Global Liquidity Updates
Recession amidst the faces of investors?
We are seeing major liquidations across all asset classes in the past few days. The main question is how the FED will react to this volatility.
The FED will consider two options: an emergency sharp cut or a steady cut.
An emergency sharp cut can deliver instant liquidity to stocks, crypto, and bonds, speeding up a rebound by decreasing borrowing cost and enticing investment.
However, it can aggravate market volatility, potential inflation spikes, and reduce the FED's future policy flexibility.
A steady cut although slower, could be more sustainable, but the immediate impact may be necessary in urgent scenarios, and the meeting for this is scheduled for September.
Additional, the FED might consider a bailout option, injecting funds directly to stabilize key sectors. This could quickly restore confidence and prevent systemic collapse but raises concerns over moral hazard and long-term debt sustainability.
It will be interesting to see which option the FED decides to take here.
Liquidity stands out as the predominant driver in modern financial markets.
While interest rates have traditionally been the focal point in financial analysis, it is actually the movements of liquidity that effectively steer market patterns.
As debt levels soar to unparalleled levels, our financial system is progressively moving towards perpetual debt refinancing rather than fresh capital investments.
The Liquidity Seasonality Chart demonstrates an overall upward trend in liquidity levels over the course of the year. Despite occasional obstacles, liquidity shows a notable increase, particularly towards the year-end.
This trend sheds light on the reason behind the significant upsurge witnessed in asset markets during specific periods.
Grasping the fluctuating liquidity patterns throughout seasons can provide a valuable edge in investment decisions, especially when integrated with additional market analysis resources.
Important to note is that this chart uses the last 25 years' worth of data. While arguably that is still a low sample size, going any further into past may provide inaccurate readings due to the obvious change in monetary system that has taken place over the past two, but during the last decade in particular.
So far, we haven't seen anyone else share this type of study case, and while we seem to be the first ones to experiment with it, the study does make a compelling case to be included in a forward-looking analysis.
The U.S. Treasury Q3 plan for 2024
The U.S. Treasury is set to borrow $740B in Q3 2024, targeting an end-of-September cash balance of $850 billion.
This includes issuing long-term securities to finance it.
Additionally, they are managing liquidity with short-term bills through regular weekly bill auctions and cash management bills (CMBs).
Short-term bills are the thing to look at as they require frequent refinancing, pushing more liquidity from the TGA into the market.
Attached below you see a chart displayed on Bitcoin and the impacts of each QRA release, note that they indicate a shift in the market, even if short-term.
