Monetary policy is the horse, economy is the cart.

Liquidity moves the economy + financial markets in both directions. Monetary policy works with a lag and its effects become obvious several months later.

GDP and CPI are lagging indicators, they always look hot near the top.
The recent boom was created by the easiest liquidity conditions....ever!

The abrupt ending of QE and tightening by other central banks will bring about big economic slowdown in H1 '22.

Lots of carnage under the hood, many stocks weak...the indices are skating on thin ice.
Based on liquidity conditions and several leading economic indicators, it appears both economic activity and inflation will peak soon...

Thereafter, we are likely to get a swift contraction in risk assets and flight to safety (US$ and USTs).
Thanks to unprecedented QE and fiscal stimulus, central banks and governments succeeded in creating an 'everything bubble', with several asset-classes (commodities, crypto, housing and stocks) bubbling at the same time.

Gentle reminder ---> Liquidity cuts both ways.

• • •

Missing some Tweet in this thread? You can try to force a refresh
 

Keep Current with Puru Saxena

Puru Saxena Profile picture

Stay in touch and get notified when new unrolls are available from this author!

Read all threads

This Thread may be Removed Anytime!

PDF

Twitter may remove this content at anytime! Save it as PDF for later use!

Try unrolling a thread yourself!

how to unroll video
  1. Follow @ThreadReaderApp to mention us!

  2. From a Twitter thread mention us with a keyword "unroll"
@threadreaderapp unroll

Practice here first or read more on our help page!

More from @saxena_puru

27 Dec 21
Fed announced QE "taper" in Nov and accelerated it in Dec....but data shows that over past 4 weeks, its balance-sheet still grew by ~$120b!

In anticipation of the end of QE, hedge funds dumped tech stocks in Nov/Dec. With Fed still pumping $120b/month, will HFs now ↗️ exposure?
After realising that despite QE "taper" announcements, the Federal Reserve's balance-sheet still grew by $120 billion over the past four weeks, I covered my #NQ_F short at a loss, also my long $ futures position and $TLT

I've also increased exposure to growth stocks.
In November, the Fed announced it would reduce QE by $15 billion per month and in December, it announced it would reduce it by $30 billion per month (with view to ending it in March).

Despite these 'hawkish' declarations, its balance-sheet still grew by ~$120b over past 4 weeks!
Read 4 tweets
25 Dec 21
Current cycle -

The current QE-cycle has been unprecedented!

Between March '20 and Feb '21 (11 months!), most high flying stocks quadrupled, quintupled or more and over the past 2 months, they have declined by 40-70%!

During the upswing, years of gains were compressed,,,
...into just 11 months (stocks usually quadruple, quintuple or more over many years!) and this contraction over past few weeks (40-70% declines) has also been very abrupt!

Due to the size of QE, fiscal stimulus + animal spirits, the moves were exaggerated in both directions...
...After the high flying stocks had run up so much so quickly and their valuations had become super stretched, it was obvious to me that future returns were going to disappoint. I shared this sentiment several times in my posts in late '20 and early '21.

This is why, instead...
Read 6 tweets
23 Dec 21
Portfolio positioning -

Long - US$ futures, $TLT + some growth stocks, $ cash
Short - NASDAQ futures #NQ_F

Portfolio is net short stocks
We are dealing with a QE cycle (not rate hike cycle) -

That'll come later...

In the past, each QE-end was followed by ~20% decline in the indices from ATHs...back then, valuations were way lower too.
Word of caution -

No crystal ball here, so anything can happen....

However, am familiar with stock market cycles and Fed's QE cycles....both suggest caution during H1 '22.

This is not a recommendation, please do own DD and I reserve the right to be wrong.
Read 5 tweets
16 Dec 21
Update -

With central bank intervention/QE, asset markets have become prone to massive booms and busts.

Algos + online trading have made the markets super fast and now, big moves happen very quickly.

10 or 20 years ago, stocks used to decline 40-50% in a year or two and....
....now, they go down this much (and more) within weeks! In Nov '21, when Fed announced QE taper, many high growth stocks tanked by 40-70% within 6 weeks and during this period, my hedging strategy did not offer me full protection.

My high growth stocks declined more than the...
...ARK ETFs and in order to protect my capital, I sold all my stocks and to profit from the intense selling, also went net short.

Going forwards, when the tide of liquidity goes out again, instead of remaining invested and hedging, I may (once again) sell all stocks and...
Read 4 tweets
15 Dec 21
Impressive rally in stocks following hawkish Fed!

Given FOMC stance, was expecting more selling - market proved me wrong today.

A number of the growth stocks which were down by 50-70% over past month rallied hard...has market discounted the worst?

On watch for base building.
Still of the view that before this cycle ends, we will see 15-20% pullback in the indices from their ATHs....

However, with most growth stocks already bombed out (down 50-70%) from their ATHs, perhaps they will now base out as indices roll over?

This game isn't easy!
Intellectual honesty more important to me than ego.

Today's price action (especially in growth stocks) was impressive! During '00-'03 bust, TMT stocks declined by 50-80% in 3 years, in this cycle many declined by 40-70% in a few months!

On watch to see if they build bases now..
Read 4 tweets
13 Dec 21
This QE cycle was massive (bigger than the previous rounds) and its unwind is likely to be quicker (4-5 months). Equity valuations are also a lot higher today!

Many expecting a year-end rally but $NDX peaked over 3 weeks ago and recent bounce failed well below ATH...
Anything can happen but it looks increasingly likely that the carnage is now spreading to the indices.

The risk/reward over the following weeks is unfavourable, stocks likely to be lower in 2022 before Fed comes to the rescue again.

The Fed will help but only after more pain.
Fairly obvious that we were in a QE-induced bubble.

In my interview last year (July 2020) with @Matt_Cochrane7 , I clearly mentioned that we were in an 'incipient bubble' which was likely to blow into a full fledged mania before the bust.

When liquidity shrinks, bubbles pop.
Read 5 tweets

Did Thread Reader help you today?

Support us! We are indie developers!


This site is made by just two indie developers on a laptop doing marketing, support and development! Read more about the story.

Become a Premium Member ($3/month or $30/year) and get exclusive features!

Become Premium

Too expensive? Make a small donation by buying us coffee ($5) or help with server cost ($10)

Donate via Paypal

Or Donate anonymously using crypto!

Ethereum

0xfe58350B80634f60Fa6Dc149a72b4DFbc17D341E copy

Bitcoin

3ATGMxNzCUFzxpMCHL5sWSt4DVtS8UqXpi copy

Thank you for your support!

Follow Us on Twitter!

:(