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Stock Markets Will Collapse Without Liquidity from the Fed
Clif Droke discusses the lack of liquidity in the market and the dire need for an injection if there is to be any sort of bull-rally in the fall.
Droke stated “Bull markets are to a large extent liquidity driven affairs. Without an abundance of excess monetary liquidity sloshing through the financial market, stocks and commodities have little hope of developing the necessary ingredient of forward momentum. Momentum is what attracts an ever-growing number of investors to participate in a bull market, which in turn is what keeps the bull market going. When liquidity dries up, momentum perishes and investors quickly lose interest. This, in a nutshell, is how bull markets turn into bear markets, viz. the absence of liquidity.”
A great example of the markets desire for liquidity can be seen last week when both the Fed and ECB announced they were capable of adding stimulus to the economies but wouldn’t be doing so (at least not yet). The reaction from the market was a sharp sell-off. The Dow ended up losing 200 points for the week. Droke stated that “The NYSE Broker/Dealer Index (XBD), which is much more sensitive to future liquidity expectations [than the Dow], plummeted 9% since Wednesday’s Fed meeting.”
Liquidity injections create bull-markets just as it did in 2009 when the US led the global markets to recovery. However, that injected liquidity has now run out and investors are desperate for another taste – another chance at a bull-market.
Droke believes that the Fed missed an opportunity last week to implement further stimulus given the falling yield curve, which represents a healthy monetary trend and provides flexibility for Bernanke. The Fed’s tenacity and willingness to ease and provide a necessary boost is in question. The fact that Bernanke had a favourable opportunity to provide liquidity and didn’t may suggest that the treasury market isn’t as rosy as the numbers suggest. The lack of commitment from Bernanke may also suggest that the Fed has in fact fired its last bullet.
Click here to read Clif Droke’s article.