It's All A Liquidity Trade
It's All A Liquidity Trade
Quick Market Thoughts and Portfolio Update
Thanks to
for this chart.The price of equities depends on a few factors. One of the major ones is global liquidity. The Capital Wars is a great and unique source of liquidity related info, providing weekly updates on an aggregated “global liquidity” factor that he tracks.
Looking at the chart you can see how asset prices have outpaced liquidity growth recently. You can also eyeball how closely correlated these to pieces of data are.
I have been writing all year about how I am expecting liquidity to go up. I continue to hold that view, and you can see a small uptick recently. I view that as likely to be part of a continued trend.
At the same time US indexes have had a very notable correction this week.
In some ways I’ve viewed this correction as overdue. Opinions differ as to what caused it, but I think we can broad strokes it as follows:
Big momentum shift from Large Cap to Small Cap kicked off, probably based on interest rate expectations. We should really recognize this as a momentum shift. All year long Large Cap has crushed, and suddenly it didn’t. People were caught offsides short Small Cap and Long Large Cap, and that caused frantic covering, a spike in the associated volatility, leading to a VAR shock.
Large Cap has run ahead of itself.
These factors caused a reckoning with the reality that Mag 7 won’t quietly go up everyday forever, and a reattachment to reality.
I think the “reattachment to reality” is largely behind us now. Reality could continue to get worse, in which case we may continue to sell of and anchor to lower and lower prices. Barring that, I think we will stabilize here.
Just using that chart from Capital Wars again we can see how prices have come back in line with what liquidity growth would suggest.
Crypto
Meanwhile crypto is having a very constructive breakout which has prevented this week from being too painful for us.
Lots of very promising news has been coming out for Crypto.
Trump has declared that he wants Crypto to be “made in the USA.”
He’s also discussed making Jamie Dimon his Treasury Secretary, adding that Jamie has “changed his tune” on crypto.
There’s even talk of a “strategic reserve” of Bitcoin being purchase by the US Govt. This last one is about as unlikely as it gets, but it sounds good.
In my view the US dollar is destined to weaken, it’s only a matter of time. I view Bitcoin and crypto generally as a good play on a weak dollar, and also view cryptocurrencies as here to stay for their utility as currency/store of value/etc.
I remain fairly bullish, even in the relatively short term for Bitcoin because these moves have been driving predominantly by spot buying and not leverage.
Funding rates are still low across the board, so we are unlikely to get a massive capitulation event until that changes.
Weighing Missed Opportunities
This has been a fairly good year, but still I want to take a second to think about what we could have done better so far.
In some ways, this correction off the top was obvious. But in other ways, it wasn’t. Predicting the timing of it would have been incredibly tough, especially because it was sparked in the direct aftermath of the coolest CPI print in (literal) years.
Still, buying puts with the VIX in the 12 handle couldn’t have been too bad.
We remain vigilant. A cut at the September meeting is virtually a lock now with the market pricing a 96% chance of a cut and the fed doing nothing to dissuade them.
In all, I think we’ve done well in this publication not to over trade, not to let them take our coins away with leverage, and to continue to think critically in trying times.
Stay Long and Carry On.
Please also always remember... none of this is financial advice. I’m not a professional. I quite literally don’t know what I’m doing. I’m just a guy, with a keyboard, who scored high enough on some standardized tests to think I can beat the market.