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"Money printer go brrr...stocks go up" This is how most retail traders think about liquidity It's not wrong. It's just about one third of the picture 🧵
Liquidity isn't one thing. It can be thought of as three layers stacked on top of each other Once you can see them, market behaviour that looks crazy starts making more sense
Layer 1: The Tide Central bank balance sheets. The global credit system. The Fed, ECB, BOJ, PBOC This is the structure. The size of the pool everything else swims in @@crossbordercap work on this is the gold standard. He tracks a roughly 65-month Global Liquidity Cycle that drives stock returns as much as earnings ever have That cycle is grinding lower into 2026
Layer 2: The Current Fiscal liquidity. Treasury issuance mix. The TGA. Deficit spending velocity This is where Fintwit's favourite formula comes in: Fed Net Liquidity ≈ Fed total assets − TGA − RRP When Yellen pivoted to bill-heavy issuance in late 2023, she quietly drained the reverse repo facility and pumped liquidity into the system without the Fed lifting a finger Markets ripped. Recession-watchers got run over That was fiscal policy doing the monetary policy job
Layer 3: The Wave Endogenous liquidity. The market generating its own juice through reflexive feedback loops Rising prices compress vol...which boosts collateral values...which expands risk budgets...which pulls systematic strategies into equities...which forces underweights to chase...which triggers dealer hedging flows that suppress vol further The market literally feeds itself At peak, it can dominate everything else
The 2023 rally was fiscal The 2024 rally was endogenous The 2020 surge had all three layers firing at once Most retail traders watched the Fed, saw QT, and stayed on the sidelines while markets ran without them They were watching only one layer
Endogenous liquidity can be self-sustaining...as long as primary liquidity doesn't drain too fast It doesn't need the tide rising. It just needs the tide not to fall hard enough to break the loop That's why markets can rally during QT. Why valuations can defy gravity for years Until they can't
When all three layers reverse at once, you get the Minsky Moment Vol expands. Collateral values drop. Risk budgets shrink. Dealers flip from long gamma to short gamma. Buybacks stop. New issuance freezes Every link in the reflexive chain snaps in the same direction, violently The same machine that pushed prices up now accelerates the way down
So next time someone tells you "liquidity drives stocks", ask them what they mean by "liquidity" If they only know one layer, they're going to get caught flat-footed when the other two do their thing