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 (19)
No. 1-19

“Index” funds, are the public’s best (still shitty, but it’s all that’s left) attempt at getting what a proper currency, like Gold, would offer for free: An “index” on the economy as a whole. Such that they get risk free participation in the overall growth of the economy. Without the kind of childish, ridiculous, and ultimately never more than self serving pretensions to “being clever,” that is being pushed by active managers, promising better than random results at picking random numbers.

All the nuttiness is due to the Fed’s promotion of “assets” as a whole. It’s not as if passive vs active management makes a lick of difference. Both groups are just picking random numbers, after all. The ones contributing meaningfully to price discovery, are insiders; people with access to non-public information they can trade on. None of whom have any particular incentive to share their edge with some pointless Fed welfare recipient in New York. For the rest, it’s all random anyway: Their best buy is their cheapest buy.


I'd be curious to know what percentage of ownership in the S&P companies their trade-able stocks represent.

And, am I reading correctly that Puplava says 88% of the total S&P trade-able stock value is held by Vanguard, Black Rock, and State Street?

Where does that leave all these often-repeated assertions about who owns the "wealth" of the US? As in, how does one know who owns shares of V, BR, and SS funds?


Wait a minute. I've traded equity positions with three of the companies list among the five in the article (Vanguard, Schwab & Fidelity). They were the trading platform and custodians of my positions. But my trades were my decisions, a few in index funds but mostly individual equities. Is there data on what percentage of the S&P 500 is owned via index funds? Just identifying the custodians doesn't necessarily translate into a liquidity crisis.


"88% of the S&P is with Vanguard, BlackRock, and State Street": the article provides no source or proof of any kind for that assertion. On it's face, it is simply not possible. False, fake, whatever you want to call it.