Net Liquidity

Think of it this way

It is the water that actually comes out of your shower at home. The reservoir may be full to the brim (the Fed's balance sheet), but if someone closes a valve along the way (the TGA) or the water sits still in an intermediate tank (the RRP), nothing comes out at your house. What matters is not the reservoir, it is what arrives.

What is Net Liquidity?

It is the Fed's money that is actually circulating through the private system. It is calculated by subtracting from the Fed's total balance sheet the two things that hold money out of circulation: what the government keeps in the TGA and what institutions park in the reverse repo.

How to read Net Liquidity

A weekly line. What matters is the slope, not the level. Rising stretches tend to be favorable for risk assets; falling stretches, unfavorable. Turn it on alongside bitcoin on the chart and you will see the relationship for yourself. Lag: none, or +15 days at most: the cash is already in the accounts.

What Net Liquidity means for the market

It is the most cited liquidity metric in the market, and for that very reason it has coordinating power: many people trade while watching it. That said, its relationship with prices is real but unstable: there are periods of high correlation and periods in which it disappears. Use it as a backdrop, not as an entry signal.

Where the money flows

It is what is left for the private sector after two diversions. Example: the Fed has created several trillion dollars, but if the Treasury holds 800 billion in its account waiting to pay and money market funds park another 200 billion in the RRP, that trillion is in no bank and cannot buy anything. Only what gets past both diversions reaches the accounts from which someone decides to invest.

What to watch in Net Liquidity

Look at the slope over the last 4 to 8 weeks, not the level. A weekly change of 45 billion is normal; from 130 you are in the 10% of most volatile weeks, and above 330 in the top 1%. Two specific signals to look for: first, four straight weeks of decline while bitcoin or the S&P keep rising —that divergence tends to close on the price side, not the liquidity side—; second, the turn after a long streak, which historically has marked the change of tone better than any absolute level.

The most widely followed liquidity measure in the market. If it rises, more money is available.