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Market and Business Cycle Changing to Deflationary as Liquidity Decreases

Market and Business Cycle Changing to Deflationary as Liquidity Decreases

May 10, 2023


In our September 14, 2021 and October 05, 2021 blogs we demonstrated the foreshadowing of the severity of inflation because of the massive addition to the money supply. In our August 11, 2022 blog we showed how energy (oil and gas) inflation was painfully affecting the economy.  Now that the Federal Reserve (Fed) is truly and quickly tightening the money supply (quantitative tightening) for the first time in decades, while the Fed is also raising interest rates (see January 10, 2023 blog, 2nd chart), small and mid-sized bank have hit a wall. We are probably entering a deflationary and recessionary market. The potential “pivot” we hear about on the news, is more likely a future pendulum swinging from one extreme to the other when wealth destruction is widespread. The question is how fast and how hard. Review the stock market cycles below. Right now it is about quality cash management.

The Fed is draining liquidity and increasing rates at the same time. The effect of this will be felt over the next 6 to 12 months.

 Deflation in commodities is projecting a downturn in the economy (supply vs demand). Employment/Unemployment is a lagging indicator which will be changing over the next several months as liquidity disappears from the system.

Bank failures and/or forced mergers will also slow lending, in turn reducing more liquidity.

The bank index (see June 14, 2022 blog) continues to deteriorate. The banking system is downsizing the number of banks, again reducing liquidity.


This can be a vicious cycle (credit expansion and contraction) just as in years past. The concern is debt: who owns it and what quality assets, if any, are supporting that debt.

It is important to have patience and stay focused on your personal long game of financial planning and investment allocation and not get caught up in FOMO (Fear Of Missing Out).

The S&P has been in a tight trading range since May of 2022. The "Bear markets and subsequent bull runs" chart from our Big Picture blog, 1/10/2023,  should help explain that it takes time to work through current challenges.

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Data and rates used were indicative of market conditions as of the date shown. Opinions, estimates, forecasts, and statements of financial market trends are based on current market conditions and are subject to change without notice. References to specific securities, asset classes and financial markets are for illustrative purposes only and do not constitute a solicitation, offer, or recommendation to purchase or sell a security. Past performance is not a guarantee of future results.