Email of the day on risks versus liquidity
Comment of the Day

May 29 2020

Commentary by Eoin Treacy

Email of the day on risks versus liquidity

The trillions of US dollars / Euros / Yens etc. given to us by central banks and governments are like painkillers leading us to feel better than we should feel. The SP500 back at over 3.000 point. Stock markets look one year ahead, right? But aren’t we too optimistic? Consumers in the US are either without a job and or savings or they are saving more than usual, which is a serious headwind. Forty percent of people with a lower income have lost their jobs. As if all those SP500 companies do not need any customers, really? If large companies cut costs there is less income for other smaller companies. This domino effect is just starting, meaning even more people will be without job soon. Maybe I’m too negative, I really hope I’m wrong. Back to the stock market. To avoid a subjective vision on the stock market I’m looking for indices to give me an objective warning signal of a top. There are four indices I selected: ND100, Fang, VIX and AD/DE. I would like to hear your opinion and suggestions about this please. Looking forward to Friday’s big picture video. Have a nice weekend.

Eoin Treacy's view

Thank you for this question which I believe just about everyone has an interest in. I will distil it down to the simple question of whether liquidity provision trumps all other factors combined? It’s a big topic but the evidence over the last 12 years supports the view that the primary result of quantitative easing is to inflate asset prices. With interest rate suppression actively underway nothing has really happened to challenge that conclusion. Nevertheless, prices do not go up in a straight line indefinitely and someone is going to have to pay for the largesse eventually.

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