Money is based on central bank reserves held by commercial banks (called 'liquidity') and G-sibs have a x14.3 leverage ratio¹, it makes sense that the maximum value of the SP500 (the US economy) is reserves times this leverage.
Currently banks have 3.175T of these reserves², but;
•QT cancels some 80bn reserves each month³
•Tax income in September usually drains 200bn of reserves temporarily*
These two together would remove 460bn by end October, putting bank's reserves at 2.6T. Multiplied by 14.3 this makes 37T which was the current value of the SP500 at the end of June when it stood at 4450**
Will stocks trade sideways until this valuation ceiling is hit? When the SP500 hit this ceiling in August 2019, markets ceased to function until Fed intervened with a mini QE.
¹ “[G-SIB] CET1 risk-based capital requirements defined as a 4.5% minimum requirement + a 2.5% capital conservation buffer” https://www.bis.org/basel_framework/chapter/LEV/40.htm?inforce=20220101&published=20191215
²Reserves held by commercial banks https://fred.stlouisfed.org/series/WLODLL
³(SOMA holdings are down 850bn since May '22. https://www.federalreserve.gov/releases/h41/default.htm)
*Treasury general account: https://fred.stlouisfed.org/series/WTREGEN
**https://ycharts.com/indicators/sp_500_market_cap
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