Stuffing banks with reserves via Quantitative Easing doesn't spur lending if there's no real economy demand. The current shift is driven by a genuine "pull" for credit from sectors like AI and onshoring, making banks willing to lend, which is a far more powerful economic force.

Financial markets are not driven by the economy; the economy is downstream from markets. The liquidity cycle, representing money available to the financial sector, precedes real economic activity by 15-20 months, making it a powerful leading indicator for macro investors and asset allocators.

A strengthening real economy isn't always bullish for assets. Increased activity, inventory building, and capital expenditures raise working capital demands, pulling liquidity out of the financial system. This starves markets of needed capital, creating a liquidity crunch independent of central bank actions.

The primary near-term risk for equities is not interest rate hikes but a squeeze on liquidity. This is driven by the combination of fading central bank balance sheet support (e.g., reduced reserve management and Treasury buybacks) and accelerating capital demand from a strengthening real economy.

The end of a liquidity cycle is not typically triggered by central banks, but by the real economy. As economic activity strengthens late-cycle, it drives up commodity prices. This process acts as a tax on the system, destroying liquidity and tipping the market into turbulence.

The S&P 500 is hitting all-time highs amidst a severe energy crisis because soaring global money supply is overriding fundamental risks. This liquidity floods into financial assets as real economy activity (money velocity) slows, creating a major disconnect between markets and reality.

Strong earnings growth can fuel the equity market even when the Federal Reserve is on hold, meaning rate cuts are not a prerequisite for solid returns. The more significant and immediate risk is a liquidity crunch, where the private economy's capital needs for investment and recovery outstrip supply from the Fed and Treasury.

Asset allocation should be based on liquidity cycles, not economic cycles like GDP growth, as they are out of sync. An increase in liquidity precedes economic acceleration by 12-15 months. Strong economic data can even be a negative signal for asset markets as it means money is leaving financials for the real economy.

The convergence of positive global growth indicators raises a crucial question for monetary policy. If the economic backdrop is genuinely strengthening, as these diverse signals suggest, it undermines the justification for central banks to implement further rate cuts. This creates a potential divergence between improving economic reality and market expectations for easing.