This dashboard monitors high-risk signals based on historical patterns. The theory suggests that a convergence of cycle patterns, liquidity risks, and leverage indicators could signal elevated market risk. These charts help visualize when multiple warning signals align.
Why it matters: This combined view shows actual S&P 500 quarterly returns (bars), margin debt as % of historical peak (purple line), with midterm election years highlighted as yellow background bands to help identify correlations between these risk signals.
Pattern to watch: When margin debt approaches or exceeds previous peaks (100%), risk is elevated. The 2021 peak preceded the 2022 correction. Midterm years often see corrections regardless.
The "Fed Put/Drag" Model: Federal Reserve policy affects markets through two primary channels: Cost of Capital (interest rates compress/expand P/E ratios) and Liquidity (QE/QT injects or drains money from the system). This simplified model estimates the S&P 500 impact based on historical sensitivity factors.
Rules of Thumb: A 25 bps rate hike typically causes ~1-1.5% equity decline (P/E compression). $100B in annual balance sheet expansion adds ~1-2% to S&P 500 (liquidity effect).
Change ÷ 25 × -1.25%
Monthly × 12 ÷ 100 × 1.5%
The Theory (Gabaix & Koijen): The market is "inelastic" — for every $1 invested, market cap increases by $5-8. This multiplier works both ways: inflows amplify gains, outflows amplify crashes. With shareholder yield at just ~1.9%, the market is driven by flows, not fundamentals.
Current prices are supported by temporary flows, not permanent value. Click scenarios to see what happens when each layer disappears.
Status Quo: All support layers intact. Market stable at current levels.
The Liquidity Void: Unlike textbook markets, real sellers don't appear until prices rise significantly. For every 1% of stock you want to buy, prices must rise 5% to find willing sellers. This is why flows dominate fundamentals.
The Reversion Risk: US was ~40% of global market cap historically. Now at 65%. If global investors rebalance even 5% away from US, the multiplier creates a $2.5T+ headwind. This is the "silent risk" — it requires no recession, just a shift in global allocation.
Why it matters: The "Yen Carry Trade" is a major global liquidity source. Investors borrow cheap Yen (at ~0% interest) to buy US assets. When JGB yields rise (especially above 1.0%), the Yen appreciates, forcing a liquidation of US positions.
Signal: Red alert lines at 1.0% (warning) and 1.9% (critical). Watch for sustained breaks above these levels.
Note on Inelastic Markets Hypothesis: Research by Gabaix & Koijen suggests that $1 of inflows into passive/buyback flows creates ~$5 of market cap movement due to the "inelastic" nature of the market supply. This multiplier works in reverse during outflows.
Last updated: 2025-12-12T10:55:14.374806