Negative Liquidity Will Drive Stocks Lower

Posted February 3, 2016

Liquidity in the United States turned negative in the fourth quarter of 2015. I believe this played an important role in the severe stock market selloff that began around that time. If so, the outlook for stocks and other asset prices is disturbing since Liquidity appears likely to remain negative FOR THE NEXT FIVE YEARS.

In the new Macro Watch video, uploaded today, I have updated my Liquidity Gauge projections out to 2020. They shows that, even under a best-case scenario, Liquidity will remain negative out as far as the eye can see. This will create a much more difficult environment for asset prices. Years of excess Liquidity have driven stocks, property, Net Worth and the economy higher. Those days are gone. As Liquidity now contracts, asset prices are likely to fall, pulling the economy back into recession.

Only a very steep drop in US government bond yields seems capable of keeping stock prices and the economy afloat. Investors should not be surprised if the Fed soon acts to drive bond yields lower – either through QE 4 or by threatening to impose negative interest rates on bank reserves. The Fed has been driving the economy by pushing up asset prices since 2008. They won’t sit idly by if asset prices now begin to plunge.

This video explains significant revisions to the projections for the budget deficit and the current account deficit (two of the three components of the Liquidity Gauge). If you are a Macro Watch subscriber, log in and watch this 25-minute video now. There you will find 38 downloadable charts with all the details.

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