The liquidity tide is going out!
There is no doubt the liquidity tide is retreating fast. It has been falling since last August and the series monitored by our friends at CrossBorder Capital shows that the global level has only been this low twice in the last 40 years. Once was ahead of the Savings and Loans crisis in the late 1980s. The second was in 2007 – I need say no more. Worse than that, three measures which are the strongest predictors of a bear market are all at extreme levels: investors’ risk appetite is high, central bank liquidity is low and cross-border flows, particularly those out of the US, are weak.
That’s not to say it will happen tomorrow. There are still some positive signs coming out of China in particular, where in a Trumpian world the People’s Bank is rapidly taking over from the Federal Reserve as the global liquidity provider of last resort. But if they turn the taps off too, it really will be a case of battening down the hatches.
When the tide retreats, who will turn out to be swimming commando? They will almost certainly be found in the Developed Markets and it probably won’t be the banks this time round. It’s worth noting that markets lead the economy by at least nine months, and it could just be a good old-fashioned recession in 2020 or 2021, with companies which have extended credit to consumers in the forefront. Think auto and phone service agreements, store cards, travel companies and anybody else who has extended credit unwisely.
Find out more about the end May numbers here.