{"id":38807,"date":"2023-07-21T16:56:11","date_gmt":"2023-07-21T20:56:11","guid":{"rendered":"https:\/\/ifintechworld.com\/markets\/liquidity-is-b-s-why-stock-market-moves-have-less-to-do-with-central-bank-balance-sheets-than-investors-think\/"},"modified":"2023-07-21T16:56:12","modified_gmt":"2023-07-21T20:56:12","slug":"liquidity-is-b-s-why-stock-market-moves-have-less-to-do-with-central-bank-balance-sheets-than-investors-think","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=38807","title":{"rendered":"\u2018Liquidity is B.S.!\u2019 Why stock-market moves have less to do with central-bank balance sheets than investors think."},"content":{"rendered":"
\n

It\u2019s been popular to link swings in stocks and other asset prices to changes in the balance sheets of the Federal Reserve and other major central banks, but the data doesn\u2019t back up that idea, a market economist argued in a Thursday note.<\/p>\n

Of late, the argument has centered on this year\u2019s first-half stock-market rally that has continued into July, noted Dario Perkins, managing director for global macro at TS Lombard. <\/p>\n

\n

The thesis holds that despite the Federal Reserve\u2019s monetary tightening efforts, the injection of money into the financial system in March in response to regional banking woes and the rundown of the Treasury Department\u2019s general account amid the debt-ceiling fight in Congress provided fuel for stock-market gains. <\/p>\n

Perkins said investors have been \u201cobsessed\u201d by charts, similar to the one below, showing a supposed relationship between the Nasdaq Composite
\n COMP,
\n -0.22%<\/bg-quote>
\n and Fed provided liquidity, as measured by the central bank\u2019s balance sheet minus its reverse repo program and the Treasury General Account.<\/p>\n

<\/p>\n
<\/p>\n<\/figure><\/div>\n

But those types of charts are misleading, Perkins said, because you can only assess correlations by looking at changes in variables, not their levels \u2014 especially when looking at two series that are both rising.<\/p>\n

Now that central bank liquidity is set to shrink again, some pundits and analysts predict gloom. So-called quantitative tightening, in which central banks shrink balance sheets swollen by bond buying during so-called quantitative easing periods will no longer be offset by the rundown of the Treasury General Account. <\/p>\n

The European Central Bank is running down its balance sheet at a record pace and the Bank of Japan might eventually tweak its program of yield-curve control, ostensibly reducing the bid for global financial assets, Perkins said.<\/p>\n

But a closer look at correlations between QE and asset prices doesn\u2019t back that up, he argued.<\/p>\n

\u201cTo start, there is no stable relationship between asset prices and central banks\u2019 balance sheets (even in the QE era),\u201d Perkins said. The chart below takes another look at the relationship between the Nasdaq and the Fed\u2019s QE program:<\/p>\n

<\/p>\n
<\/p>\n<\/figure><\/div>\n

On a global scale, the chart below tracks the MSCI World Index
\n 990100,
\n -0.60%<\/bg-quote>
\n and combined Fed, ECB and BoJ QE. It shows central bank liquidity explains only a fraction of asset-price swings, Perkins noted.<\/p>\n

<\/p>\n
<\/p>\n<\/figure><\/div>\n

\u201cThe weak correlation between QE and asset prices is not surprising.\u00a0Central banks are responsible for a tiny part of true liquidity in financial markets. True liquidity is about access to funding and \u2018balance sheet,\u2019\u201d he wrote. \u201cLiquidity is B.S.!\u201d<\/p>\n

The Nasdaq, fueled by a frenzy over artificial intelligence software, has rallied around 35% so far in 2023, while the S&P 500
\n SPX,
\n +0.03%<\/bg-quote>
\n has gained around 19%, and the Dow Jones Industrial Average
\n DJIA,
\n +0.01%<\/bg-quote>
\n has advanced 6.6%.<\/p>\n

What\u2019s being ignored by the focus on central banks, Perkins said, is the amount of leverage and collateralized borrowing that takes place in the modern financial system, especially the shadow banking sector. That means liquidity is now flexible and \u201celastic\u201d to the needs of the economy. \u201cThere is no fixed amount of \u2018loanable funds,\u2019\u201d he said.<\/p>\n

To the extent liquidity is meaningful, it must be about more than whether central banks are expanding or shrinking their balance sheets, Perkins said. \u201cTrue liquidity is about access to funding.\u201d<\/p>\n

So what does that mean for the market? Further stock market gains will require that access, which could come easier if artificial-intelligence technology lives up to its hype. Meanwhile, tighter monetary policy doesn\u2019t rule out a further rise for risk assets, he said, pointing to the run-up to the bursting of the dot-com bubble in 2001 as a \u201ccautionary tale.\u201d<\/p>\n

\u201cThe Dotcom meltup in U.S. tech stocks started with a global growth scare in 1998 and a soft\/no landing in the US. Investors became even more convinced they were seeing a new paradigm of the New Economy. No more boom and bust! Tech productivity boom!\u201d Perkins said. \u201cCould we see something similar?\u201d<\/p>\n<\/p><\/div>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

It\u2019s been popular to link swings in stocks and other asset prices to changes in the balance sheets of the Federal Reserve and other major central banks, but the data doesn\u2019t back up that idea, a market economist argued in a Thursday note. Of late, the argument has centered on this year\u2019s first-half stock-market rally […]<\/p>\n","protected":false},"author":1,"featured_media":34500,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"gallery","meta":{"footnotes":""},"categories":[241],"tags":[83],"class_list":["post-38807","post","type-post","status-publish","format-gallery","has-post-thumbnail","hentry","category-markets","tag-featured","post_format-post-format-gallery"],"yoast_head":"\n\u2018Liquidity is B.S.!\u2019 Why stock-market moves have less to do with central-bank balance sheets than investors think. | iFintechWorld<\/title>\n<meta name=\"description\" content=\"It\u2019s been popular to link swings in stocks and other asset prices to changes in the balance sheets of the Federal Reserve and other major central banks,\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/ifintechworld.com\/?p=38807\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"\u2018Liquidity is B.S.!\u2019 Why stock-market moves have less to do with central-bank balance sheets than investors think. | iFintechWorld\" \/>\n<meta property=\"og:description\" content=\"It\u2019s been popular to link swings in stocks and other asset prices to changes in the balance sheets of the Federal Reserve and other major central banks,\" \/>\n<meta property=\"og:url\" content=\"https:\/\/ifintechworld.com\/?p=38807\" \/>\n<meta property=\"og:site_name\" content=\"iFintechWorld\" \/>\n<meta property=\"article:published_time\" content=\"2023-07-21T20:56:11+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2023-07-21T20:56:12+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/ifintechworld.com\/wp-content\/uploads\/2023\/07\/1689151274_social.jpeg\" \/>\n\t<meta property=\"og:image:width\" content=\"1280\" \/>\n\t<meta property=\"og:image:height\" content=\"640\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta name=\"author\" content=\"News Room\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"News Room\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"3 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"https:\/\/ifintechworld.com\/?p=38807#article\",\"isPartOf\":{\"@id\":\"https:\/\/ifintechworld.com\/?p=38807\"},\"author\":{\"name\":\"News Room\",\"@id\":\"https:\/\/ifintechworld.com\/#\/schema\/person\/6224724fd4116361255b179dc5c70b61\"},\"headline\":\"\u2018Liquidity is B.S.!\u2019 Why stock-market moves have less to do with central-bank balance sheets than investors think.\",\"datePublished\":\"2023-07-21T20:56:11+00:00\",\"dateModified\":\"2023-07-21T20:56:12+00:00\",\"mainEntityOfPage\":{\"@id\":\"https:\/\/ifintechworld.com\/?p=38807\"},\"wordCount\":679,\"commentCount\":0,\"publisher\":{\"@id\":\"https:\/\/ifintechworld.com\/#organization\"},\"keywords\":[\"Featured\"],\"articleSection\":[\"Markets\"],\"inLanguage\":\"en-US\",\"potentialAction\":[{\"@type\":\"CommentAction\",\"name\":\"Comment\",\"target\":[\"https:\/\/ifintechworld.com\/?p=38807#respond\"]}]},{\"@type\":\"WebPage\",\"@id\":\"https:\/\/ifintechworld.com\/?p=38807\",\"url\":\"https:\/\/ifintechworld.com\/?p=38807\",\"name\":\"\u2018Liquidity is B.S.!\u2019 Why stock-market moves have less to do with central-bank balance sheets than investors think. | iFintechWorld\",\"isPartOf\":{\"@id\":\"https:\/\/ifintechworld.com\/#website\"},\"datePublished\":\"2023-07-21T20:56:11+00:00\",\"dateModified\":\"2023-07-21T20:56:12+00:00\",\"description\":\"It\u2019s been popular to link swings in stocks and other asset prices to changes in the balance sheets of the Federal Reserve and other major central banks,\",\"breadcrumb\":{\"@id\":\"https:\/\/ifintechworld.com\/?p=38807#breadcrumb\"},\"inLanguage\":\"en-US\",\"potentialAction\":[{\"@type\":\"ReadAction\",\"target\":[\"https:\/\/ifintechworld.com\/?p=38807\"]}]},{\"@type\":\"BreadcrumbList\",\"@id\":\"https:\/\/ifintechworld.com\/?p=38807#breadcrumb\",\"itemListElement\":[{\"@type\":\"ListItem\",\"position\":1,\"name\":\"Home\",\"item\":\"https:\/\/ifintechworld.com\/\"},{\"@type\":\"ListItem\",\"position\":2,\"name\":\"\u2018Liquidity is B.S.!\u2019 Why stock-market moves have less to do with central-bank balance sheets than investors think.\"}]},{\"@type\":\"WebSite\",\"@id\":\"https:\/\/ifintechworld.com\/#website\",\"url\":\"https:\/\/ifintechworld.com\/\",\"name\":\"Repay Down\",\"description\":\"Latest Personal Finance News, Tips and Updates\",\"publisher\":{\"@id\":\"https:\/\/ifintechworld.com\/#organization\"},\"potentialAction\":[{\"@type\":\"SearchAction\",\"target\":{\"@type\":\"EntryPoint\",\"urlTemplate\":\"https:\/\/ifintechworld.com\/?s={search_term_string}\"},\"query-input\":\"required name=search_term_string\"}],\"inLanguage\":\"en-US\"},{\"@type\":\"Organization\",\"@id\":\"https:\/\/ifintechworld.com\/#organization\",\"name\":\"Repay Down\",\"url\":\"https:\/\/ifintechworld.com\/\",\"logo\":{\"@type\":\"ImageObject\",\"inLanguage\":\"en-US\",\"@id\":\"https:\/\/ifintechworld.com\/#\/schema\/logo\/image\/\",\"url\":\"https:\/\/ifintechworld.com\/wp-content\/uploads\/2023\/04\/rep-logo-dark.png\",\"contentUrl\":\"https:\/\/ifintechworld.com\/wp-content\/uploads\/2023\/04\/rep-logo-dark.png\",\"width\":558,\"height\":90,\"caption\":\"Repay Down\"},\"image\":{\"@id\":\"https:\/\/ifintechworld.com\/#\/schema\/logo\/image\/\"}},{\"@type\":\"Person\",\"@id\":\"https:\/\/ifintechworld.com\/#\/schema\/person\/6224724fd4116361255b179dc5c70b61\",\"name\":\"News Room\",\"image\":{\"@type\":\"ImageObject\",\"inLanguage\":\"en-US\",\"@id\":\"https:\/\/ifintechworld.com\/#\/schema\/person\/image\/\",\"url\":\"https:\/\/ifintechworld.com\/wp-content\/uploads\/2023\/04\/avatar_user_1_1682606986-96x96.png\",\"contentUrl\":\"https:\/\/ifintechworld.com\/wp-content\/uploads\/2023\/04\/avatar_user_1_1682606986-96x96.png\",\"caption\":\"News Room\"},\"sameAs\":[\"https:\/\/ifintechworld.com\"],\"url\":\"https:\/\/ifintechworld.com\/?author=1\"}]}<\/script>\n<!-- \/ Yoast SEO plugin. -->","yoast_head_json":{"title":"\u2018Liquidity is B.S.!\u2019 Why stock-market moves have less to do with central-bank balance sheets than investors think. | iFintechWorld","description":"It\u2019s been popular to link swings in stocks and other asset prices to changes in the balance sheets of the Federal Reserve and other major central banks,","robots":{"index":"index","follow":"follow","max-snippet":"max-snippet:-1","max-image-preview":"max-image-preview:large","max-video-preview":"max-video-preview:-1"},"canonical":"https:\/\/ifintechworld.com\/?p=38807","og_locale":"en_US","og_type":"article","og_title":"\u2018Liquidity is B.S.!\u2019 Why stock-market moves have less to do with central-bank balance sheets than investors think. | iFintechWorld","og_description":"It\u2019s been popular to link swings in stocks and other asset prices to changes in the balance sheets of the Federal Reserve and other major central banks,","og_url":"https:\/\/ifintechworld.com\/?p=38807","og_site_name":"iFintechWorld","article_published_time":"2023-07-21T20:56:11+00:00","article_modified_time":"2023-07-21T20:56:12+00:00","og_image":[{"width":1280,"height":640,"url":"https:\/\/ifintechworld.com\/wp-content\/uploads\/2023\/07\/1689151274_social.jpeg","type":"image\/jpeg"}],"author":"News Room","twitter_card":"summary_large_image","twitter_misc":{"Written by":"News Room","Est. reading time":"3 minutes"},"schema":{"@context":"https:\/\/schema.org","@graph":[{"@type":"Article","@id":"https:\/\/ifintechworld.com\/?p=38807#article","isPartOf":{"@id":"https:\/\/ifintechworld.com\/?p=38807"},"author":{"name":"News Room","@id":"https:\/\/ifintechworld.com\/#\/schema\/person\/6224724fd4116361255b179dc5c70b61"},"headline":"\u2018Liquidity is B.S.!\u2019 Why stock-market moves have less to do with central-bank balance sheets than investors think.","datePublished":"2023-07-21T20:56:11+00:00","dateModified":"2023-07-21T20:56:12+00:00","mainEntityOfPage":{"@id":"https:\/\/ifintechworld.com\/?p=38807"},"wordCount":679,"commentCount":0,"publisher":{"@id":"https:\/\/ifintechworld.com\/#organization"},"keywords":["Featured"],"articleSection":["Markets"],"inLanguage":"en-US","potentialAction":[{"@type":"CommentAction","name":"Comment","target":["https:\/\/ifintechworld.com\/?p=38807#respond"]}]},{"@type":"WebPage","@id":"https:\/\/ifintechworld.com\/?p=38807","url":"https:\/\/ifintechworld.com\/?p=38807","name":"\u2018Liquidity is B.S.!\u2019 Why stock-market moves have less to do with central-bank balance sheets than investors think. | iFintechWorld","isPartOf":{"@id":"https:\/\/ifintechworld.com\/#website"},"datePublished":"2023-07-21T20:56:11+00:00","dateModified":"2023-07-21T20:56:12+00:00","description":"It\u2019s been popular to link swings in stocks and other asset prices to changes in the balance sheets of the Federal Reserve and other major central banks,","breadcrumb":{"@id":"https:\/\/ifintechworld.com\/?p=38807#breadcrumb"},"inLanguage":"en-US","potentialAction":[{"@type":"ReadAction","target":["https:\/\/ifintechworld.com\/?p=38807"]}]},{"@type":"BreadcrumbList","@id":"https:\/\/ifintechworld.com\/?p=38807#breadcrumb","itemListElement":[{"@type":"ListItem","position":1,"name":"Home","item":"https:\/\/ifintechworld.com\/"},{"@type":"ListItem","position":2,"name":"\u2018Liquidity is B.S.!\u2019 Why stock-market moves have less to do with central-bank balance sheets than investors think."}]},{"@type":"WebSite","@id":"https:\/\/ifintechworld.com\/#website","url":"https:\/\/ifintechworld.com\/","name":"Repay Down","description":"Latest Personal Finance News, Tips and Updates","publisher":{"@id":"https:\/\/ifintechworld.com\/#organization"},"potentialAction":[{"@type":"SearchAction","target":{"@type":"EntryPoint","urlTemplate":"https:\/\/ifintechworld.com\/?s={search_term_string}"},"query-input":"required name=search_term_string"}],"inLanguage":"en-US"},{"@type":"Organization","@id":"https:\/\/ifintechworld.com\/#organization","name":"Repay Down","url":"https:\/\/ifintechworld.com\/","logo":{"@type":"ImageObject","inLanguage":"en-US","@id":"https:\/\/ifintechworld.com\/#\/schema\/logo\/image\/","url":"https:\/\/ifintechworld.com\/wp-content\/uploads\/2023\/04\/rep-logo-dark.png","contentUrl":"https:\/\/ifintechworld.com\/wp-content\/uploads\/2023\/04\/rep-logo-dark.png","width":558,"height":90,"caption":"Repay Down"},"image":{"@id":"https:\/\/ifintechworld.com\/#\/schema\/logo\/image\/"}},{"@type":"Person","@id":"https:\/\/ifintechworld.com\/#\/schema\/person\/6224724fd4116361255b179dc5c70b61","name":"News Room","image":{"@type":"ImageObject","inLanguage":"en-US","@id":"https:\/\/ifintechworld.com\/#\/schema\/person\/image\/","url":"https:\/\/ifintechworld.com\/wp-content\/uploads\/2023\/04\/avatar_user_1_1682606986-96x96.png","contentUrl":"https:\/\/ifintechworld.com\/wp-content\/uploads\/2023\/04\/avatar_user_1_1682606986-96x96.png","caption":"News Room"},"sameAs":["https:\/\/ifintechworld.com"],"url":"https:\/\/ifintechworld.com\/?author=1"}]}},"amp_enabled":true,"_links":{"self":[{"href":"https:\/\/ifintechworld.com\/index.php?rest_route=\/wp\/v2\/posts\/38807","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/ifintechworld.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/ifintechworld.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/ifintechworld.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/ifintechworld.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=38807"}],"version-history":[{"count":1,"href":"https:\/\/ifintechworld.com\/index.php?rest_route=\/wp\/v2\/posts\/38807\/revisions"}],"predecessor-version":[{"id":38808,"href":"https:\/\/ifintechworld.com\/index.php?rest_route=\/wp\/v2\/posts\/38807\/revisions\/38808"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/ifintechworld.com\/index.php?rest_route=\/wp\/v2\/media\/34500"}],"wp:attachment":[{"href":"https:\/\/ifintechworld.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=38807"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/ifintechworld.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=38807"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/ifintechworld.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=38807"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}