liquidity cycle

dtrader98

dtrader98

Has anyone seen or completed any type of study that looks at statistics of time periods for liquidity cycles. I would argue that most of the economy points to us about 1/4-1/2 way towards the trough approaching recession. About the only factor that has not participated on that path (-YET-) is the stock market's performance.

If the liquidity cycle holds weight, at some point the market must weaken before we hit the recession point. I was curious to know what, say, a mean time period (months, years?) would be from peak to trough.

BTW for those posters who were talking about how PTJ called 87 top based on comparisons to 30's, I've compiled that chart myself and I would say that we aren't quite there yet, if we only approach it using TA. That's why I think a lot of folks are calling for melt up. They are anticipating the next stage of 87 style top. However, I still think it could also prove to be a false call like capitulation calls in 2003.

The two arguments that work best in favor for extending the bull IMHO is
1) Massive liquidity being pumped via repos, M3, and commercial players on long side.
2) Gen Public hasn't been sucke(r)d in yet. Very low participation since 03 drop.
They haven't been convinced yet, as money flow and sentiment show.

However, the liquidity cycle argument and long term cycles outlook, strongly tugs toward the bear argument.
 
Quote from dtrader98:

Has anyone seen or completed any type of study that looks at statistics of time periods for liquidity cycles. I would argue that most of the economy points to us about 1/4-1/2 way towards the trough approaching recession. About the only factor that has not participated on that path (-YET-) is the stock market's performance.

If the liquidity cycle holds weight, at some point the market must weaken before we hit the recession point. I was curious to know what, say, a mean time period (months, years?) would be from peak to trough.

BTW for those posters who were talking about how PTJ called 87 top based on comparisons to 30's, I've compiled that chart myself and I would say that we aren't quite there yet, if we only approach it using TA. That's why I think a lot of folks are calling for melt up. They are anticipating the next stage of 87 style top. However, I still think it could also prove to be a false call like capitulation calls in 2003.

The two arguments that work best in favor for extending the bull IMHO is
1) Massive liquidity being pumped via repos, M3, and commercial players on long side.
2) Gen Public hasn't been sucke(r)d in yet. Very low participation since 03 drop.
They haven't been convinced yet, as money flow and sentiment show.

However, the liquidity cycle argument and long term cycles outlook, strongly tugs toward the bear argument.
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Interesting analysis. Always nice to read quality posts.

CDO appetite is still pretty high so don't discount that. Also, the bond market for companies has been very favorable. So they have been able to buy back stock. And the PE firms can do LBOs.

The debt market still has a lot of juice.
 
I would agree with the l/c comparison to our current market. Although Chinese and African development would change the outlook of a major bear correction coming or a recession. We have new tools such as bots to ensure a stable global market.

Akuma
 
The general public is already "all in" via their 401k and IRA's in mutual funds. The average folks don't have any money left to put into anything. They have credit cards and home loans to pay, and are already in debt up to their ears.
 
thrifty bob, I'm assuming that fed flow of funds data is somewhat accurate. Using that as a gauge, percent of household assets in funds is nowhere near 2000.

Even if household financial assets dropped dramatically for the masses, it is still measured as a relative number and is far from 2000 highs (which coincidentally hit the same overbought level as 1968 before declining significantly into 70s inflationary era-- didn't pull back up until 90s). If we follow the inflationary (stagflation if you like) path of the 70s, which is the theme I've been seeing of late, the average "joe" participation in this liquidity pumpup still has a long way to go down, before they get sucke(r)d back in again.

I was asking about ECRI FIG data, because I noticed some blogs saying that it shows leading inflationary measures trending down. If however, I'm interpreting it properly, It is still showing a short burst in inflation and FED rate hikes (not cuts) to come. Need more data to confirm. If anyone has a tbl of the raw data to PM me I
can return a chart analysis of what I'm suggesting.
 
"CDO appetite is still pretty high so don't discount that."

I just read a pretty long article, titled "Toxic debt" in the latest bloomberg. It wasn't too favorable about the market, citing huge losses due to opaque instrument packages obscuring risky assets like subprime mortgages (cites 25% of CDO's contain these). Some of the largest beneficiaries from the CDO market lately are the credit raters, who have distanced themselves from liability by issuing strong indemnity clauses. IMO it's eerily reminiscent of Partno's "fiasco" story about credit agencies issuing AAA ratings to GS currency derivatives before a string of major collapses like thai baht. Ironic that the first CDO was created by Milken in 80s. Sounds a lot like junk bond frenzy of that period.

Anyways, although the yields have been attracting a lot of pension funds due to high credit ratings, the article didn't sound too promising for distant future of CDOs from my take (particularly, assuming subprime fallout isn't done).
 
dtrader98:

I'm writing a paper about commercial liquidity cycles (I'm just a risk-averse junior legal academic, not a real trader) and was interested in your observation about:

The two arguments that work best in favor for extending the bull IMHO is
1) Massive liquidity being pumped via repos, M3, and commercial players on long side.
2) Gen Public hasn't been sucke(r)d in yet. Very low participation since 03 drop.
They haven't been convinced yet, as money flow and sentiment show.

Do you mean by 'commercial players' equity intermediaries like hedge and private funds and sovereign wealth funds? What seems different about this liquidity cycle is that there's much more equity capital at stake.
 
I was pretty much referring to commercial hedgers of major index futures.

"Commercial - The CFTC classifies a futures account that meets the reporting level as a "commercial" when that account holder files a statement with the Commission that states it is commercially engaged in business activities hedged by the use of the futures markets. They're the ones that we're most interested in. For example, the commercial traders of S&P futures are the largest institutional players like banks, pension funds, mutual funds, hedge funds and the trading arms of Wall Street firms."

http://ezinearticles.com/?The-Commi...Profit-From-Legal-Inside-Information&id=86465

If you follow COT data on index futures, you'll find that there has been enormous net long positions put on by commercials just about every time the market has tried to correct on this bull market, while the smaller speculators (non-reportables) have been net short the majority of the time. Large speculators have been unloading lately, but commercials have been stepping in on the other side of both small and large speculators unloading.

Some COT background:
http://www.zealllc.com/2003/spxcot.htm
(keep in mind the recent activity has been about opposite the examples they show).

Regarding joe investor's participation in
mutual fund markets:
you can follow flow of funds from the treasury, to see that the typical household has had a very low participation since 2003.
It's not the pockets of the little guys moving these markets.

Regarding the liquidity cycle itself,
what's most odd is how distorted the BLS inflation and other data has become. One has to wonder whether to use the distorted data or real data when modeling the liquidity cycle.
All these analysts are pontificating how amazingly low inflation is and explaining how great equity returns are viewed relative to those assumptions.
The premise of the liquidity cycle is that it should eventually override these distortions, but it's been frustrating to model this at best.
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Interesting COT quote from larry williams:

"July of 1987
Hallelujah! Commercials net long position rises from 4,000 contracts in June to 15,000 contracts in mid-July. Wow, wail till you see what happens next, by the end of July commercials are net long 23,500 contracts in the S&P 500; their largest net long position thus far in all of 1987. And look at the large traders; they are selling out of this market! Not only that, but commercials are buying in an uptrend. Again, this is unusual action, but is considered very bullish. For whatever reason, commercials are heavy buyers in the market. The green check mark represents the pivot point, from a potential top to a renewed buying interest in the S&P 500. Make note of the green vertical arrow as well. This is a good example of what I mean when I say the markets get setup by the commercials ahead of the move itself. Even though commercials were buyers in July, it took another month until you saw in a significant rally in August. (Yellow arrow) As soon as a savvy investor saw that spike in commercial buying interest in the month of July, there is only one thing to do, and nobody screams it out like Cramer; ‘BUY BUY BUY!’ "

Ironically, this behavior is exactly what I'm seeing in today's market. The small speculators got sucked in long over the next few months and we all know what happened shortly thereafter.
 
Quote from dtrader98:

Has anyone seen or completed any type of study that looks at statistics of time periods for liquidity cycles. I would argue that most of the economy points to us about 1/4-1/2 way towards the trough approaching recession.

Found some nice stats and charted distribution. If I am interpreting correctly, we are about 4.5 yrs into current bus cycle expansion (give or take, depending upon if we are in contraction yet), which is well approaching the tail end of the curve. Can't nail down specifics, as recessions aren't called until after the fact. Although, another interesting observation -- you can't see it on this chart, but the smoothing curve for periods of expansion is growing exponentially. Good news for bulls at least.

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