SPX And The Liquidity Tsunami

Well, they have gone out and done it this time. A super easy Fed with help from generous fiscal policy has allowed monetary liquidity to balloon  to 40% yr/yr, a historic record. with the economy  still depressed, the velocity of money has tanked with the extra liquidity flowing to the financial and capital markets. What's more the Fed is now apparently willing to have inflation move up over the longstanding target to foster a stronger labor market and put an end to the deflation pressure created by the rapid decline in the economy during the Covid lock down phase. Normally,with this kind of stimulus, the US economy would surge for a bit, but with the longer term potential of the economy inherently modest, the eventual recovery of money velocity will primarily reflect higher inflation. If so, we will eventually see higher bond yields, a reduced SPX p/e ratio, and, perhaps a lower value for the USD.

The stock market has been having a party. The SPX has been in a wicked sharp upturn and at a nearly

14% premium to its 40 wk. m/a is sufficiently overbought to render the market unlikely to make

substantial progress over the next six months. But, since we are dealing with such a huge swell of

liquidity, it could, however unlikely, surprise to the upside. By my reckoning, if the SPX moves

above the recent 3508 up to 3800 in the months ahead, we will be in a dangerous price bubble.

SPX Weekly