Liquidity Crisis Coming: Here, There, Everywhere

Jim Puplava thinks a liquidity crisis is on the horizon. I agree, adding that the problem is global.

Please pay attention to Jim Puplava at Financial Sense. He says a Liquidity Crisis Looming.

In total, index funds represent $7 trillion of U.S. stock funds that have no active manager. All buying and selling are done automatically. Active management has gone out of fashion, Puplava noted, and as this sea change occurs, the market's ability to price companies diminishes.

Ownership of stocks in the S&P 500 is concentrated with three companies; Vanguard, BlackRock, and State Street. They represent about 88 percent of the S&P 500, and if we include Schwab and Fidelity, over 90 percent of the S&P 500 is basically now in the hands of five companies.

“It's really mindless investing,” Puplava said. “The crux of the problem is that mutual funds own more bonds that seldom trade than ever before, but they're still promising to pay out investors within seven days of redemption, a promise they may not be able to fulfill in the next downturn or crisis.”

Global Problem

The problem is global.

Central bank actions explain most of what you need to know. Italian bonds provide a good example.

Despite the recent, massive selloff in Italian bonds, 10-year Italian bonds still trade at roughly the same yield as US 10-year bonds.

Is there no default risk? No eurozone exit risk?

Of course there is. But those bonds trade where they do because the ECB is engaged in QE to a far greater extent than the the Fed ever did. How nuts is that?

88% of the S&P is with Vanguard, BlackRock, and State Street. How nuts is that?

Close to $7 trillion in bonds trade with a negative yield. The figure was close to $10 trillion at one point. How nuts is that?

According to LCD, covenant-lite loan now account for a record 75% of the roughly $970 billion in outstanding U.S leveraged loans.

Covenant-lite agreements vary, but they allow things like paying interest with more debt rather than cash or skipping repayments entirely for periods of time. How nuts is that?

Totally Nuts

This is totally nuts, across the board.

Puplava calls it "mindless". I suspect he would be the first to admit that he seriously understated the concern.

My "totally nuts" position is also too mild, but I also struggle for the precise words.

Crisis Looms

A global liquidity crisis looms. It is entirely central-bank sponsored.

Just don't expect me, Puplava, or anyone else to tell you precisely when the crisis will hit. But it will. And when it does, don't fool yourself into believing that you can necessarily escape in time.

Mike "Mish" Shedlock

Comments
No. 1-19
Casual_Observer
Casual_Observer

Read John Mauldin's latest series talks about the next crises in the Bond markets.

shum
shum

My pension provider just wrote to me saying that 'due to an efficient market...' .. 'we are no longer offering managed funds..' - they now give you a choice of passive funds.

When everyone's thinking the same, then no-one's thinking. Even worse, no-one now is even pretending to think.

Advancingtime
Advancingtime

In a panic or crisis, one of the first things to go is liquidity!

We should not forget that a "liquidity trap" differs from the standard liquidity problem. In many ways, it is just the opposite. This causes a great deal of confusion in that it can be difficult to comprehend why too much liquidity is an issue.

This is why it is important to look a little closer at these two terms and what they represent. The article below looks at the ramification from each as they play out and how they affect the economy.

truthseeker
truthseeker

I don’t think most people understand what a liquidity crisis really is and think that no matter what happens, they’ll b able to sell their stocks and bonds when they want. When they are told this means there r no bids, no buyers for their investments at any price, except for maybe pennies on the dollar, they go into shock looking for someone to blame for stealing their assets. Yet I think what will b much more dramatic with regard to liquidity will b those assets where there are absolutely no sellers at any price in any currency. Of course that will cause governments around the world to rise up with an emergency response to blame and go after those they know who have hoarded food, medicine and precious metals as martial law takes effect and tanks come rolling down the street!

TheWindowCleaner
TheWindowCleaner

Yeah we can wallow in the disgraces of the paradigm of Debt Only or we can turn capitalist economies around with the price deflation that a discount/rebate policy at the point of retail sale will effect. It's either pain, chaos and collapse or greater profit, joy and rejuvenation.