From Tuomas Malinen’s Forecasting Newsletter.
Issues discussed:
‘Liquidity surprise’ in June has pushed markets to all-time-highs.
The sudden increase in liquidity is likely to wane or even collapse going into the fall.
Reminiscence of the current conditions with those that preceded the 1929 stock market crash are becoming disconcerting.
I had a rather relaxing summer break. I drove to northern Norway, Tromso, through Lapland, went to a festival (Ilosaarirock in Joensuu) and did some farming. The main aim was to take some time off from the economy and the markets, and in that I was succesful. :)
While I was away, our analyst, Máté Sütó, continued to work with the U.S. banking data. I think we have finally found a way to properly categorize U.S. banks according to their risk of failure in a bank run. We will, finally, start to publish a list of the most risky and the most safe U.S. banks, with specifics on the metric we are using, in August.
In this first post-vacation entry, I will analyze the liquidity shock, or ‘surprise’ behind the market euphoria and the possibility of an abrupt decline in liquidity in the fall. We published a warning on a ‘last hurrah’ market rally in mid-July. The rallying part of it has now come to pass, with the Dow Jones Industrial Average (DJIA) having just had its longest winning streak since the rather ominuous year of 1987. It’s something of a historical fact that long rallies at the end of the business cycle tend not to end well, even though 1987 was not the end of business cycle (recession arrived in 1990). This time around several factors are converging to what may become a repetition of the ‘Great Crash’ of October 1929, which occurred at the end of the business cycle.
Alas, investors may have been dragged into one of the biggest ‘bull traps’ ever seen. Let me elaborate.
Liquidity surprise
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