Why the Stock Market Has Boomed

“There is a very simple reason why stocks melted up in recent weeks,” explain the gentlemen of Zero Hedge — “and a very simple reason why they’re set to stumble in the second half.”

What is the very simple reason why stocks melted up in recent weeks? And what is the very simple reason why stocks are set to stumble in the second half?

Answers shortly. First we look in on the site of the recent melt-up — and the site of the potential melt-down.

We refer of course to Wall Street.

The Dow Jones Industrial Average took a very slight stumble today, down 35 points. The S&P 500 posted a 36-point gain.

Yet the Nasdaq Composite enjoyed itself a day at the races — up 213 points. The index, in fact, accounts for much of the “melt-up” just referenced.

The 10-year Treasury yield stretched to 3.81% today. On May 11, it hovered at 3.39%. That represents a fantastic leap in under two weeks time.

What does it portend? We do not quite know.

Gold — meantime — absorbed a severe whaling today. The metal hemorrhaged $24 and change.

Yet to return to the first of our central questions: What is the very simple reason why stocks melted up in recent weeks?

We must first tackle this question: How could stocks “melt up” against the Federal Reserve’s ongoing rate hikes and quantitative tightening?

That is, how can stocks melt up against the prevailing ice? Here is the answer:

The recent bank wobbles — commencing in March — have worked a thawing effect.

The ice has reverted to its liquid form.

That is because the Federal Reserve blew the dust from its blowtorches… and proceeded against the ice.

It sent $300 billion of ice transforming into liquid. That fresh liquidity undid a substantial portion of previous tightening… and floated the stock market to a higher level.

Here is Zero Hedge, citing Goldman crackerjack Borislav Vladimiro:

The $300bn increase in bank funding due to the bank stress in March. This liquidity increase has mitigated the impact of the real rate increase on risky assets (and we also said it would lead to a market melt-up at a time when everyone else turned very bearish).

We hazard this “very simple reason” is a very plausible accounting. We believe it explains the recent melt-up, so-called.

And so we have our satisfactory answer to question no. 1.

Yet what of question no. 2 — What is the very simple reason why stocks are set to stumble in the second half?

“While the “delayed liquidity” effect explains why stocks have continued to rise in recent weeks as shown by the net liquidity boost in the US,” continues Zero Hedge… “the bigger question is what happens next.”

The answer is another freezing. The liquid presently flowing will return to ice in the year’s second half.

Once again Zero Hedge cites the abovesaid Vladimiro:

As peak liquidity — as the… risk-friendly liquidity patch we were expecting for H1-23 comes to an end — the liquidity outlook turns for a potential substantial further tightening in H2-23.

How much liquidity could go to ice in the year’s second half? Again, Zero Hedge:

According to Goldman calculations, which echo our own, we should see between $600bn and $1.2tn decline in liquidity by year end just in US and additional $400-500bn decline in Europe…

Assuming a blended average US drain of about $900bn (in reality it will be higher), and adding the $500BN from Europe, and we are looking at about $1.5 trillion drained from global markets by year end.

$1.5 trillion is plenty handsome. It represents a very substantial ice formation.

Thus we are far from certain that the present gaiety can endure. We subscribe to the de-liquified, ice-choked, juiceless second-half theory.

The Daily Reckoning