As we get closer to year end, and investors start thinking about how to position portfolios for 2023 it’s important to understand the different cycles that affect the economy, or better said, that the economy goes through. One of them is the liquidity cycle, where money flows from assets to cash and from cash to assets, and it can be an amplifier of volatility like we’re seeing these days. If you follow the “clock”’of the chart below, you can see that as central banks tighten rates, liquidity goes down, assets fall and equity risk premium (among others) need to rise so we can start the cycle again. That hasn’t happened yet, at least not meaningfully, and it’s difficult to see the start of a new cycle until that happens. We should be indeed closer to the end of the tightening cycle than to its beggining, but probably need to go through more pain before we can start the next liquidity cycle.
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Source: Bridgewater Associates
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