Liquidity is the most important concept for understanding markets, yet it's constantly misunderstood. Let's get precise.

What Liquidity IS:

'The gross capacity of the financial system to fund positions.'

This means: How much balance sheet capacity exists to buy assets, extend loans, and take risk? It's not cash sitting in accounts — it's the FLOW of savings and credit through markets.

Liquidity is about:

• Available funding for leveraged positions
• Willingness and ability of intermediaries to extend credit
• The velocity of money/credit through the system

What Liquidity ISN'T:

• Just the Fed's balance sheet (that's one input)
• Just M2 money supply (M2SL) (that's a stock, not a flow)
• A single number you can look up (it's a composite)

The Howell Equation:

P = L × (P/L)

Price = Liquidity × Risk Positioning

Asset prices depend on BOTH liquidity AND how market participants are positioned. High liquidity + cautious positioning = prices can rise. Low liquidity + aggressive positioning = prices vulnerable.

Measuring Liquidity:

In practice, we track proxies:

• Fed Net Liquidity (FED_NET_LIQUIDITY) (WALCL - TGA (WTREGEN) - RRP (RRPONTSYD))
• Global M2 (GLOBAL_M2) and central bank balance sheets
• MOVE Index (MOVE) (leverage throttle)
• Credit spreads and lending standards

No single metric captures 'liquidity.' You must track multiple indicators and synthesize them.