Marc Faber’s diminishing liquidity view was put forward in a recent interview with ET Now. Marc Faber, a Swiss investor based in Thailand, is the editor and publisher of the Gloom Boom & Doom Report newsletter.
Marc Faber’s diminishing liquidity view explains why yields are rising which is also the main current risk facing global financial markets.
The crux of Marc Faber’s diminishing liquidity view is based on the tendency of central banks stepping back from asset purchases and letting interest rates gradually adjust on the upside.
“The crux of Marc Faber’s diminishing liquidity view is based on the tendency of central banks stepping back from asset purchases and letting interest rates gradually adjust on the upside”
Marc Faber’s diminishing liquidity view suggests that financial markets are becoming more fragile as a result of tighter global liquidity.
The sell-off in stocks experienced in early February and October is due to tighter liquidity conditions. “Global liquidity is expanding at a diminishing rate” Marc Faber.
So Faber’s diminishing liquidity view is based on central banks injecting less liquidity into the financial system through their asset purchase program.
The European Central Bank (ECB) is still carrying out monthly purchases of 30 billion euros ($35 billion) of government and private debt. Put another way the ECB continues to inject 360 billion euros annually through its asset purchase program.
Marc Faber’s diminishing liquidity underscores the fact the ECB has publicly outlined its plans to unwind up its massive asset purchase plan (Europe’s equivalent of quantitative easing QE) by December “if the eurozone economy remains resilient”.
“Global liquidity is expanding at a diminishing rate”
Further evidence of Marc Faber’s diminishing liquidity view can be seen with The Bank of Japan (BoJ) happening, or (trimming its bond buying).
But perhaps the best evidence to support Marc Faber’s diminishing liquidity view is the Fed’s QE unwind or Quantitative tightening (QT).
This chart shows the Fed’s QE unwind in action (Source Fed Board of Governors, St.Louis Fed).
“The QE unwind was still in ramp-up mode in September, according to the Fed’s plan. For September, the Fed was scheduled to shed up to $24 billion in Treasuries and up to $16 billion in MBS” – Wolfstreet
Since the beginning of QE unwinds during the second half of 2017, the Fed has reduced its balance sheet by 285 billion dollars
“The QE unwind was still in ramp-up mode in September, according to the Fed’s plan. For September, the Fed was scheduled to shed up to $24 billion in Treasuries and up to $16 billion in MBS”, Wolfstreet.
So there is ample evidence which shows that Marc Faber’s diminishing liquidity view is accurate.
The Fed, the world central bank by default, and its western stooges (ECB, BoJ) are all reining in liquidity. However, global net liquidity is still not negative but liquidity is expanding at a diminishing rate.
Marc Faber’s diminishing liquidity view is made worse with the Trump administration picking a fight, a trade war with its largest buyer of US assets, China (bonds, stocks, and US property).
So this US-inspired trade war within China is “disturbing financial markets around the world”, Marc Faber.
Marc Faber’s diminishing liquidity view suggests that yields are going to continue rising
The corporate credit market faces real challenges going forward.
Over the last decade, the central banks’ massive asset purchase program has inflated the market for debt, corporate and sovereign bonds. But in the post QE era, the main buyer of bonds the central banks are stepping away from the market and that is leaving the market with too many bonds and not enough bidding. So the bond market could experience acute liquidity problems going forward.
“The growth in sovereign, corporate and EM leverage in the QE era has left these markets significantly larger than where they were a decade ago. The combined USD market for Treasuries, MBS, corporate and EM debt has risen from US$29.8 trillion in 2007 to US$42.9 trillion today.
This much larger market is going through an (arguably) smaller pipe. Aggregate dealer balance sheets remain smaller than pre-crisis, with fewer market makers. This state of affairs has yet to be fully tested in the post-crisis era, but with central bank balance sheet expansion giving way to contraction, it likely will be,” Morgan Stanley’s chief cross-asset strategist, Andrew Sheets.
“We’re going to stress test our whole corporate credit market for the first time” – Paul Tudor Jones
So Marc Faber’s diminishing liquidity view means that bond yields are about to rise.
But rising corporate bond yields are going to make financing debt more burdensome for businesses.
Moreover, if we throw into the equation a slowing global economy (and all the economic indicators are pointing to this) then the end game of rising cost and falling revenues is corporate debt defaults.
“We’re going to stress test our whole corporate credit market for the first time”, Paul Tudor Jones.
Marc Faber’s diminishing liquidity view could stress test the corporate credit market to breaking-point
But some market watchers are arguing that the threshold tipping point has already been reached with the collapse of GE stocks, down by more than 50% and its credit downgraded to near junk status. GE, what was once America’s largest company is waving the red flag. Europe’s largest bank, Deutsche Bank has been downsizing and fighting off junk bond status for years.
In a few words, the big corporates have got so used to suckling on the central bank’s free money teat and they are unsure how they will weather the central bank’s monetary normalization policy.
So Marc Faber’s diminishing liquidity view suggests that something has got to give, either the Trump administration goes soft on the US-China inspired trade war or the central banks floods the market with liquidity again. If we continue along the path of diminishing liquidity then the next crisis is likely to be in the corporate credit markets.
Dan Loeb targets Sony. Dan Loeb is an activist investor and founder of Third Point, which oversees about $14.5 billion in assets.
Last year the activist investor viewed Campbell soup as a bargain when Third point reported that the soup maker could fetch a takeover value of $52 to $58 per share.
A year later and the activist investor Dan Loeb targets Sony
Dan Loeb's activist hedge fund Third Point is raising an investment vehicle to generate between $500 million and $1 billion so it can continue to buy Sony shares, according to a recent report in Reuters.