This is a very big subject and needs me to write in greater detail on the blog. However, I will just share a few of the charts that are updated daily, giving you a picture of quantitative easing (QE) and tightening (QT).
The green line shows the FED’s Balance Sheet which is currently sitting at $7.5 trillion. The orange line is the liquidity pumped into the system. It gets a bit complicated, but the calculation is TGA + RREPO. The TGA is the Treasury General Account, which is the U.S. government’s operating account that is maintained by designated depositaries, primarily Federal Reserve Banks and their branches, to handle daily public money transactions. In plain English, this is the government’s current account.
The RREPO is the reverse repo rate, another complicated subject. I will share something on RREPO tomorrow. Just stay with me a little longer. We do some manipulation to get Net Liquidity.
With Net Liquidity we can run an analysis and have a look at how correlated the SP500 is with Net Liquidity. In the chart below, I loop through a range of 1 to 30 days to shift the SP500 to achieve the highest correlation against Net Liquidity. Currently shifting the SP500 1 day behind the Net Liquidity Index gives us the highest correlation of 0.46 which is actually pretty high. You can see that over the last year the SP500 has been rallying without the help of liquidity, which is quite interesting. In a more in-depth post, I will share more history and draw deeper conclusions. I am simply highlighting the fact that seemingly logical relationships don’t always hold true. This is complex stuff.