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I'm fed up with w/ the intellectually dishonest "Fed liquidity" nonsense being propagated across Fin-Twit & the buyside. It's the kind of analytically lazy risk management framework that represents a source of grave DANGER for the average investor. Per my friend @BuddyCA64525731:
It's shocking to me that across the hundreds of institutional investors I speak with and thousands of individual investors I interact with on Fin-Twit that I have not seen ONE quantitative analysis of what "Fed liquidity" actually means for markets. Just a lot of conjecture...
Well, today is your lucky day b/c I spent all day yesterday adding some @Hedgeye-style DATA SCIENCE to the LIQUIDITY vs. FUNDAMENTALS debate.
Not surprisingly, the #math leaves much to be desired in support of anchoring on "Fed liquidity" as a primary risk management framework.
Not surprisingly, the #math leaves much to be desired in support of anchoring on "Fed liquidity" as a primary risk management framework.
In short, "Fed liquidity" simply does not backtest well as a REPEATABLE & ROBUST Macro Risk Management framework. If you're myopically focused on either the 2nd or 3rd derivatives of the Fed's balance sheet, you'll fail to capture a SIGNIFICANT PORTION of the upside in the $SPY.
Additionally, anchoring on "Fed liquidity" through the lens of 2nd and 3rd derivative changes to the Fed's balance sheet does not backtest well in the direction of generating CLEAR & CONCISE BUY/SELL SIGNALS. Moreover, which Fed head are you supposed to anchor on? Lots of NOISE!
I don't want this thread to come off as suggestive of the view that "Fed liquidity" doesn't matter. It obviously does. The DATA I'm highlighting here simply implies anchoring on FUNDAMENTALS provides investors w/ far better upside/downside capture %'s than anchoring on LIQUIDITY.
