SocGen: The Market Is Experiencing THE ARCHIMEDES PRINCIPLE

Per Wikipedia, the Archimedes Principle is: “Any object, wholly or partially immersed in a fluid, is buoyed up by a force equal to the weight of the fluid displaced by the object.”

According to SocGen, that’s the market. Liquidity has been pumped in like crazy, and that’s buoying all assets.

This chart, showing that stocks are up along with bonds (with the latter defying its normal relationship to the news flow) gets at the gist of SocGen’s point.

Says SocGen:

The massive liquidity injections by the central banks have enabled risky assets to perform well despite a low growth environment. They have also averted a collapse in the banking system. Even so, the Fed is still expected to launch QE3, further monetary policy easing is expected in China and numerous investors consider LTRO3 as highly probable. The question is why should the central banks inject more liquidity into the system. Indeed, in the US, GDP momentum is positive, employment data is improving and the housing market has bottomed; in the euro area, the risk of a banking default is now close to zero; and it looks as if China can avoid a hard landing. Thus it seems monetary policy will continue to ease despite good economic figures. In other words, investors want to have their cake and eat it. So where will the next shock come from? Will it be the central banks that disappoint or will it be the economy? We acknowledge that equities may continue to perform well as a result of the central bank support measures. However we also believe the central banks will act only on a deterioration in economic data. In addition, the current rise in oil prices could push back the prospect of further monetary policy easing.

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Photo: SocGen

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