It’s all about liquidity:

‍

It’s all about liquidity.

What is liquidity?

‍

Market liquidity, as per Investopedia, is a market feature whereby an individual or firm can quickly purchase or sell an asset without causing a drastic change in the asset's price.

‍

Another word for liquidity is money.

‍

Who controls liquidity?

‍

The US Federal Reserve backstops the largest market in the world.

‍

Stanley Druckenmiller was the first person I learned this from in a quote I saw.

‍

‘Earnings don't move the overall market; it's the Federal Reserve Board... focus on the central banks, and focus on the movement of liquidity... most people in the market are looking for earnings and conventional measures. It's liquidity that moves markets.’

‍

Pay attention to the US Federal Reserve and the movement of liquidity.

‍

They’ve indicated they are withdrawing liquidity from the system.

‍

That pops asset bubbles.

‍

They injected trillions of dollars into the economy chasing a fixed amount of goods.

‍

So now you have inflation.

‍

Not just in assets, but real goods.

‍

That’s a problem when it trickles down to food and energy.

‍

Growth doesn’t happen when energy costs and food costs are high.

‍

Problems happen, especially when the poorest and middle class can’t afford to live.

‍

Removal of liquidity also affects asset markets.

‍

The crypto bubble is popping as I write this.

‍

Luna, a stablecoin backed by Terra, dropped 45% in a day 

‍

It lost its peg to the dollar.

‍

Why?

‍

Because these crypto exchanges don’t have liquidity.

‍

All the shitcoins are going to zero because there’s not enough money backing it up.

‍

Your money is only as good when it’s converted to cash.

‍

Internet money on a computer is not taxable. You need to convert it into a government currency.

‍

Let me give you an example.

‍

If the market value of crypto is trillions of dollars, that’s only true if you can take your money out of the exchanges.

‍

But if they don’t have the money to backstop your transactions, and they aren’t fully regulated entities, you could lose everything.

‍

Your money is not insured at a crypto exchange.

‍

All this is happening because liquidity is being withdrawn.

‍

When that happens, asset markets drop.

‍

Almost every asset market is overvalued.

‍

History tells us that will revert to the mean, if not below it.

‍

Liquidity evaporates, just like in 2001 and 2008.

‍

Money disappears.

‍

Trillions have already disappeared, and trillions more will soon.

‍

So to understand asset markets, understand liquidity.

‍

It’s all about liquidity.

‍