Why we need liquidity
WHETHER you believe it or not rising stock markets – and other markets – rely on increasing amounts of money being available for investment.
We have seen how markets have reacted to the slow increase in liquidity over the last year or so. And I hate to tell you that there is a thing called a liquidity cycle which happens every four years, roughly.
There’s a thing called the Total Liquidity Index, which right now is at the highest level it has been for some considerable time, which means we are quite far through the present cycle. It is precisely why Bitcoin has hit its all time high. It’s precisely why altcoins have been doing rather well. And it’s precisely why we are about to go into reverse.
What, I hear you cry? Bitcoin is going to $150,000. Then $200,000. Not unless someone starts printing lots of cash in short order. Whereas we are at some $125 trillion of total liquidity at the moment, in six months time the index (which tracks things 12 weeks ahead) is predicting a huge drop of perhaps 20 or 25 percent.
That won’t stop people reaching for the sky but it will make it even more difficult to achieve. To be clear, liquidity very much influences how high-risk assets perform. We have the Fed’s rate decision this week and, arguably, this might be the single most important decision it ever takes.
Add in the debt problems the US has (and don’t bet on Elon Musk sorting that out in double quick time), add in the commercial property Armageddon that is slowly bankrupting the US banking system and we have a nearly perfect requirement for rates to fall. And if they do, what then? Do we go back to normality, whatever that is?
The problem is not the absolute level of interest rates, it is how they compare to inflation. If inflation is 2.5% and interest rates 4.5% that – in real terms – is a very tight squeeze on businesses and the public. Rates would have to drop quite dramatically to reach a “neutral” level, and there is no evidence that the FED or anyone else in the rate setting firmament wants that.
But everything may change. On January 20 there will be a re-invigorated administration, Trump Mark 2, which just might change things. He will certainly want his own way, rightly or wrongly. Big business has flocked to his banner and it would be very surprising if he did not reward them.
The House Budget Committee in America has been listening to testimony about government and personal debt, and has concluded that a different fiscal course is required. The budget has got out of control, with too much promised to too many people and too many projects subsidised.
The Committee said it was all right at the moment (they would say that, wouldn’t they) but that in five years’ time it would be too late. If you’ve read a few of my articles you will see I believe we are already beyond what can be borne in taxes. Tony Blair agrees with me.
But there’s another problem, which is the one that might scupper us all. There are plenty of USD in the States. But unfortunately, the wonderful Eurodollar market is seriously short of dollars.
Just ask yourself, why are the Chinese selling US Treasuries? It’s not because they want out of the dollar. They need them to trade and buy stuff. The Eurodollar market is about $5 trillion.
A lot of cash, you might say. But the oil market is about $2 trillion. American trade is about $7 trillion. Notice anything? In case you don’t that’s a shortfall every year of about $4 trillion, only partly made up by about $2 trillion of net American imports.
Perhaps it’s a lucky break that President-elect Trump is coming in at this very moment, tariffs and all.
Update 1: I know I’m boring about Argentina and Milei but compare and contrast: And a hat tip to Guido Fawkes: “Argentina emerged from recession in Q3 of 2024. From July to September GDP expanded by 3.9%. The same quarter in 2023 saw a contraction of 2.1%. Quite the way to mark one year in office...
"Sovereign bonds are in recovery as JPMorgan expects a whopping 5.2% GDP growth from Argentina in 2025."
Makes you want to weep.
Update 2: Remember me saying inflation wasn’t dead? It’s back on an upward path today. You were warned.
