Fast forward to the past decade, and financial engineering is not just alive and well but this time on steroids. Following the 2008 Financial Crisis, the U.S. Federal Reserve pumped trillions of dollars of liquidity into the market via four rounds of quantitative easing and ultra-low interest rates.
For those who don’t like dual Y-axis charts, the R-Squared of the S&P 500 and Fed net liquidity between 2008 and 2022 was 0.841, according to Real Vision and using Refinitiv Data. This means 84 per cent of the observed weekly variation in the S&P 500 can be explained by the Fed net liquidity. This leads us to the real cause of the U.S. equity market’s launch higher in March of this year, and while many of you may think it was AI, there was something more important going on behind the scenes. The Fed once again increased its balance sheet by nearly US$400 billion to support the banks that thought low rates would exist forever.