Foreword
This is a quick note, which tends to be just off the cuff thoughts/ideas that look at current market situations, and to try to encourage some discussions.
The market has been floating on a gush of liquidity since 2009, and while the economy has grown by ~60% since then, stocks have climbed ~560% since the nadir in 2009. What happens if the liquidity spigot goes away? We may be about to find out.
As usual, a reminder that I am not a financial professional by training — I am a software engineer by training, and by trade. The following is based on my personal understanding, which is gained through self-study and working in finance for a few years.
If you find anything that you feel is incorrect, please feel free to leave a comment, and discuss your thoughts.
Double, double toil and trouble
Upcoming liquidity drains:
- Quantitative Tightening
- Ongoing for a while now
- Treasury General Account refilling
- When the debt ceiling is passed, the Treasury will need to sell a bunch of bonds to refill their bank account to the tune of $200-400B (1)
- Resumption of student loan payments
- Currently estimated to resume end August
- Loans on adjustable rates will also likely resume at (the now much) higher rates
- General downturn in consumer discretionary spending
- https://fred.stlouisfed.org/series/REVOLSL suggests that much of the fiscal largesse during the pandemic has been spent and consumers are loading up on debt again
- Potential rate hikes
- Current estimates range from 1-2 cuts by end of year to 2-3 more hikes by end of year
- This is generally true of all major central banks, minus Japan and China
- Potential recession
- Been predicted by various folks for, err.. 2 years now.
- While some commodities and business leaders are sounding the alarm, job numbers (which tend to be lagging) are still pretty strong
Predictions
Haha, fooled you — I don’t generally do predictions. It’s not hard to make a case for stocks going up or down based on the issues above, and I’m pretty sure whatever I say, the market gods will just laugh and the complete opposite will happen anyway.
So, I guess we’ll find out.
Footnotes
- There are some who claim that the Treasury needs to sell over a trillion of bonds. A quick look at https://fred.stlouisfed.org/series/WTREGEN suggests that while the TGA had a peak of $1.8T during the pandemic, in recent years, the more normal amount is around $200-400B. I’m not sure if there’s something I’m missing, but $200-400B sounds more correct to me.
Janky Thoughts 