Sunday Afternoon..

Probably an eventful week will start from here, just survive the Super Bowl and hope you bet well.

I hate to admit this, but it took me some 18 months to come to grips with what was going on with the stock market. I liked to think that my traditional measures, like GDP vs Stocks, Yield Curves, P/E’s, sentiment measures, you name it were important. I thought we were seeing a bunch of crazy people embedded with Greenspan’s “irrational exuberance”. But until my friend who publishes thechartstore.com charts and analysis sent me this chart, I just viewed the FED Balance sheet as something to complain about, like I had with Ben Bernanke’s QE2, for the past 11 years. Then it hit me, within reason, nothing else mattered but this chart showing the correlation between stock prices and the FED Balance Sheet, it is liquidity, which I have often talked about but had not put into this analysis context.

I then analyzed the correlations and produced this chart which show how close the two paths follow each other, especially since 2020.

The Chart below shows how I was trying to represent the fact that stocks were overpriced versus GDP, which was true but did not really have an answer as to why.

Which leads me to some some summary comments leading to what I would call at the moment, a Sticky Bubble...

1. We keep trying to point out, over the past 14 years, that the stock market is not related to the economy. And, for sure since 2011 that has been true thanks to Ben Bernanke.
2. Stock prices are about liquidity, not value, it is something that commodity traders learn early, it is not a pure supply demand market, it is supply / liquidity fueled demand market.
3. Which leads to where we are now, the disconnect between stock price value and GDP production unit value.  This relationship is out of sight.  Does that mean the economy is hot and going to roar ahead?  According to the FED GDPNOW forecast for the first quarter, which we posted Friday, that is not the case.

Here are some links to earlier comments on this site over the past six months where my progression in thinking to where we are now can be seen.

9/23/21 Things Changed – Eureka Perspectives (eureka-perspectives.com)

The Fed Backstory, October 30, 2021 – Eureka Perspectives (eureka-perspectives.com)

There will be a post tomorrow morning on Monday’s trading outlook.