It’s not a new chart – in fact it makes the rounds on a fairly regular basis.
The iteration I saw this week showed the relationship between global money supply, stocks and high yield bonds over the past five years. The trend for all three was the same – up and to the right, with early 2021 bring a fresh round of new highs.
For whatever reason, my first thought on seeing this version was that Wu-Tang Clan had it right all along.
Some background: Released in 1993, “Enter the Wu-Tang (36 Chambers)” by Wu-Tang Clan is not just one of the best rap albums of all time – in my opinion it’s one of the best albums in any genre. It came out when I was in high school, and I’ve listened to it periodically ever since. (Caveat: as the album cover notes, not all the lyrics are family friendly. If you are going to listen to it, please use some discretion.)
One of my favorites songs was Track 8 (that was on the B side of the cassette tape, on which I first listened to it), “C.R.E.A.M.”
The oft-repeated refrain went something like this: “Cash, Rules, Everything, Around, Me. C.R.E.A.M. Get the money. Dollar, dollar bill y’all”
You can probably see where I am going with this.
Back to today.
When I see people discuss the relationship between liquidity and asset prices, I think back to the wisdom of Wu-Tang.
Liquidity is the life blood of the financial markets. Interesting stat: In the years since the release of that Wu-Tang album, all of the net gains in global equities have come when a majority of global central banks have been in easing mode. That is the case now and financial markets are currently awash in liquidity.
It’s unfortunate that so much of the ink spilled in discussions about liquidity, the Fed and asset prices is spent defending (or bashing) one of two extremes. Two entrenched camps see the Fed as either the only thing responsible for asset price movements or as not responsible at all. There seems to be no middle ground.
A more robust view allows for the reality that the Central Banks and financial liquidity can have a significant impact on asset prices – but other things do as well. That’s why if you look at our weight of the evidence, you will see that Financial Liquidity is one of six inputs.
So where does that leave us?
Is there an important relationship between what central banks are doing and how financial markets are behaving? I would have to agree with Wu-Tang and say yes, definitely.
Are there other influences (headwinds & tailwinds) at work as well? Yes indeed and we want to balance what we see from the Fed with what we are seeing elsewhere.
In this environment, the Fed is supplying cash – our goal is to understand where in the financial markets it is finding a home.
No need for blame.
No need for denial.
In what other songs can you glean wisdom about the financial markets? Let me know.