🔔 Liquidity Is King

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Liquidity is King...

If liquidity is KING, why even bother with macro?

It's a strong question and one I asked many times before deciding to take the plunge into macro and try to figure out what really drives markets...

A lot of it comes down to perceptions and definitions...

When you see stuff like this 👇

Or even this 👇

Who looks at this and thinks "oooooh, how exciting"?

Anyone you'd ever want to associate with?

No chance. That stuff is f*cking BORING

Add in a dose of lifelong economists circle-jerking about their economic models (that are as good as your average horoscope at predicting the future), and you can really understand why people would shy away from 'macro'...

Those people are missing the point.

Macro is NOT macroeconomics or macroeconomic theory

Macro is EVERYTHING

Take this phrase for example 👇

It's 100% correct.

But the economy is a driver of liquidity (and liquidity is king)

Covid response saw liquidity flood the system:

Economic activity slows > central banks and governments respond with fiscal and monetary support > liquidity hits the system > risky investments (e.g. high yield bonds, EM currencies) are underpinned, real assets (e.g. stocks, houses) are bought...

Indiscriminate buying followed as liquidity flowed freely, gushing into every dry well of the financial system, and finding its way into a few new spaces too

Dollar shortages led to a huge USD (DXY) rally from 94.65 to 104 in just 10 days...

Until dollar swap lines were opened or extended between central banks...

This previously untapped spring of USD supply saw the dollar fall rapidly from those highs...

Would you have found this in your macroeconomic textbooks?

PANDEMIC RESPONSE THEORY (illustrated version)

Must have missed that chapter...

Back to the point: macro is the study of everything

But no-one can study EVERYTHING...

In the context of markets, it's everything that drives liquidity.

The interactions between financial markets, politics, central banks, regulators, businesses & prominent storytellers...

That's the game we're all choosing to play.

Economic data serves one purpose above all others

To support or negate the stories that markets are basing their beliefs on...

Once everyone believes a story and is invested in the story, it's usually nearing the end.

But if no-one believes the story, no-one invests and the story never gets told...

There's an idea that the crowd are always wrong, but like every other simplistic soundbite, that lacks context...

If the crowd were always wrong, markets would never move.

Markets are the crowd.

Markets are sort of like airports

Bear with me: they see millions of passengers through their gates, they offer a huge variety of routes and almost everyone can get to any destination they desire.

Everyone can get what they want from airports.  

An airport is a place of infinite possibility.

If each flight is a market and the passengers represent liquidity...

It's about finding those routes that will be most popular, buying a ticket while it's cheap (before the crowd figures out that everyone will want one) and then dispassionately selling your ticket back into that crowd before the flight departs.

Airports are also wonderful places to observe herd behaviour and the interactions between the gatekeepers, the regulators, even the captive consumer...

Maybe not the perfect analogy (though analogies are rarely perfect), but hopefully illustrates that 'macro' is everywhere, and it's so much more than macroeconomics...