After the Federal Reserve decided to cut interest rates again at the Federal Open Market meeting on October 30, the market breathed a sigh of relief, the loose liquidity environment continued, and US stocks hit record highs unabated.

The liquidity feast starts again

The Fed began to raise interest rates in 2015, rising from zero to 2.5% after nine increases. At the same time, the Fed normalized its balance sheet, meaning it stopped investing after the bonds it held matured.

The result is a shrinking balance sheet, or shrinking table. Over the past three years, the Fed's balance sheet has shrunk by $1.2 trillion, equivalent to 25 per cent of the Fed's total assets. (see figure below)

Successive interest rate hikes and shrinking balance sheets led to a rapid decline in dollar liquidity, which accumulated to a surge in overnight repo rates in mid-September. Overnight interest rates, which were originally in the 1.75% price range of 2%, rose by more than 8%. The last time a similar incident occurred was during the global financial crisis in 2008. At a time when abnormal changes in interest rates could destabilize financial markets, the Fed had to restart its rate-cutting cycle at the end of July.

Like the supporting operation when raising interest rates, increasing capital injection (expanding the table) and reducing interest rates also belong to the operation of mutual cooperation.

Since end of SeptemberTo ease the tight liquidity in the market and insufficient bank reserves, the Fed has significantly increased the size of its overnight and regular repo operations and launched a plan to buy $60 billion of short-term Treasuries a month until June next year, totaling $540 billion.

This led to a $258 billion increase in the Fed's balance sheet, which it had just reduced to less than $4,000bn in early 2019.

Against this backdrop, it is logical for the Fed to cut interest rates at the end of October, all aimed at alleviating the liquidity squeeze in the dollar market.

Macquarie Bank analysts said in a recent report that at a time when US economic data were mixed and there was no recession, "mobile cattle" appeared first, and central banks released water one after another, supporting the strength of major stock indexes in many countries.

In a word, the music didn't stop and the dance continued.

The uncertainty of "performance" is still high.

In the middle of this year, due to an important sign of recession in the United States, namely, long-and short-term Treasury yields upside down, market concerns began to rise, U. S. stocks also showed a pullback.Since then, the yield spread on the 10-year three-year Treasury note has actually remained around zero and has not improved significantly, reflecting that the US economy has not been rid of the danger of a high probability of going into recession.

The Federal Reserve has cut interest rates three times in a row in the past four months, which actually shows that the US economy may face greater downside risks.

According to the latest data released, the annualized rate of constant GDP prices in the United States fell for two consecutive quarters, from 3.1% in the first quarter to 2% in the second quarter, and continued to fall to 1.9% in the third quarter, narrowing the rate of decline. In the context of relaxed financial conditions in the third quarter, the US economic growth rate remains unchanged from the downward trend.

Compared with the rapid stabilization and rebound of the US economy after two preventive interest rate cuts in 1995 and three preventive interest rate cuts in 1998, this year's preventive interest rate cut is not as effective as it used to be.

Changjiang Research believes that the "alarm" of the US economy has sounded: the US GDP exceeded expectations in the third quarter mainly due to an improvement in exports.The growth rates of private consumption and investment, which reflect domestic demand, both continued to decline.

October PMI of US Pharmaceutical Industry48.3, lower than expected and slightly higher than the previous valueBut it is the third month in a row that it is below the rise and fall line.Indicating that the US manufacturing industry is still in a downward channel.

This may also be one of the reasons behind the US decision to suspend trade frictions, which has also created a better external environment for the high-end US stock market.

So,At present, US stocks lead the way with full horsepower. The world is a typical liquidity bull.The mixed economic data indicates that the earnings growth rate of listed companies is still uncertain.

Us stocks have been strong since the start of the year, with the s & p 500 up more than 20 per cent, with the downside of risk-free interest rates (that is, valuation) being the main contribution to the index's gains since the start of the year. Valuations can still be the main driver of the index when earnings are growing well, but once earnings start to fall sharply, valuations are groundless.

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