There will soon be an outflow of approximately one and a half trillion USD, and in combination with an unhealthy sentiment, an overbought market, and slowing economic activity, there may be a sharp squeeze on the financial markets.
Liquidity
Liquidity, or the amount of money circulating in the economy, is a very important variable that affects the consumer’s willingness to spend and thus affects the sentiment of the entire market. Historically, we could often observe that if new liquidity is injected into the economy, the velocity of money will accelerate, that is, the speed with which money can be exchanged. And since the trail of one hunter is the income of another, liquidity is like a reaction of the economy and affects the psychology of the consumer. A well-known example of this is the unprecedented flow of liquidity into the economy with the onset of Covid-19, when the total volume of money in the USA increased within two years and by no more than a quarter of the total volume! These pensions were printed by the American central bank (Fed) in an attempt to prevent a deep economic crisis during the course of the pandemic. It bought up government and corporate bonds and thus enriched the economy by more than 5 trillion USD. Liquidity flooded the economy, and in the aftermath, euphoria prevailed, when companies had unprecedented profitability, consumers lived very rich lives, and stock markets exploded. Index S&P 500 in this periodb grew by 100%, the Dow Jones by 90% and the technological Nasdaq Composite even by 125%. Liquidity in circulation can be monitored in many ways, but among the five basic ones: M2 money supply, the general balance sheet of the central bank, or one-day reverse trade with the central bank.
Experts believe that the American Fed was rushing it and is now trying to correct its mistake by raising annual rates and quantitative tightening (reducing liquidity at a rate of about USD 90 billion per month). High inflation is the result of excess liquidity and we are now in the process of loss. This dream does not have to be as pleasant as the euphoric phase, and that is for the reason that excess liquidity has to come from both sides. Only in this way (or with a radical increase in productivity) will we get rid of high inflation.
Both the government and the Fed will withdraw liquidity
Closing the debt ceiling in the US will prevent a catastrophic event in which the United States will not be able to pay its obligations if it has the means to do so. The reaction was positive, but not in any significant way, because the rest of the market was confused by the optimistic scenario of the development of the debt ceiling. The issue of new short-term US government bonds follows, but someone has to buy them. Wall Street analysts estimate that the US Treasury will seek USD 1.2 trillion in the next few months.
Ironically, the good at first will turn out to be bad at first, because in the next few months there will probably be a rapid outflow of liquidity from circulation. For the first time in this cycle, liquidity will be pushed down by both the US Fed (quant. tightening) and the US government (additional state treasury). So far, at least one of these institutions has always injected liquidity into the circulation, avoiding a situation where both would be withdrawn in tandem. The American government has strongly supported the economy since the middle of last year, which is the date since the Fed began quantitative tightening. During roughly the last 13 months, the American government has released roughly 0.9 billion USD into the economy, and the Fed has only sent 0.6 billion USD due to the banking crisis. Now there will be an outflow of approximately one and a half trillion USD (1.2 billion + 0.09*4 billion) in 24 months. In combination with unfavorable seasonality in the summer and autumn months and slowing down of economic activity, there is likely to be a sharp decline in the financial markets.
Some analysts from Wall Street question the liquidity of stocks and are skeptical about the amount of money, although historically this relationship is special, but even it does not always work according to expectations.
M.Sc. Timur Barotov
BHS analyst
He works as an analyst at securities trader BH Securities as, where he is responsible for forecasting and analysis of capital markets with a fixed exchange for American markets. He graduated with a master’s degree in finance from the Institute of Economic Studies of Charles University and has been investing in it since the beginning of his studies. His professional experience includes consultancy in the field of acquisitions and acquisitions, and analyst projects involving valuing companies.
BH Securities a.s.
BH Securities is a licensed securities trader and only the Prague Stock Exchange. The company was founded in 1993, shortly after the creation of the capital market in the Czech Republic.
Today, BHS is one of the most important non-bank securities dealers on the Czech capital market, and the individualized investment service has been providing it continuously for 30 years without changing the name or approach.
BHS offers a long portfolio of investment services. In addition to trading on the capital markets, these are asset management and individual portfolios (asset management), qualified investor funds, bond issues and trading, sub-funds and gold investments.
More information can be found at: www.investice.cz/ or to: www.bhs.cz.
2023-06-08 09:25:50
#markets #elite #liquidity #drain
