#1234 Darius Dale | Central Banks Control The Stock Market
8/15/2023 · 16 min · transcript via mlx
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Key topics
— Global liquidity, defined as central bank balance sheets plus money supply plus FX reserves minus gold, is a primary driver of asset prices across stocks, bonds, Bitcoin, and corporate credit.
— Private sector actors (particularly in investment surplus economies like Europe and Japan) generate the majority of global liquidity; central banks are secondary but can inflect trends during downturns.
— Currency volatility, interest rate volatility, and the US dollar real effective exchange rate are inversely correlated to global liquidity; controlling these factors helps forecast liquidity movements.
— The 2023 liquidity cycle recovery is non-linear, unlike historical patterns; global liquidity experienced negative trailing three-month impulses in June (−$4 trillion) and July (−$2.4 trillion), signaling choppy conditions.
— Growth slowdowns and inflation declines drive public sector (central bank) liquidity increases, while falling dollar and volatility drive private sector liquidity increases; the inverse relationships hold for liquidity contractions.
— Current macro signals show bear signals in China and the Eurozone equities, fixed income stress in Japanese government bonds, and weakness in the Chinese yuan, reflecting slowing growth, negative impulses, and unfavorable policy trajectories.
Market & price signals
— Global liquidity proxy shows strong co-integration with S&P 500, Bitcoin, and Ethereum over the last three to four years, but bond markets have decoupled as policymakers raised rates. The liquidity cycle bottomed in October 2022 and has entered an upturn, but momentum remains choppy: trailing three-month impulse was negative for four consecutive months through July, improving only marginally. Z-score analysis of leading indicators (OECD composite index, unemployment, core CPI) signals weak near-term public sector liquidity support over six months. Coincident indicators show declining growth volatility, currency volatility, USD strength, and oil prices, suggesting a permissive private sector environment at present. Systematic trade signals include bear alerts for China and Eurozone equities, Japanese bond curve stress, and persistent Chinese yuan weakness.
Actionable insights
— Monitor the US dollar, currency volatility, and interest rate volatility as leading proxies for global liquidity; declines in these metrics indicate improving private sector liquidity conditions and potential upside for risk assets.
— Recognize that the 2023 liquidity recovery is non-linear and choppy; avoid assuming a linear, multi-quarter ramp in asset prices; instead, watch monthly impulse trends and central bank policy shifts for inflection points.
— Track 42 Macro's daily global liquidity monitor (growth, inflation, policy signals by country) and systematic trade ideas to identify asymmetric setups; current bear signals in equities and fixed income suggest defensive positioning until growth or liquidity impulses stabilize.
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