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The Precipice
The Precipice
Global markets have found themselves again at the precipice. My sense is that everyone’s numb – literally dazed and confused from prolonged Monetary Disorder and the resulting perverted market backdrop. Repeatedly, “The Precipice” has signaled easy-money buying and trading opportunities. Again and again, selling, shorting and hedging at “The Precipice” guaranteed you were to soon look (and feel) like an absolute moron – for some, progressively poorer dunces the Bubble was pushing yet another step closer to serious dilemmas (financial, professional, personal and otherwise). A focus on risk became irrational. Fixation on seeking potential market rewards turned all-encompassing.
All of this will prove a challenge to explain to future generations. Keynes: “Worldly wisdom teaches that it is better for the reputation to fail conventionally than to succeed unconventionally.” And paraphrasing the great Charles Kindleberger: Nothing causes as much angst as to see your neighbor (associate or competitor) get rich. In short, Bubbles are all powerful.
Going back to those darks days in late-2008, global policymakers have been determined to not let the markets down. Along the way they made things too easy. “Do whatever it takes!” “Shock and Awe!” “Ready to push back against a market tightening of financial conditions.” “Do what we must to raise inflation as quickly as possible.” Historic market excess and distortions were incentivized and, predictably, things ran amuck. “QE infinity.” Seven years of zero rates, massive monetary inflation and incessant market backstopping have desensitized and anesthetized. Rational thought ultimately succumbed to “perpetual money machine” quackery. And now all of this greatly increases vulnerability to destabilizing market dislocations, as senses are restored and nerves awakened.
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Corporate foie gras
Corporate foie gras
In addition, we know that financial corporations are flush with cash, or excess reserves held at the Federal Reserve. Throughout the various quantitative easing (QE) programs conducted by the Federal Reserve, commercial banks have been force fed cash as ducks on a foie gras farm. This has swelled their excess reserves to the unprecedented, and what would be thought unimaginable only few years’ back, level of US$2.6 trillion.
With all this cash the system should be, again according to the perma-bulls, more than ready to withstand the shock from the ongoing global deleveraging, a stronger dollar, emerging market blow-ups and the forthcoming US recession.
We beg to differ. When it comes to excess reserves they are most likely already “spoken” as a form of collateral in shadow banking chains. While the initial effect from QE on the shadow banking system was massive deflationary shock as all the high quality securities used in re-hypothecated collateral chains were soaked up by the Federal Reserve, it is a safe bet that excess reserves has to some extend filled that void.
In the non-financial sector on the other hand cash is, well, plain old cash. With more than US$1 trillion of the stuff on their balance sheet complacency is destined to be prevalent. And it is.
Credit market instruments, id est. debt, have also risen at a tremendous rate. Net debt, that is credit market liabilities less cash, has actually never been higher. As the chart below shows, sitting at more than US$6.6 trillion, non-financial net debt outstrips even the high from 2008.
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