SOMEONE LEFT
THE TAP ON... A few years back the phrase TINA (There Is No Alternative) was omnipotent. Every saver was trying to buy into yield of some sort, to temper the ill effects of zero interest rates. It was a logical time, driven by illogical circumstances. The central banks had left the world awash with cash and borrowing money had never been cheaper.
A few years back the phrase TINA (There Is No Alternative) was omnipotent. Every saver was trying to buy into yield of some sort, to temper the ill effects of zero interest rates. It was a logical time, driven by illogical circumstances. The central banks had left the world awash with cash and borrowing money had never been cheaper.
Let us envisage investment as a very large ornate pot, sitting outside a magnificent house at the top of a hill. It looks great. Beneath it is the cobbled street, which leads down to a drain that is covered with moss. If you now see this pot as an overall investment pool in which the liquid level rose more and more, as people dispensed their cash into it indiscriminately. With zero interest rates abounding anything that has had a yield has been dumped into this large pot. As more liquid poured into the investment pot it dampened the volatility within. The volume of water flowing in, meant that the pot was getting heavier and heavier, with hard leaden assets, also increasingly ever fuller of liquid and thus harder and harder to shift.
We assumed that with any seismic change in economics or politics, once the pot became unbalanced by some liquidity exiting it, the pot would fall over and all the liquid would run down the street into the drain. It didn’t. The pot has wobbled but the weight of the vast amount of liquid within it, has stabilised it quickly; like an investment weeble.
Perhaps it will still topple and the pot is so big and full, that the disused moss drain might not be able to take the deluge; but recently we have been reminded how heavy and full of liquid the pot really is. As emerging markets have hit the skids, with investors realising that the excessive borrowing these countries did in the last ten years, in dollars, potentially causes a vicious downward spiral whenever the dollar rises, the liquid has not left the pot it has simply displaced into another area. Investors withdraw their investment from EM but leave it in the pot. This time mainly flowing into US assets and primarily the S&P.
Does the pot need liquid to come out of it to destabilise it or will the increased currents from the liquid moving around more violently inside the pot (with a little bit flowing out of the top) be enough to destabilise it and send it crashing? If the liquid inside gets considerably choppy we will lose increasing amounts over the lip but at the moment TINA has shown what a powerful force it still is. Asset flows simply move around looking for another less volatile investment haven.
At the centre, the liquidity inside the pot is and always has been the US dollar. As more turbulence works up the inside walls, the more liquid gets moved into the dollar centre. The more this happens the more a vertex is formed. Liquid splashing up the inside walls and splashing out of the top but the inside remaining relatively calm (by the way, I am not a physicist or an expert in Grecian
Urns....the answer being that whatever a Grecian earns, it is borrowed euros).
20 | ADMISI - The Ghost In The Machine | September/October 2018
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