Odd Lots Matt King Sees a $1 Trillion Liquidity Drain Heading for Markets
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Mar 30, 2023 Matt King, a Citigroup strategist specializing in global macroeconomics, dives deep into the puzzling market dynamics of 2023. He explains why risk assets surged despite central banks' inflation-fighting rhetoric. King reveals that nearly $1 trillion in liquidity has recently been injected into the financial system, raising concerns about the impending withdrawal of this support. He questions whether private business investments will adequately fill the gap left by this liquidity drain, making for a thought-provoking discussion on the future of financial markets.
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Market Mystery
- Risk assets have performed surprisingly well despite central banks' hawkish stance on inflation and rising yields.
- Matt King attributes this to a $1 trillion liquidity injection by central banks over the past three months, contradicting the narrative of quantitative tightening.
Stealth QE
- Central banks, despite announcing quantitative tightening, have injected liquidity into markets.
- Changes in reserves, rather than securities, correlate strongly with risk asset performance, contradicting common central bank assumptions.
Portfolio Balance Effect
- Liquidity injections impact markets through a portfolio balance effect.
- Excess money in the private sector, coupled with a shortage of safe assets, pushes investors into riskier assets like Dogecoin or Tesla.