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“Pure Liquidity”

by Bill Holter, JS Mineset, SGT Report:

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!

Global central bankers, stuck at zero, unite in plea for help from governments

…………

As Fed Nears Rate Hikes, Policymakers plane for ‘Brave New World’

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, “counter party 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 me, Alan Greenspan explained the virtues of gold back in 1966 http://www.constitution.org/mon/greenspan_gold.htm . 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 rivaled 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
JSmineset.com

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6 comments to “Pure Liquidity”

  • Eric

    Was just going to share.

    http://www.zerohedge.com/news/2016-08-29/mission-creep-how-fed-will-justify-maintaining-its-excessive-balance-sheet

    The Federal Reserve has 4.5 trillion USD in useless digital “paper” that nobody wants, soon to be 8 trillion USD. And no Gold. Just Gold “certificates.”

    Something stinks.

    Governments and banks are no longer necessary.

  • rich

    Opinion
    Review & Outlook

    The Federal Reserve’s Politicians
    Interest groups now lobby the central bank as if it’s a legislature.

    Aug. 28, 2016 5:43 p.m. ET
    178 COMMENTS

    That was some scene late last week in Jackson Hole, Wyoming. The grandees of the Federal Reserve, before their annual retreat with fellow central bankers, took time to engage with the progressive activists of Fed Up. The meeting might as well have been one of those road-show hearings by congressional committees.

    And why not? The Fed these days has more power than Congress. So thoroughly has the central bank taken over regulating finance since Dodd-Frank, so completely does it preoccupy financial markets, and so broadly has it intruded into fiscal policy and the allocation of capital that Fed officials Janet Yellen, Stanley Fischer and Bill Dudley are the most important economic decision makers in government.

    Fed Up activists are merely following the power, but why should Fed officials stop with them? If the Fed is going to be a political body, why not hold a hearing for savers whose retirement plans have been upset by seven and a half years of near-zero interest rates? Or what about pension trustees who have seen their funding shortfalls soar due to low interest rates? Once the political entreaties start, what is the standard for cutting them off?

    We don’t mean to be spoilsports, but there is the minor detail that no one elects Fed Governors. The Constitution gives Congress control over money and “the Value thereof.” When Congress created the Fed a century ago, it included regional banks and presidents in part to insulate the central bank’s monetary decision-making from political pressure.

    But as the decades have passed, and especially in the post-panic era since 2008, the Fed itself is doing the intruding on what ought to be decisions by elected authorities. Former Fed Chair Ben Bernanke became a public fixture at the side of Treasury Secretary Tim Geithner in selling Obama economic policy. The Fed also moved directly into allocating capital with its QE bond-buying, tilting its policy toward housing in particular.

    Fed policies to raise asset prices have favored affluent stock owners over middle-class savers who have bank accounts or lower-yielding investments.

    All of this has been largely ignored by the public and political class, and perhaps the Fed deserved the benefit of the doubt in the crisis aftermath. Yet the Fed now shows no signs that it wants to return to its narrower role, even eight years into an economic expansion. A Fed that wanted to reduce its political footprint would wind down its $4.5 trillion balance sheet as its bond holdings mature. The Yellen Fed instead is reinvesting the principal from maturing bonds to maintain its sway over long-term bond rates.

    The biggest news out of Jackson Hole this year—other than the Fed Up parley—wasn’t that Ms. Yellen hinted at a possible rate increase in December. The Fed’s decision making is so ad hoc and arbitrary now that no one has any idea what the Fed will do in December—including Ms. Yellen.

    The bigger news was her statement that the Fed now considers QE bond buying to be a routine part of its “toolkit” to keep unemployment low. Come the next recession, her implication is that the Fed won’t stop merely at buying Treasurys or mortgage securities. It will follow the European Central Bank in buying a board swath of corporate bonds. This will plunge the Fed even deeper into favoring some parts of the economy over others.

    The Fed views its post-crisis policies as a great success, but the populist revolt this year shows that voters aren’t content with 1%-2% growth. The Fed has forecast faster growth every year since the recession ended, only to be wrong every time. Sooner or later the public and its representatives are going to demand that the Fed show economic benefits from its vast de facto political powers.

    In a healthy democracy, no body can accumulate power as the Fed has without more accountability.

    http://www.wsj.com/articles/the-federal-reserves-politicians-1472420590?mod=e2two

  • tomche

    “In a healthy democracy, no body can accumulate power as the Fed has without more accountability.”

    Democracies are anathema to freedom and liberty. What we HAD was a constitutional Republic, not a democracy….and it’s gone.

  • Eric

    This starts getting good around 18:30

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