I began to warn in December 2021 that the process of the CLI flattening was beginning, and that that would lead to bad things happening. Subsequently, the line maintained a steady rise until March 2022 when the Fed ended QE. It’s hard to see on the scale of this chart( I began to warn in December 2021 that the process of the CLI flattening was beginning, and that that would lead to bad things happening.
So far, those bad things that I predicted have barely scratched the surface of the potential of what’s to come as this line stays flat. The Fed has warned us that it will start shrinking its balance sheet after the May FOMC meeting. That will pull money out of the banking system. That’s when we should start to see really “bad things.”
Meanwhile, the stock market is has reached the low side of its normal band of motion from the CLI. If history is any guide, the stock market will remain vulnerable to further severe declines until a week or two after the line representing the S&P 500 penetrates the bottom of the normal range of motion from the liquidity line.
In 2011, touching the bottom of the band was a bullish signal. But I don’t think that will work today. Back then the Fed was loose and committed to stay loose. Now, it’s in just the opposite posture. They won’t be sending the cavalry to help the stock market any time soon.
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