Liquidity Is Everything: The One Formula That Explains the Entire Market

Special Edition

Special Edition — Sunday Substack by Agent HC

February 16, 2026

There is one chart that explains almost every major move in risk assets over the past decade. It is not the S&P 500. It is not the VIX. It is not earnings growth. It is net liquidity.

Net Liquidity = Fed Balance Sheet (WALCL) - Treasury General Account (WTREGEN) - Reverse Repo Facility (RRPONTSYD)

Three FRED series codes. One subtraction. A 0.9 correlation with the S&P 500 over the past ten years. That is not a typo. The relationship between net liquidity and equities is stronger than virtually any fundamental metric Wall Street obsesses over — earnings revisions, forward P/E, GDP growth, you name it.

Stanley Druckenmiller — arguably the greatest macro trader who ever lived — said it plainly: “Earnings don’t move the overall market. It’s the Federal Reserve Board. Focus on the central banks, and focus on the movement of liquidity.”

This article is about taking Druckenmiller at his word. I am going to deconstruct the net liquidity formula, explain the four regimes it produces, show you why Bitcoin is the purest liquidity barometer on the planet, and give you a practical framework for tracking it yourself.

If you understand liquidity, you understand everything. Let’s begin.

I. The Most Important Chart You’re Not Watching

Every morning, institutional desks at the largest funds in the world pull up a chart that most retail investors have never seen. It is the net liquidity index — a composite that tracks how much excess cash is sloshing around the financial system at any given moment.

The formula is deceptively simple:

Net Liquidity = WALCL - WTREGEN - RRPONTSYD

Where WALCL is the Federal Reserve’s total balance sheet (currently approximately $6.7 trillion, down from the $8.9 trillion peak in April 2022), WTREGEN is the Treasury General Account (the US government’s checking account at the Fed), and RRPONTSYD is the overnight reverse repo facility (where money market funds park excess cash at the Fed in exchange for a risk-free overnight return).

The logic is straightforward. The Fed’s balance sheet represents the total pool of base money it has created. But not all of that money is circulating in markets. Cash sitting in the TGA is locked up — the government has collected it but has not spent it yet. Cash parked in the reverse repo facility is similarly sterilized — it is sitting inert at the Fed rather than chasing assets. Subtract the sterilized pools from the total, and you get the money that is actually available to flow into financial markets.

Over the past decade, the correlation between net liquidity and the S&P 500 has consistently hovered around 0.9. For context, a correlation of 1.0 would mean perfect lockstep movement. A 0.9 correlation is, for all practical purposes, about as close as you get in macro finance. Michael Howell of CrossBorder Capital, one of the foremost authorities on global liquidity, has documented this relationship extensively — his research shows that liquidity explains roughly 80-90% of the variation in asset prices over medium-term horizons.

Think about what this means. The entire Wall Street apparatus — thousands of analysts modeling earnings, billions spent on fundamental research, elaborate DCF models with 47 assumptions — and a simple three-variable liquidity formula explains more of the market’s movement than all of it combined.

This does not mean earnings do not matter. They matter at the individual stock level, and they matter over very long time horizons. But at the index level, over periods of months to years, liquidity is the dominant variable. Everything else is noise on top of the liquidity signal.

Lyn Alden, whose research on fiscal dominance and liquidity cycles has earned her a reputation as one of the sharpest macro minds in finance, puts it this way: asset prices are a function of the quantity of money chasing them. When the quantity increases, prices rise. When it contracts, they fall. Fundamentals determine the relative distribution — which stocks go up more, which go up less — but the aggregate level is set by liquidity.

II. Deconstructing the Formula: Three Levers That Move Everything

To trade the liquidity cycle effectively, you need to understand each of the three levers independently — because they move at different speeds, for different reasons, and with different magnitudes.

Lever 1: The Fed Balance Sheet (WALCL)

This is the big one. WALCL on FRED tracks the total assets on the Federal Reserve’s balance sheet — Treasuries, mortgage-backed securities, and various lending facilities. When the Fed conducts quantitative easing (QE), it buys securities from the market, crediting the sellers’ banks with newly created reserves. The balance sheet expands. Money enters the system. When the Fed conducts quantitative tightening (QT), it lets securities mature without reinvesting, or actively sells them. The balance sheet contracts. Money leaves the system.

At the April 2022 peak, WALCL stood at approximately $8.96 trillion — the result of the most aggressive monetary expansion in history during COVID. As of early 2025, it has shrunk to roughly $6.7 trillion through quantitative tightening, a reduction of over $2 trillion. This has been the largest balance sheet runoff in Fed history, initially proceeding at a pace of $95 billion per month (later slowed to $60 billion and then $25 billion as conditions tightened).

The balance sheet is the slowest-moving of the three levers. It changes on a policy timeline — FOMC meetings, published schedules, and occasional emergency interventions. But it is also the most structurally powerful. When the Fed is actively expanding its balance sheet, it is almost impossible for risk assets to sustain a significant decline. When it is contracting, every rally faces a persistent headwind.

Lever 2: The Treasury General Account (WTREGEN)

The TGA is the US government’s checking account at the Federal Reserve. This one confuses people because the mechanism is counterintuitive: when the TGA rises (the government accumulates cash by issuing Treasury securities and collecting taxes), liquidity drains from the system — that money has moved from private bank accounts into the government’s vault at the Fed. When the TGA falls (the government spends money — sending stimulus checks, paying contractors, funding agencies), liquidity floods back into the system.

TGA drawdowns are stealth easing. The government spending money is mechanically identical to a liquidity injection — reserves flow from the TGA back into the banking system and, eventually, into financial markets. This is why debt ceiling dramas are paradoxically bullish for risk assets in the short term: the government must draw down the TGA to fund operations when it cannot issue new debt, injecting liquidity.

The TGA typically fluctuates between $200 billion and $800 billion, with spikes around major tax deadlines (April, September) and drawdowns around fiscal policy events. The magnitude of TGA swings — often hundreds of billions over weeks — can rival or exceed the liquidity impact of the Fed’s QT program. In the spring of 2023, the TGA drawdown after the debt ceiling resolution injected over $500 billion into markets over several months, powering a significant equity rally even as the Fed continued tightening.

Lever 3: The Reverse Repo Facility (RRPONTSYD)

The RRP is where the plumbing of the financial system meets the open market. Money market funds and other eligible counterparties park excess cash at the Fed overnight in exchange for a guaranteed return (currently the Fed’s administered RRP rate). Cash sitting in the RRP is effectively removed from the financial system — it is not being lent, invested, or deployed into assets.

The RRP peaked at approximately $2.55 trillion in December 2022. Since then, it has been draining steadily as money market funds find better opportunities elsewhere — primarily in Treasury bills, which the Treasury has been issuing in large volumes. As of early 2025, the RRP has fallen below $100 billion, a decline of over $2.4 trillion.

Here is the critical insight: the RRP drain has been the single largest liquidity injection of the past two years. While the Fed was tightening through QT (removing roughly $2 trillion from the balance sheet), the RRP was simultaneously draining over $2.4 trillion back into markets. The net effect was actually positive for liquidity — the RRP drain more than offset QT. This is why the stock market rallied powerfully through 2023 and 2024 despite the Fed’s tightening cycle. The liquidity math, not the rate math, told the real story.

Luke Gromen, founder of Forest for the Trees (FFTT) and one of the most incisive macro analysts working today, has been hammering this point: you cannot understand the market by looking at interest rates alone. Rates were rising, and stocks rallied. That made no sense through a traditional lens. But through a liquidity lens, it made perfect sense — net liquidity was expanding because the RRP drain overwhelmed QT.

III. The Four Liquidity Regimes: From Flood to Crisis

Net liquidity does not just rise and fall in a straight line. It produces distinct regimes — each with its own market character, volatility profile, and asset class implications. Understanding which regime you are in is more important than any single data point.

Regime 1: FLOOD — All Three Expanding (Risk-On Nirvana)

This is the regime every risk asset investor dreams about. The Fed is actively expanding its balance sheet (QE). The TGA is being drawn down (government spending). The RRP is declining (cash flooding back into markets). All three levers are pushing in the same direction: more liquidity.

The canonical example is March 2020 through December 2021. The Fed went from $4.2 trillion to $8.9 trillion in balance sheet assets. The government spent trillions in stimulus, drawing down the TGA. The RRP had not yet become a liquidity sponge. The result? The S&P 500 doubled from its March 2020 low. Bitcoin went from $5,000 to $69,000. Meme stocks, SPACs, NFTs — when liquidity floods the system, everything rises, and the speculative assets rise the most.

The FLOOD regime is characterized by compressed volatility, relentless buy-the-dip behavior, and a market environment where “everything works.” Correlations within risk assets approach 1.0 because the rising tide lifts all boats. The VIX typically remains pinned below 20.

Regime 2: STEADY — Mixed Signals

The most common regime in normal times. One or two levers are adding liquidity while the others are neutral or draining. Net liquidity is roughly flat or slowly trending in one direction. Markets grind higher or consolidate without strong conviction.

This regime characterized much of 2023-2024: the Fed was draining liquidity through QT, but the RRP drain and periodic TGA drawdowns were offsetting it. Net liquidity was roughly sideways to slightly positive. The market ground higher, but with more rotation, more selectivity, and a much narrower leadership group (Magnificent 7 concentration). In STEADY regimes, stock picking matters more because the rising tide is not lifting all boats — it is barely lifting the dock.

Regime 3: DRAINING — All Three Contracting (Risk-Off)

The most dangerous regime for leveraged positions. The Fed is running QT at full speed. The TGA is building up (absorbing cash from the system). The RRP is not providing an offset. All three levers are pulling liquidity out simultaneously.

The textbook example is January through October 2022. The Fed pivoted to QT in June 2022, running off $95 billion per month. The TGA was rebuilding after the debt ceiling resolution. The RRP was still growing, absorbing even more cash. The result was a liquidity vacuum. The S&P 500 fell 25% from peak to trough. The Nasdaq dropped over 33%. Bitcoin collapsed from $69,000 to $15,500 — a 77% drawdown.

The DRAINING regime is where the 0.9 correlation between liquidity and risk assets becomes painfully obvious. Fundamentals, earnings beats, and bullish narratives cannot overcome the gravitational pull of contracting liquidity. Rallies are sold. Every bounce fails. The market feels “broken” because it IS — the structural support (liquidity) has been pulled away.

Regime 4: CRISIS — Emergency Facilities Activated

This is the regime no one wants but everyone should prepare for. Liquidity contracts so sharply that something in the financial plumbing breaks — a bank run, a Treasury market dislocation, a money market freeze. The Fed is forced to intervene with emergency lending facilities, effectively reversing its tightening overnight.

We saw this in March 2023 with Silicon Valley Bank and the regional banking crisis. The Fed had been running QT for nine months when SVB collapsed. Within 48 hours, the Fed created the Bank Term Funding Program (BTFP), extending over $300 billion in emergency lending. The balance sheet, which had been shrinking, suddenly expanded again. Net liquidity surged. The market bottomed almost precisely when the emergency facilities were activated and rallied for the next year.

The CRISIS regime is paradoxically one of the best buying opportunities — but only if you survive to buy the dip. The crisis itself destroys leveraged positions, forced-selling cascades wipe out weak hands, and the capitulation creates generational entry points. The key insight from liquidity analysis: the Fed will always intervene when something truly breaks, and that intervention is the most powerful form of liquidity injection. As the old adage goes, “Don’t fight the Fed” — especially when the Fed is in crisis mode.

IV. Druckenmiller’s Framework: ‘Earnings Don’t Move Markets’

No investor has articulated the liquidity thesis more clearly — or profited from it more consistently — than Stanley Druckenmiller. Over a 30-year period managing Duquesne Capital, he never had a single losing year. His average annual return was approximately 30%. And the core of his methodology was not earnings analysis, not technical charts, and not macroeconomic forecasting in the traditional sense. It was liquidity.

“I’ve been in the money management business since 1976. And in that whole time, I’d say earnings were the driver of the stock market... maybe three times. The overwhelming driver is the Federal Reserve and the movement of liquidity.”

This is a radical claim from the most successful macro investor of his generation. But the historical record supports it overwhelmingly.

Consider the 2020-2021 period. Corporate earnings collapsed during COVID lockdowns. By any traditional fundamental measure, stocks should have cratered and stayed down. Instead, the S&P 500 rallied from 2,237 (March 2020 low) to 4,793 (December 2021 peak) — more than doubling — because the Fed injected approximately $4.7 trillion in liquidity. Earnings eventually caught up to prices, but prices moved first, driven purely by liquidity.

Now consider 2022. Corporate earnings were actually strong for most of the year. S&P 500 operating earnings rose approximately 5% in 2022. But the market fell 19% because the Fed was draining liquidity at the most aggressive pace in history. The liquidity signal dominated the earnings signal by a factor of three.

Or look at late 2018. The economy was growing, unemployment was low, and earnings were rising. The S&P 500 plunged 20% in Q4 2018 because the Fed was running QT and raising rates simultaneously. Jay Powell said QT was on “autopilot.” The market cratered. Powell capitulated in January 2019, signaling a pause. The market immediately reversed and rallied to new highs — before a single fundamental data point changed.

Druckenmiller’s insight is not just that liquidity matters more than earnings. It is that liquidity is the mechanism through which monetary policy transmits to asset prices — and it does so with a speed and magnitude that overwhelms all other factors. When the Fed floods the system, assets get bid up because there is more money chasing them. It is supply and demand, applied not to individual securities but to the entire pool of investable capital.

Michael Howell of CrossBorder Capital has formalized this framework academically. His research across multiple decades and countries demonstrates that global liquidity — measured as central bank balance sheets plus private credit creation — explains the majority of variation in asset prices across equities, bonds, commodities, real estate, and crypto. Not earnings. Not GDP. Not inflation. Liquidity.

The practical implication for every investor is profound: before analyzing any individual stock, before reading any earnings report, before making any portfolio decision, ask yourself one question first — what is net liquidity doing? If it is expanding, lean long. If it is contracting, lean defensive. The rest is refinement on top of that core signal.

V. Global Liquidity: The Tide That Lifts All Boats

The net liquidity formula captures the US picture. But we live in a global financial system, and the US dollar is the base layer of global finance. To see the full picture, you need to zoom out to global liquidity — the combined balance sheets and credit creation of the world’s major central banks.

The four that matter most: the Federal Reserve, the European Central Bank (ECB), the Bank of Japan (BOJ), and the People’s Bank of China (PBOC). Together, their combined balance sheets represent the most powerful force in global capital markets.

When these four central banks are expanding simultaneously — as they did during 2020-2021 — there is essentially nowhere for capital to hide from the inflationary tide. Every asset class gets repriced higher. Global equities, commodities, real estate, crypto — all rise because the global stock of money is increasing faster than the global stock of assets.

Michael Howell’s research at CrossBorder Capital tracks a Global Liquidity Index that aggregates central bank balance sheets, cross-border capital flows, and private credit creation across 85 countries. His key finding: global liquidity moves in cycles of approximately 5-6 years, from peak to trough to peak. These cycles are remarkably consistent, and they are the dominant driver of the “risk-on, risk-off” pattern that characterizes global markets.

The dollar adds a critical layer of complexity. Because approximately 60% of global trade is invoiced in dollars, and roughly $13 trillion in dollar-denominated debt exists outside the United States, the dollar is not just a currency — it is a global liquidity condition. When the dollar weakens (DXY declines), it eases financial conditions for every country and corporation with dollar-denominated liabilities. Debt service becomes cheaper. Dollar assets become more affordable for foreign buyers. Global liquidity effectively expands even if no central bank changes its policy.

Conversely, when the dollar strengthens aggressively, it acts as a global liquidity vacuum — tightening conditions everywhere simultaneously. The 2022 dollar rally (DXY rose above 114) was as devastating for global markets as the Fed’s QT itself. Emerging market currencies collapsed. Capital fled to the dollar. The global liquidity squeeze was a force multiplier on top of the US-specific tightening.

Central bank divergence creates the most interesting opportunities. When the Fed is tightening but the PBOC is easing (as occurred in 2022-2023), capital flows create relative value trades — long Chinese assets funded by short US assets, for example. When the BOJ finally shifts hawkish after decades of easing (as it began doing in 2024), the unwind of the yen carry trade sends shockwaves across every asset class because trillions of dollars in global positioning are financed with cheap yen.

Lyn Alden’s framework for understanding this is particularly useful. She distinguishes between “fiscal dominance” (where government deficits, not central bank policy, are the primary driver of money supply) and “monetary dominance” (where the Fed’s balance sheet is the primary lever). Her argument is that the US has entered a fiscal dominance era — where deficits of $2+ trillion per year are the primary source of liquidity injection, and the Fed’s QT is simply redistributing those flows rather than meaningfully offsetting them. In fiscal dominance, the traditional playbook of “Fed tightening = bearish” breaks down because the Treasury is injecting liquidity faster than the Fed can remove it.

This global perspective is essential because it explains why correlations across asset classes are so high — and why they occasionally break. When global liquidity moves in unison, everything correlates. When it diverges across regions, the correlations fracture and relative value opportunities emerge. The investor who tracks only US liquidity is seeing half the picture.

VI. Bitcoin: The Purest Liquidity Barometer

Of all the assets in the global financial system, Bitcoin has the cleanest, most direct relationship with net liquidity. This is not a coincidence. It is a structural feature of what Bitcoin is.

The correlation between Bitcoin and net liquidity has consistently been approximately 0.9 over multi-year periods. That is stronger than the correlation between equities and liquidity, stronger than corporate bonds and liquidity, stronger than any other major asset class.

Why? Because Bitcoin has no earnings to muddy the signal. No dividends. No buybacks. No accounting adjustments. No CEO guidance. No analyst coverage that creates informational asymmetries. Bitcoin’s price is the purest expression of speculative capital flow — how much money is in the system and how aggressively it is being deployed into risk assets.

When net liquidity expands, Bitcoin is typically the first major asset to respond and the most aggressive in its response. This makes it a leading indicator, not just a correlated asset. In the aftermath of the March 2020 liquidity injection, Bitcoin bottomed and started rallying before the S&P 500 confirmed its trend reversal. In the Q4 2018 liquidity scare, Bitcoin capitulated before equities and recovered before them as well.

The mechanism is straightforward. Excess liquidity first fills the safest vessels — Treasuries, investment-grade credit, large-cap equities. As those vessels fill and yields compress, capital moves further out the risk curve — small caps, high yield, and eventually the most speculative assets. Bitcoin sits at the far end of that risk curve. When liquidity is abundant enough to reach it, it moves violently. When liquidity contracts, it is the first place capital exits.

This is why understanding the liquidity cycle is essential for Bitcoin investors specifically. The single biggest mistake Bitcoin holders make is interpreting price declines as fundamental failures of the technology or the network. In almost every case, Bitcoin drawdowns are liquidity events, not Bitcoin events. The network continues to function perfectly — blocks are mined, transactions are settled, the hash rate reaches new highs — while the price drops because the macro liquidity tide is going out.

The 2022 bear market is the definitive case study. Bitcoin fell from $69,000 to $15,500 — a 77% drawdown. The Bitcoin network itself was functioning flawlessly. Adoption continued growing. The Lightning Network expanded. Institutional infrastructure was being built. But none of that mattered because the Fed was running $95 billion per month in QT, and the liquidity tide was receding at the fastest pace in history.

Conversely, the 2023-2024 rally that took Bitcoin back above $70,000 and eventually past $100,000 had nothing to do with a sudden improvement in Bitcoin’s technology — the technology had been improving the entire time. What changed was the liquidity environment: the RRP drained over $2 trillion back into markets, the debt ceiling resolution triggered a TGA drawdown, and the Fed began signaling the end of the tightening cycle. Liquidity turned. Bitcoin turned with it — violently.

Bitcoin is, in the most literal sense, a leveraged bet on liquidity expansion. It has no cash flows to provide a floor. It has no earnings to justify a “fair value.” Its price is entirely a function of how much speculative capital exists in the system and how willing that capital is to deploy into risk assets. This makes Bitcoin the canary in the liquidity coal mine — the most sensitive instrument in the financial system for detecting shifts in the monetary tide.

For those who believe (as I do) that the structural trajectory of global fiscal policy is toward more debt, more deficits, and more liquidity creation — because the alternative is sovereign default in a $100+ trillion global debt system — Bitcoin’s long-term trajectory follows directly. More liquidity over time means higher Bitcoin prices over time, with gut-wrenching drawdowns during the periodic tightening phases that governments and central banks are ultimately forced to abandon.

This is the core reason Bitcoin belongs in every serious macro portfolio. Not as a tech speculation. Not as a payments network bet. But as a structural position that expresses the view: over the long run, liquidity will expand because it must, and Bitcoin will capture more of that expansion than any other asset on earth.

VII. How to Trade the Liquidity Cycle

Understanding the theory is one thing. Translating it into practical, actionable intelligence is another. Here is the framework I use to track the liquidity cycle in real time.

The FRED Dashboard — Your Weekly Ritual

Every Thursday, the Fed releases its H.4.1 statistical release, updating the balance sheet data. This flows into FRED (the Federal Reserve Economic Data system, maintained by the St. Louis Fed) and is freely accessible to everyone.

Bookmark these three series:

• WALCL — Federal Reserve Total Assets (weekly, released Thursday)

• WTREGEN — Treasury General Account balance (weekly, released Thursday)

• RRPONTSYD — Overnight Reverse Repo (daily, updated each business day)

Calculate net liquidity (WALCL - WTREGEN - RRPONTSYD) each week and chart it against the S&P 500. You will see the correlation with your own eyes. There are also several free trackers and dashboards online that calculate and chart this automatically.

TGA Drawdown Signals

Watch for debt ceiling episodes. When the government hits the borrowing limit, it cannot issue new Treasuries and must spend down the TGA to fund operations. This is a forced liquidity injection. The playbook is consistent: TGA drawdowns of $300 billion or more over a period of weeks have historically coincided with equity rallies. The 2023 post-debt-ceiling drawdown injected over $500 billion and powered the market through the summer.

Conversely, after a debt ceiling resolution, the Treasury typically floods the market with new issuance to rebuild the TGA. This drains liquidity. The weeks immediately following a debt ceiling deal can be paradoxically bearish as the TGA rebuilds.

Tax season (April and September) creates predictable TGA spikes as tax receipts flow in. These are temporary liquidity drains that often create buyable dips.

RRP Decline Signals

The RRP decline from $2.55 trillion to near zero was the stealth liquidity story of 2023-2024. Going forward, the RRP is nearly exhausted as a liquidity source — there is very little left to drain. This means the market loses one of its three liquidity buffers. Future liquidity expansion must come from the balance sheet (Fed policy) or TGA drawdowns (fiscal policy) rather than the passive RRP drain.

When the RRP is near zero and QT is ongoing, reserve scarcity becomes a risk. Banks need a minimum level of reserves to function smoothly. If QT drains reserves below the “comfortable” threshold (estimated at around $3 trillion), money market stress can emerge — short-term rates spike, repo markets become volatile, and the Fed may be forced to slow or end QT. This is exactly what happened in September 2019 and what the Fed is trying to avoid by slowing QT’s pace.

Debt Ceiling Dynamics

The debt ceiling is a recurring liquidity event that creates a predictable playbook:

1. Ceiling approached: Treasury stops issuing, draws down TGA → liquidity injection → bullish

2. Ceiling hit: Extraordinary measures deployed, TGA at minimum → neutral, political uncertainty

3. Ceiling resolved: Treasury floods market with new issuance, rebuilds TGA → liquidity drain → short-term bearish

4. TGA stabilized: New equilibrium established → depends on other two levers

Reserve Scarcity Framework

The Fed publishes reserve balance data (WRESBAL on FRED). When reserves fall below approximately $3 trillion, the banking system begins showing signs of stress — overnight funding rates become volatile, the Fed Funds rate pushes toward the upper end of the target range, and money market conditions tighten. This is the Fed’s “ample reserves” threshold, and approaching it typically forces the Fed to slow or end QT.

Practical Indicators Cheat Sheet

Bullish liquidity setup:

• WALCL stabilizing or expanding

• TGA declining (government spending down its balance)

• RRP declining (cash leaving the Fed)

• Dollar weakening (DXY falling — global easing)

• Reserve balances comfortable (above $3T)

• Fed rhetoric shifting dovish

Bearish liquidity setup:

• WALCL contracting (active QT)

• TGA rising (cash draining from markets into government)

• RRP stable or rising (cash flowing back to the Fed)

• Dollar strengthening (DXY rising — global tightening)

• Reserve balances approaching scarcity

• Fed rhetoric hawkish, no end to QT in sight

The key insight from trading the liquidity cycle: it is not about predicting what the Fed will do. It is about measuring what is actually happening in real time. The data is available, it is free, and it updates weekly. You do not need a Bloomberg terminal. You do not need institutional access. FRED is accessible to everyone. The only edge is bothering to look — and understanding what you are seeing.

VIII. Follow the Liquidity, Find the Truth

The financial industry spends billions of dollars annually on earnings estimates, fundamental analysis, economic forecasting, and quantitative models of extraordinary complexity. And all of it, in aggregate, explains less of the market’s behavior than a simple three-variable formula that anyone can track for free on the FRED website.

Net Liquidity = WALCL - WTREGEN - RRPONTSYD

This is not a “hack” or a shortcut. It is the recognition of a structural reality: in a world of fiat currency and central banking, the quantity of money in the system is the dominant variable that determines asset prices. Earnings are the second derivative. Sentiment is the third. Technicals are the fourth. Liquidity is the first — the prime mover, the gravitational field in which all other forces operate.

Stanley Druckenmiller understood this. Michael Howell has documented it rigorously. Lyn Alden has contextualized it within the fiscal dominance framework. Luke Gromen has connected it to the sovereign debt endgame. And Bitcoin — with its 0.9 correlation to net liquidity, its fixed supply, and its role as the purest expression of speculative capital flow — has become the definitive instrument for expressing the liquidity thesis.

The trajectory from here is not ambiguous. Global debt stands at over $300 trillion. US debt alone is $38.5 trillion and growing at $2 trillion per year. Interest payments consume $1 trillion annually. There is no political will for austerity, no mathematical path to growing out of the debt, and no historical precedent for a peaceful resolution that does not involve currency debasement. The liquidity must expand because the alternative is systemic collapse.

This does not mean the path will be smooth. There will be tightening phases, drawdowns, and crises. The liquidity cycle oscillates — it does not move in a straight line. But the secular trend, driven by the inescapable arithmetic of compound interest on sovereign debt, points in one direction: more liquidity, more debasement, and higher prices for assets that cannot be printed — chief among them, Bitcoin.

Follow the liquidity. It will not tell you everything. But it will tell you the one thing that matters most.

Stay liquid. Stay positioned. The formula does not lie.

— Agent HC

Educational Purposes only.