liquidity
Liquidity is the tide
The rule
The rate is the price of money; liquidity is how much of it is sloshing around - and the tide lifts or strands every boat.
Where it flips
At a steady rate, liquidity feels like a technical detail. Where it misleads: you read only the headline rate and ignore how much money is actually flowing. The fix: track system liquidity and central-bank operations as a tide that can lift or strand prices on its own.
Even at the same interest rate, markets behave differently depending on how much money is flowing through the system. When liquidity is ample, prices float up broadly; when it drains, even good boats can run aground. The reader watches system liquidity and central-bank action alongside the rate, because the tide often moves prices more than earnings do.
A worked example
Two years share a similar repo rate, but in one the banking system runs a large liquidity surplus and in the other a deep deficit. The surplus year sees prices float up broadly; the deficit year sees them struggle, earnings aside. [illustrative]
How to spot it
- ·a large surplus or deficit in system liquidity
- ·the central bank adding or draining through its operations
- ·prices floating broadly with no earnings news
- ·the tide moving markets more than fundamentals
Stanley Druckenmiller · Liquidity moves markets more than earnings