June 3, 2020
Stocks have moved aggressively higher over the past 24-hours.
The crash in stocks was fierce, and so has been the recovery — up 44% from the March 23rd lows.
Back in late April, we talked about the 2,930-3,000 area in the S&P (the white box in the chart below). This was a sensible area to mark the top of a range for a while – at least until we had some visibility on what the world looks with economies reopening.
So, when we came out of Memorial Day weekend, it just seemed like the pieces were in place for a defining “rip the band-aid off” moment for the economic crisis.
With that, we are now just beginning to see what asset prices look like when a functioning economy meets an unprecedented sea of global liquidity. I suspect it’s going to surprise a lot of people.
Just how big is the sea (of liquidity)? Remember, not only has the Fed and other global central banks flooded the world with trillions and trillions of new money, but the Fed removed the reserve requirement ratio for banks. It’s now ZERO. At a zero reserve requirement ratio, the stock of money could increase infinitely.
Translation: The value of money is being destroyed, which means the price of assets go up!