When Money Starts to Move

Doug Noland writes the very researched and detailed Credit Bubble Bulletin.  Last week was notable for a shift in financial markets that he believes may be a harbinger for an end to what he calls ‘history’s great financial bubble’.

“It’s been awhile since I’ve used this terminology. But global markets this week recalled the old “Bubble in Search of a Pin.” It’s too early of course to call an end to the great global financial Bubble. But suddenly, right when everything looked so wonderful, there are indication of "Money" on the Move. And the issues appears to go beyond delays in implementing U.S. corporate tax cuts.”

Doug then goes on to chronical equities falls at the end of the week across the globe but importantly in the context that we didn’t see that flow to ‘safe haven’ bonds and more notably junk bonds started to fall as well.  Why is that important?

“Especially late in Bubble periods, the marginal (“junk”) borrower plays an increasingly instrumental role in both Financial and Real Economy booms. Loose financial conditions and intense speculation ensure abundant cheap finance. And so long as cheap “money” remains readily available, it will be borrowed (irrespective of the trend in fundamental factors).

A tech-heavy Nasdaq surged to record highs during the first quarter of 2000, seemingly oblivious to the rout that was unfolding in telecom debt. In all the exuberance, it’s easy to forget that “tech” Bubbles are fueled by infrastructure spending by scores of negative cash flow enterprises dependent on junk bonds, leveraged lending, speculative sector flows and loose finance more generally. Especially after securities prices have succumbed to speculative blow-off dynamics, few are prepared for how rapidly liquidity abundance can disappear.”

“I’m beginning to think it might not take all that much to wake folks up to risk. And by the looks of Japanese and European equities (along with junk ETFs) this week, there may be some big players with fingers hovering over sell buttons. The Fed will likely raise rates next month, and I’ve already read some analysis that chairman Powell may not be the dovish pushover he’s been portrayed. There was also news out this week shedding further light on the growing split at the ECB. Meanwhile, the esteemed head of the People's Bank of China was publicly warning of ‘hidden, complex, sudden, contagious and hazardous’ risks within the Chinese financial system.”

Finally Doug talks us through how this might all end:

“Imagine a flurry of outflows from junk ETFs spurring illiquidity in the underlying securities holdings. This begins to spook some players leveraged in investment-grade corporate Credit. The more sophisticated players begin to take some risk off the table, as financial conditions tighten. Fears of outflows from the - now massive - passive investment-grade funds complex spur incipient risk aversion in equities. De-risking/de-leveraging dynamics begin to take hold – at home and abroad (spike in the yen pressuring global “carry”?). And with everyone now Crowded so nice and tight into the big tech names, an abrupt reversal of the leadership technology stocks would further rattle the leveraged lending market that has been operating in overdrive. Fears of a bursting “tech” Bubble overwhelm greed. Sinking tech would take down the indices, unleashing a bit of harsh reality upon the tsunami of “money” that has disregarded risk to participate in the passive index mania. The short volatility Crowd gets crushed.”