Stock prices are currently right in the middle of the channel surrounding the liquidity line in the Compositite Liquidity Chart (viewable in subscriber version). By this measure the market isn’t overbought, as so many bearish pundits are bellowing. Nor is it oversold. It’s just tracking the growth of systemic liquidity. Not too hot, not too cold, but just right. Goldilocks.
What’s the point. It’s always the same. Up, up, and up. One day that will change, when leverage goes in reverse. At that point, money will be destroyed faster than the Fed can print it.
I started tracking and charting the data that goes into the godfather of my liquidity charts in 2002, courtesy of the NY Fed print shop. Here’s the chart that started it all. It was made famous in 2012 when Rick Santelli featured it in one of his rants on CNBC.
The correlation between the Fed printing and pumping money into Primary Dealer trading accounts, and the direction of stock prices is well known today. When I started tracking the data on this chart in 2002 it wasn’t. But I immediately saw the correlation, even then.
Back then the Fed was doing next to nothing relative to what it does now, but the market always seemed to move in lockstep with the Fed’s daily operations even then. The only thing that changed was the magnitude of those operations, which stimulated massive moves in stocks.
Now the talk is all about when the Fed will start tapering asset purchases. Of course, the Fed can’t do that because it would crash the system. I review why, in this report, and tell you when the correlation between Fed pumping and stock prices is likely to break.
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