Riding the Liquidity Wave
Riding the Liquidity Wave
How Global Liquidity Surges Impact Risk Assets, Hard Assets, and Everyday Life
In the recent week, two key charts have emerged that paint a revealing picture of the global liquidity landscape. These charts—one from CrossBorder Capital and another shared on X by Aurelien Ohayon—show how global liquidity is at a turning point, poised for a potential breakout that could have massive implications for asset prices, investor behavior, and even everyday affordability.
Let’s break down what these liquidity shifts mean for various parts of the financial and social world.
The Global Liquidity Rollercoaster
Both charts show how global liquidity has historically moved in cycles. The first chart above, from CrossBorder Capital, shows that global liquidity is now moving off recent lows, with the long-term liquidity cycle hinting at an upward trend. This aligns with the second chart shared by Aurelien Ohayon, which suggests that significant liquidity infusions in the past have triggered massive "bull runs" in risk assets, particularly in Bitcoin, as marked by the green boxes on the chart.
What’s intriguing here is the repeating pattern of “breakouts” from liquidity lows, followed by explosive rallies in asset prices. This latest liquidity breakout suggests that we're on the cusp of another major upswing in risk assets like equities, cryptocurrencies, real estate, and more. But what does this mean for different areas of the economy and most people’s everyday life?
1. Risk Asset Prices: Preparing for Another Surge
As the charts show, increasing global liquidity tends to directly correlate with surges in risk asset prices. When central banks and governments flood the market with liquidity, investors typically shift toward higher-risk, higher-reward assets such as stocks, Bitcoin, and emerging technologies.
Bullish Case: If the current liquidity breakout follows past patterns, we could be in for another "bull run," particularly in assets like Bitcoin (projected toward $500K on Ohayon’s chart). Risk assets could surge as investors take advantage of increased cash flow and cheaper borrowing costs.
Bearish Risk: However, excessive liquidity can also fuel speculative bubbles, which eventually burst. When too much liquidity enters the market too quickly, it often results in inflated asset prices detached from real value, leading to increased volatility down the line.
U.S. Household Stock Ownership Concentration:
The total United States population equals just over 345 million people as of this writing.
And according to the Motley Fool:
The wealthiest 1% of Americans (3.45m people) hold 50% of stocks, worth $21 trillion.
The top 10% of Americans (34.5m people) hold 87% of stocks, valued at $32 trillion.
The bottom 50% of Americans (@ 177m people) in terms of net worth only owns 1% of stocks, worth approximately $430 billion.
2. Hard Asset Prices: Real Estate and Commodities to Inflate
Just as liquidity boosts risk assets, hard assets like real estate and commodities (gold, oil, etc.) tend to rise in price during times of increased liquidity. When there’s more cash in the system, people seek to preserve wealth in tangible assets.
Inflation Hedge: Real estate, in particular, could see significant price increases, particularly in markets already facing low supply and high demand. Investors may flock to physical assets as a hedge against inflationary pressures brought on by excess liquidity.
Affordability Issue: Unfortunately, this also means that home prices and rents may continue to rise, putting additional pressure on affordability for the average person. As liquidity drives asset prices up, wages often lag, exacerbating financial struggles for those outside the investor class in the other 90 percent of the population.
3. Lifestyle Affordability for the Majority: A Squeeze
While increased liquidity can boost markets, it often leads to higher living costs for the average person who feels constantly “gaslit” by the politician’s rhetoric that the economy is doing great. In my opinion, a crash up in asset prices at this time is WORSE than a crash down, because at least in a crash down, there is a reset to the system that allows more people the time and opportunity to “buy back in” and ride the wave back up.
However, in this current situation, as asset prices—like housing and commodities—rise, everyday goods and services become more expensive. This liquidity boost is likely to worsen inflationary pressures, further shrinking the purchasing power of non-investors. The only life raft I see for people in this situation has been and remains the asymmetric return on risk with any amount of savings one has in an asset like Bitcoin both as a beta strategy for preserving the purchasing power of their dollars as the currency gets radically debased in the coming year(s), and also as an alpha strategy to outperform the store of value trait with abnormal returns as more of the world gets tokenized and Bitcoin gobbles up more of the global economy as both an alternative real-time settlement layer and a hedge against fiat monetary collapse.
—DISCLAIMER: Do Your Own Research and this IS NOT FINANCIAL ADVICE—
Wealth Inequality: This liquidity surge might widen the wealth inequality gap even further. Those holding assets will see their wealth grow, while those living paycheck-to-paycheck could struggle with rising costs of living. Without asset ownership, the average person will be left behind as asset inflation eats away at their disposable income.
4. Wealth Inequality Gaps: Expansion or Contraction?
Historically, increased liquidity favors those who already own assets, and these charts suggest that trend is likely to continue. Asset owners stand to benefit significantly from surging prices in stocks, real estate, and cryptocurrencies. Meanwhile, non-owners face rising costs without comparable wage growth or asset appreciation.
Expanding Wealth Inequality Gap: This liquidity-driven wealth gap expansion creates social instability. When a larger portion of society feels left out of wealth creation, populism rises, crime rises, and violence rises as political tensions may escalate. Increased liquidity could lead to a broader chasm between the "haves" and the "have-nots" at a time when society is already a proverbial tinder-box of pent-up frustrations. Be careful out there.
5. Global Conflicts: Escalation or Easing?
Rising inequality, especially when coupled with inflation, often breeds social unrest and geopolitical instability. As the liquidity surge benefits a small segment of the population, the political environment may grow more volatile. Countries may implement more extreme policies—whether monetary tightening or protectionist strategies and capital controls—to mitigate the impacts of inflation and inequality.
Tension Zones: If liquidity-driven inflation causes a sharp divide between asset holders and the working class, social unrest could increase, as we’ve seen in the past during periods of extreme economic disparity. Additionally, this could lead to heightened trade wars, protectionist policies, and diplomatic strain between nations as they compete for scarce resources.
Investor Takeaways: Pros and Cons of the Liquidity Surge
For investors, this liquidity surge presents both tremendous opportunity and significant risk.
Pros:
- Asset Appreciation: Those holding assets like real estate, stocks, and Bitcoin could see massive gains as liquidity continues to rise.
- Opportunity in Volatility: Savvy investors may exploit the market volatility that comes with these liquidity shifts to enter positions before prices surge.
- Inflation Hedge: Hard assets like real estate and commodities serve as an effective hedge against inflation, preserving purchasing power.
Cons:
- Market Volatility: Excess liquidity could lead to speculative bubbles in risk assets, followed by sharp corrections.
- Social Instability: Rising inequality and inflation could trigger political and social unrest, creating an unpredictable macro environment.
- Timing Risk: Getting in too late during a liquidity-driven bull run could lead to heavy losses if and when the bubble bursts.
For Non-Investors: Challenges Lie Ahead
For those without assets, the current liquidity trends are far less favorable. Rising costs of living and housing could further strain household budgets. However, there are still ways to adapt:
1. Invest in Education: Learning about financial markets and investments can help close the knowledge gap and make financial growth more accessible. This newsletter and other podcasts or publications like it are a great place to start with your limited time and money.
2. Cutting Expenses: As prices rise, finding ways to cut back on non-essential spending could provide some relief.
3. Exploring Passive Income: Seeking ways to build additional income streams (side hustles, investing in small ways to gain cash flow to purchase assets like Bitcoin, stocks, etc.) can help offset rising costs and get you into the game.
Conclusion: A Tidal Shift in the Making
The recent data points on global liquidity indicate we’re at the edge of a significant financial shift. For those with exposure to risk and hard assets, this could be a time of extraordinary gains. But for those without, it could lead to greater financial stress and growing inequality.
As always, understanding the broader market dynamics—and preparing accordingly—will be key to navigating the opportunities and challenges ahead.
Stay ahead of the liquidity wave—subscribe for more insights into how to protect and grow your wealth in an increasingly unpredictable economic environment!