S. dollar index is not a sign of waning liquidity but the result of markets pricing in the Trump trade and relative weakness in Europe. Conks’ monitors (below) suggest “business as usual” for dollar liquidity and, thus, risk assets — i.e. up and to the right."
A potential solution could involve the Fed implementing QE by purchasing long-term Treasuries to inject liquidity, stabilize markets, and facilitate debt refinancing. However, with the Fed currently focused on inflation concerns, it may take significant market turmoil or corrections to prompt a shift toward prioritizing liquidity support. Would you agree with this view?
Yes I agree. I wonder if there is more behind the Barr resignation, insofar that JayP may be even more 'political' than we thought? Nonetheless, they have painted themselves into a corner, since markets will surely jump at any thought of 'QE' and, pace BTC, QE surely needs to come soon?
When in doubt, I would pay attention to what the planners say and assume the opposite of their statements to be true.
OK, Michael, I thought the idea of the Fed intervening in the market to purchase bonds amid ongoing inflationary pressures would have a disastrous media impact on the dollar. The narrative is already deeply ingrained: QE = money printing = dump the dollar and leverage into gold.
But what if central bankers took a more sly approach, similar to Draghi’s move in 2012? Back then, Draghi famously declared, “The ECB will do whatever it takes,” precisely at the peak of the gold market. It was a masterstroke: just as he wrapped up money printing, he began withdrawing liquidity. The bold rhetoric masked the policy pivot, catching markets off guard.
Why wouldn’t the Fed do something similar now? They could announce intentions for QE in the coming months, reassuring markets and talking down yields—but then quietly execute QT instead, keeping bond yields capped.
I don't understand why there is suddenly so much expectations in markets.
They are in a difficult situation because the B/S will have to increase at some stage over next few months. The only practical way is to buy Treasuries. Many will immediately cry 'QE is back'. The problem is that as debt refinancing needs rise, they may be forced to buy a lot! I agree a 'little' crisis would give cover and avoid a loss of face
Michael great analysis
I view the USA economy as enormously inefficient
Also there are lots of companies with enormous valuations that don’t contribute to what I call the “real”
For example Tesla. I used to work in auto industry and it was considered basically a commodity field unless were Porsche or some such
In any case we have cars without Tesla and BYD can do better at one third the price
In healthcare and dental go to an office and will be three or even four people on front desk running insurance forms doing paperwork
Farming and mining are real produce carrots and zinc etc
Energy sector was real but no corrupted by the green
One measure the Buffett Rule uses ratio of market capitalization to real GDP
It’s way above any historical level right now
Are you aware of any measures of the real economy?
For example ratio of real economy (carrots etc) to GDP
Apart from P/E and P/ GDP not really. But are asset prices really real phenomenon or financial?
Yes to me they are a collective fiction
Not sure the proper term
Ultimately it’s all sentiment and liquidity
A sentiment tracker would be useful for trading then? But not sure how much trading is now individuals versus giant firms like Blackrock
I tried value investing many years ago but it was useless
Michael, can you please explain how the USA and China government can devalue their currency against gold.
hi Michael, thank you very much for the in-depth analysis - am a big fan of your work.
doesn't this warrant a big us-china big deal with USD devaluation that can bring global growth? wouldn't this benefit US as well instead of US alone being 'relatively well off' versus RoW in economic recession?
Question is devaluation against what? Devaluing $ vs gold helps reduce debt burden. Against say Euro, Yen could allow others to ease more and help US trade, but could trigger more inflation. I figure debt is bigger problem so welcome everyone raising gold price
I don't quite understand the concept of devaluing against gold (I've heard this before) is it a form of govt setting the price of gold or govt issuing a 'gold coin' and central bank buying the gold coin at a (higher) fixed price? thank you in advance
Thank you for your continued deep-dive analysis, Michael. I’d like to share some of my thoughts, which might offer additional points for deeper consideration:
I. The FED/Treasury’s goal seems clear:
A) Capitalizing on the excess confidence in U.S. markets to withdraw as much liquidity as possible, ultimately bringing bond yields down—a coming non-QT QT?
B) Dropping interest rates and financing with bills to avoid the interest rate trap—the ongoing non-YC YC.
The key question is: between A) and B), which will take precedence in determining the path of liquidity?
II. A potential U.S.-China deal
I believe we’re awaiting a U.S.-China agreement that could spark the much-anticipated commodity bull market. However, I see the ideal timing for this deal as being closer to the next U.S. election—likely no earlier than 2027. This timing would allow the real economy to strengthen gradually ahead of late 2028, avoiding overheating or inflationary pressures during 2028.
That said, we might see a sham easing before that, designed to calm bearish sentiment during the recession. There’s the possibility of another Chinese “Bazooka” fake intervention to manage the economic narrative.
Gold prices in the interim:
In the meantime, gold prices could actually decline. Perhaps we might see levels around $2,400—or even as low as $2,150?
Thanks Makes sense. It would likely force the USD higher. Help to crush inflation but the wrecking ball would be a threat to World GDP. I do believe Trump 2.0 wants a stronger USD
Edit: they withdrew liquidity in 2021 by using the RRP and TGA, not actually the balance sheet
But again, as I noticed in a recent comment, this scenario pretty much looks like 2021 wjen they actually shrank the B/S. The only difference is the liquidity level now is much lower than it was end 2020
...relatively to debt
Long story short, the exact opposite of what they all claim, as always!
The drain of the combined TGA+RRP continues and is still making lower highs and lower lows since mid-2022. End of 2024 there was still over 1T of potential liquidity in the 2 facilities. The TGA was flat since October and the dollar surged higher in response to this "tightening", but it can soften from here in response to the drain. So in my opinion the markets go up from here, maybe for 3-6 months. I was wrong to be bearish in December. For how long exactly is unknown but a liquidity boost since the summer of 2024 propped the markets till year end. This can repeat itself in Q1. There are plenty of things to worry about but as the RRP is basically drained, QT has to come from bank reserves and obviously the Fed will not continue this extensively. So the Fed will end QT in 2025 and along with further rates cuts which is also bullish. However, if the TGA is drained and starts building back up this, along with the dollar halting its correction and starting to rise again, potentially breaking 2022 levels in the DXY, this could very well signal some sort of top. Because it could be the last lower low (bottom) in the combined TGA+RRP balance, breaking the pattern since 2022. On the other hand, as the USA refinances 1/3 of its debt in one year, it is not unreasonable to think that the Fed will also participate by buying bonds (restart of QE). That is also bullish for markets. So even a correction might not be as steep as the one in 2022 because the inflation problem is not as grave now as it was then, where the Fed had to remove liquidity to reduce inflation, resulting in a mini-recession of 2 quarters. As we all know the dollar is king, there are factors that are bullish for the dollar like rising interest rates but on the other hand, let's not take for granted that it will rise forever. There have been also times like in the 1980's where the markets were rising along with the dollar and also the late 1990's. There have been also times where the stock market boomed with interest rates higher than present levels, like before 2000 and before 2008. Also interest rates can find a ceiling at some point and soften as they have done multiple times since 2022. Yes the dollar can go higher from here and send everything lower, but the other side of the coin is, if the markets were going up at rapid pace even when the dollar was rising, what will they do if the dollar stops rising and corrects? Higher. At least for some time.
I got https://www.substack.com/@capitalwarss impersonation
Thank you Noted
Same. Reported
Thank you
Hi Michael, thanks for providing such great content. Question for you - you mentioned that you project 5% growth in Fed / broad monetary base liquidity, assuming a few conditions. By comparison, what was the growth in those liquidity elements in 2024? And do you anticipate that growth won't be enough to satisfy the upcoming refinancing demands if it were to materialize as projected?
Good question. Wasn't the growth in global liquidity <1% by your measures in 2024? And yes asset prices did very well...
If you look in Part 2 you will see the chart if Hidden Stimulus IE Nor-QE, QE and Nit-YCC, YCC. This is the benchmark. Assuming US domestic liquidity is around $40 tr then the peak boost was US$6 tr or 15%. Also liquidity leads, so the 1% figure cited comprises a rise then fall.