LESSON 1 / 4 · 6 MIN
Liquidity and stocks: a backdrop, not a trigger
Use liquidity as context for markets without turning it into a forecast.
The argument is intuitive: when there is more money in the system, more of it ends up in risky assets; when it drains, there is less. Between 2020 and 2021, net liquidity and the stock market rose together, and in 2022 they fell together. That chart made the idea famous.
Common mistake
From 2023 the relationship broke for long stretches: the stock market rose strongly while QT continued. Earnings, AI investment and the drain coming out of the reverse repo (not reserves) explain much of it. A relationship that holds in some years and not others is a backdrop, not a rule.
Key idea
Liquidity matters most at the extremes: when it is abundant it forgives a lot, and when it becomes scarce (2019, 2025) even good news is not enough. In between, other things set prices.
Practice
Write one sentence about today's liquidity backdrop using only what you learned in this course: quantity, price and buffer. No forecast allowed.
On the site · /net-liquidity
Open /net-liquidity and read the sentence under the grade: it is exactly this kind of description.
Open it on the site →Check yourself
Net liquidity falls for six months and stocks rise. What do you conclude?