What is Global Liquidity and Predicting the Future

A Look at the Markets: S&P 500 & Bitcoin

Let’s look at the markets a little over a week after the FED reduced interest rates by 0.5%. After an initial reduction, the S&P500 recovered with a largely positive week and is up around 4.1% since the announcement.

Bitcoin has been a bigger winner with an increase of 10.7% since the FED announcement.

As always, there may be more than one factor leading to market movements.

What is Global Liquidity and Predicting the Future

Investors should have a basic understanding of the financial world to make informed decisions. For example, when evaluating an asset, we often look at specific details. Take an Apple share: we might examine turnover, profit, or growth projections. But beyond the individual asset, it’s essential to consider the economy as a whole. One key factor to examine is global liquidity.

Global liquidity refers to the total amount of money and easily accessible financial assets available across global markets. This liquidity influences how much capital is available for investment and borrowing. When liquidity is high, there is more money circulating, making it easier for companies and individuals to obtain loans and make investments. On the other hand, when liquidity is low, borrowing becomes more expensive, and growth can slow.

Central banks, such as the Federal Reserve or the European Central Bank, control global liquidity through policies like adjusting interest rates. By lowering rates, they increase liquidity, making money cheaper to access. Raising rates has the opposite effect, tightening the money supply.

Understanding global liquidity helps investors anticipate economic shifts and make more strategic investment decisions in both bullish and bearish markets.

How Global Liquidity Can Help Us Make Investing Decisions

Investor, analyst and author Lyn Alden has commissioned a report into the correlation between various assets and global liquidity. According to the report, Bitcoin has the highest correlation, as shown in the table below.

In the executive summary of the report, she states:

This is important because it suggests that Bitcoin can be a reliable measure of global liquidity. Former hedge fund manager Raoul Pal takes this a step further—can global liquidity actually help us predict Bitcoin’s price?

Using Global Liquidity as a Potential Price Predictor

Raoul Pal has identified a correlation between global liquidity and Bitcoin price movements. However, the strongest correlation occurs with a 10-week lead. This means that today’s Bitcoin price aligns best with global liquidity from 10 weeks ago.

To put it simply:

• Global liquidity leads by 10 weeks.

• Bitcoin price follows with a 10-week delay.

I have cut the chart to show this correlation.

Looking Ahead

By adding recent global liquidity data to the chart, and projecting it 10 weeks into the future, we can try to forecast Bitcoin’s price over the coming weeks.

This is the full chart from above:

Will this correlation continue? It’s impossible to know for sure, as unexpected events can impact future prices. However, it is one indicator that we can use.

As always, investors should consider all factors and make their own informed decisions.

China’s Potential Impact on Global Liquidity

This week, China’s central bank announced its largest stimulus since the pandemic, including additional funding and interest rate cuts to boost growth. The move is aimed at pulling the economy out of deflation and restoring confidence after weak economic data. As the world’s second-largest economy, China’s actions could significantly increase global liquidity, potentially lifting asset prices and easing financial conditions globally, especially in emerging markets. However, analysts caution that more fiscal measures may be needed to reach the country’s growth targets.

The potential impact of this stimulus package does not yet appear in the global liquidity charts in the previous section.

Vice President Harris Mentions Blockchain

Vice president and presidential candidate Kamala Harris has mentioned blockchain for the first time in this campaign. This is significant because, until now, the Republicans appear to be more crypto-friendly.

As I have said in this newsletter previously, I think that it is the adoption of Bitcoin that will affect the long-term price rather than the short-term impact of the 2024 US election.

Words of the Day: Global, Liquidity, Liquid and illiquid

Global - adjective - relating to the whole world

Liquidity - noun - uncountable - the fact of being available in the form of money or being changed into money quickly and easily

Liquid (finance and economics) - adjective - in the form of money or being easily and quickly turned into. money

illiquid - adjective - not in the form of money and not able to be changed into money quickly and easily

Word of the Day: Correlation

Correlation - noun - countable & uncountable - a connection or relationship between two or more facts or numbers etc