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The 2008 Great Financial Crisis came
about because we began to hit "debt saturation" levels. The
crisis was one of solvency but was attended to with added
liquidity. Sovereign treasuries still had the ability to add debt to
their balance sheets which was done in unprecedented amounts. Now, we
are again bumping up against debt saturation levels as sovereign treasuries
by and large have little room left to add more debt in efforts to reflate.
The root problem of solvency was never addresses, only postponed to another
day. That "day" seems to be in sight.
The Fed recently did a study concluding that a $4
trillion increase in their balance sheet should be enough to reverse a future
recession. I would ask several questions: first, 2008 began as a
downturn in real estate in the U.S. and quickly spread to financial asset
prices and thus institutional balance sheets ... In no way did it begin
as "normal" recessions in the past have. It was not
about inventory/sales until well into it. Why has the Fed come out with
this study now? And why use average recessions as
the potential boogeyman rather than the 2008 episode? I would
equate their study to relating the response and protocol to treating a head
cold and sore throat versus when the patient is prone to stroke and heart
attack.
I have thought for quite some time, a good
analogy for 2008 and the aftermath was like one giant
"refinancing". Think of it as a "cash out" on a
home mortgage where money is taken out against equity yet the monthly payment
didn't go up because your interest rate went down. After closing, you
feel pretty good because your payment did not go up and you have cash in hand
to help you continue making payments. This is exactly what
happened but we are again at a point where the monthly payments are starting
to "bite" again. In technical terms, liquidity is again
becoming very tight on a systemic basis.
So here we are again, in the same situation we had in
2007-2008. Too much debt with stretched valuation levels in equities
and real estate ...and stupid levels in the credit/bond markets as evidenced
by "negative rates". Central banks are again being forced to
look at expanded QE while fiscal stimulus is again being eyed with one caveat
...the Fed wants you to believe they are going to raise rates!
https://ca.news.yahoo.com/global-central-bank...--business.html
https://ca.news.yahoo.com/fed-nears-rate-h...--business.html
I ask you this, in a world where economic activity is
clearly decelerating ...and has more debt to GDP/equity than ever before, how
can the Fed raise rates? In the short term, raising rates would
strengthen the dollar versus other fiat currencies (and tighten dollar
liquidity). Is this what the U.S./world needs? And how exactly
will the existing leverage affect the underlying asset pricings? Will
this be good for stocks or real estate not to mention the mathematics
affecting bonds? The big one (and an entire writing for another day) is
the derivatives market. How will these fare? I cannot imagine
having a put on a carry trade using dollars, higher rates and a higher dollar
is a disaster waiting to happen.
In my opinion, we are again at a point in time where
"liquidity" is more important than anything else. Whether for
an individual, corporation, or state, "liquidity" will soon be ALL
IMPORTANT! Just as in 2008-2009, "counterparty risk" will
take center stage and any hint of the lack of liquidity will attract
sharks.
What exactly is "liquidity" and why is it
important. Briefly, liquidity is the immediate availability of capital
to run your business and pay current expenses and interest. I am going
to add a twist here because what some to believe to be liquid ...may not be
at the point in time it is most needed. You see, what if you had a
large cash/credit balance with a bank or institution that is forced to close
either temporarily or permanently? "Liquid" means it is
available to you NO MATTER WHAT happens. Or what if you had some sort
of unencumbered bill/note/bond and the credit standing of the issuer came
into question? Would this be liquid?
If you are bearish on where the world is financially, the above questions
should have already entered your mind topped off with the question of
"who" is your counterparty? I would suggest the goal right
now should be twofold, return OF capital and the ability to "use"
it whenever you need to. In other words, "pure liquidity".
If for any reason whatsoever your capital may not be available to you, you
do not have "pure liquidity".
Pointing out the obvious, the only "asset" on the planet
that is pure liquidity is gold (and silver to a lesser extent). You
don't believe me or want to argue with this? First and most obviously,
gold (silver) are no one else's liability and thus cannot go
"bankrupt". Yes they can and do fluctuate in value versus
fiat currencies but in a world where solvency and liquidity has become primary
concerns, do you believe gold will become less desirable versus the
liabilities of nations? If you still don't believe target="_blank"me, Alan Greenspan
explained the virtues of gold back in 1966. He went several
steps further than liquidity and discussed gold as a medium of
exchange, gold as money and a return to the gold standard.
Never mind the supply and demand imbalances or the fact that gold
is counterfeited on a daily basis where the supply gets diluted many times
over, gold can ALWAYS be used to settle a transaction. The key word
here is "always". I say this because 24/7, 365 days per year,
gold is liquid and thus available to settle any trade ...if you are fortunate
enough to own it in physical and unencumbered form.
Please note the bolded words, as long as you own real gold with no one or
entity between you and your gold ...you have pure liquidity rivalled by
nothing man made. Pure wealth to be sure but more importantly in a
world where massive additions of liquidity have not been enough and showing
signs of drying up ...pure liquidity!
Standing watch,
Bill Holter for;
Holter/Sinclair collaboration.
Prior, he wrote for Miles Franklin from 2012-15. Bill worked as a
retail stockbroker for 23 years, including 12 as a branch manager at A.G.
Edwards. He left Wall Street in late 2006 to avoid potential liabilities
related to management of paper assets. In retirement he and his family moved
to Costa Rica where he lived until 2011 when he moved back to the United
States. Bill was a well-known contributor to the Gold Anti-Trust Action
Committee (GATA) commentaries from 2007-present.
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