I have studied and reported on the correlation between the direction of liquidity, what was going on in the US banking system, and stock prices for the past 15 years.
As you know, my efforts culminated in the development of the LAMPP indicator, which reduces the most important sources and uses of liquidity in the US market to a simple red light-yellow light-green light system that requires little interpretation. I update that indicator here for you every Monday.
Right now, the LAMPP is on yellow and getting perilously close to turning red (even before the Fed begins to reduce the size of its nearly $4 trillion balance sheet).
Here’s exactly how I know…
Economists and Wall Streeters will often tell you that the Fed influences the economy by pumping money into the banking system, or by lowering or raising interest rates. But they don’t tell you exactly how the Fed does that.
That’s because most of them don’t know…and the ones who do know don’t like to talk about it.
Let’s put aside interest rates for a moment. The Fed completely screwed that tool up by injecting $2.7 trillion of cash into the banking system. With that amount of money in the system, rates don’t matter much.
All that matters is whether that huge pile of cash is increasing or not.
From 2009 until the end of 2014 under its “quantitative easing” program (or QE), the quantity of money in the system was always growing, except when the Fed took a brief pause. And the markets always rose, except when the Fed took a brief pause.
That was no accident.
Wall Street would have you believe that the Fed prints money and somehow it gets into the US economy and then by osmosis into the stock market.
In fact, it’s just the opposite.
Today, I want to take you inside the Fed’s secret “back room” and give you a look at how the sausage is made…