6/12 Liquidity: Start of Deflation
Siri run Deflationary Scenario 42069, liquidity examined
Forward
I ‘ve had it in my head for a while, but I don’t think I’ve adequately explained why I think the liquidity environment is transferring to deflationary.
So tonight I attempt to explain the different environments, as well as explain why I think the VIX unwind, whenever it happens will be likely more explosive than prior times.
Before you go sit down doomer, this is an examination of the mechanics of liquidity in market function. I really have no interest, nor take any joy in the market drawing down. I am and always will be pro-long, but I see risks evolving that I think is time was shared with the tribe.
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Let’s get this straight first, this is an exploratory post of what I think the market is leading into. My timeline for this is as I’ve written before fully actualized post the first rate cut, in theory. I didn’t bother to discuss other scenarios where we lead from disinflation to deflation because at the time I did believe goldilocks was a true potential, and it didn’t seem worth noting.
And before I get a little nerdy over the mechanics of liquidity, let’s just go over the dummy version of liquidity environments.
There are 3:
Inflationary: Characterized by Excess Liquidity, think of oil flooding an engine. It is when: High Liquidity + Fast/Slow Growth + Ineffective Rates = Stock Price Action Goes Up, But Value Goes Down
Disinflationary: Characterized by Surplus Liquidity, liquidity is easy to come by and supportive of growth. It is when: Surplus Liquidity + Above Avg Growth + Ineffective Rates = Stock Price Action Goes Up, Value Goes Up.