As Long As Central Banks Don't Sell Market Has Upside

| About: SPDR S&P (SPY)


Now that the market is out of the cage, how high can it go?

The amount of liquidity from central banks is at record highs. We're going to put in perspective just how high.

If record easing liquidity is any sign, we can't know how high is high - but it could be pretty high.

The Fed compared their $4 trillion bond buying binge to a 9% rate cut. That means that their near zero short term rates plus their -9% long term rates are pretty stimulative. Now that markets have broken out that gives ample ammunition for markets to rise.

Fed Cut Rates To Effectively Negative 9%

The Fed had a study earlier this year that tried to compare certain policy outcomes. The Fed said in that piece that if they were not able to have "optimal control" to lower rates by 9% they could instead buy $4T of longer term assets.

We know the Fed's balance sheet has ballooned to over $4T so we think it's safe to say the equivalent Fed Funds rate is -9%.

The Fed terms their current holding position as "accommodative."

If we add the ECB's near $3T in balances that would add another 7% rate cut.

Add to that roughly $4T balance sheet in Japan which would be another -9%.

We can say that on average the world is at -8% effective central bank rates. If we can add up the balances then it gets even more enormous.

It's fair to say that the world is in record easing territory.

The ECB isn't planning on cutting their bond position. If anything they are only looking to increase it. Japan is also looking to increase it. The US has said they don't plan on reducing their bond position until they are well under way with Fed Funds tightening. They will have that position for a while. Add to that the Fed is looking to be slow to raise rates even if economic data picks up.

Markets have an incredible support now with a breakout.

One Chart

Click to enlarge

Fed Data Source: NY Fed. SPY Data Source: Yahoo.

We originally showed this chart back in June. This chart compares the Fed balances to the S&P 500 ETF (NYSEARCA:SPY). When the balances fell in 2008 it helped lead the market lower. When balances went up it helped support and elevate the market.

The drop in the market was pretty close in moves when indexing the two data series. But the rise of the Fed funds was much greater than the market. This S&P chart is through June.

Our first take was that if this ever comes back down markets will get destroyed.

Now that we know the Fed has no plans currently to lower this amount, it's a support to the market.

On perceived terrible news, Brexit, Trump's isolation, Italy, etc., the market went up.

The extreme liquidity of global -8% rates or added together -26% rates is a major support for equities.

Such an extreme ease allows markets to disconnect from typical fundamental drivers.

If correct we can't know how high we can go because we've never experienced this record amount of global ease.


We can't know how much upside potential there is in markets because we've never experienced this historic amount of ease. If we wonder why fundamentals have disconnected from market performance we can look at -8% or -26% global rates. That gives a lot of support to equities. As long as central banks aren't selling, this market has support.

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