Liquidity Liquor and the Battle Ahead

3 | By Shah Gilani

Equity markets have been charging ahead for a few weeks. Not just here in the U.S., either. They’ve been rising in Europe too. Even China’s Shanghai Composite, after falling 22% last year, has been percolating higher.

Thanks to the ECB filling Europe’s punchbowl, last year’s sovereign debt hangover has been mellowed by some 100-proof “hair-of-the-dog” liquidity liquor…

And it feels good.

This party atmosphere is infectious!

After the European Central Bank poured some $600 billion (and counting) into the party bowl and let teetering European banks ladle themselves out as much as they could stomach, the Federal Reserve signaled that it wanted to throw in some free “shots,” in the form of more quantitative easing or some other easy money contribution, to make sure Europe isn’t the only party house on the block.

And now the IMF – the usually stodgy party-poopers of fiscal discipline fame – are trying to get themselves invited!

They know they’re not usually welcome while any economic bacchanal is raging, so they’re asking for donations of $500 billion to $600 billion (on top of the $400 billion in commitments they’re already packing), so they can man the kegs and stills and pump in whatever juice is necessary to make the budding soiree a true world party.

It’s amazing how giddy easy money makes everyone feel.

How else could we go from fearing the next “Lehman moment” to feeling like there’s enough money and time for over-indebted countries and increasingly strung-out banks to heal themselves?

Don’t get me wrong: I love a good party. I’ll stay until the music stops, or until the punchbowl is empty. I just hope I hear the music stop before everyone realizes the punchbowl’s been cracked.

There’s no reason not to be participating in this rally. And there’s no reason not to be aware of what’s driving it.

Liquidity, liquidity, liquidity – much like location, location, location – is everything.

Liquidity is the Liquor in Every Economy’s Punchbowl

The party started with a bang over in Europe. Not because things were so good, but because they were so bad. Without banks getting huge, almost unlimited, three-year loans at 1% from the ECB, they wouldn’t be able to buy all the new sovereign debt that’s being issued, and they wouldn’t be able to roll over their own debts.

Borrowing costs have plunged, thanks to the open liquidity keg. But borrowing needs aren’t diminishing; they’re about to intensify.

In the U.S., the Fed is talking about more easy money schemes. Not because things here are so good, but because they see them slipping.

The IMF isn’t asking to raise its emergency war chest to over a trillion dollars because everything is so good, but because they’re scared as heck that things could get ugly.

But as growth slows, existing liquidity begins to evaporate. It has to be replaced or economies will run dry and seize up.

It’s all okay right now… but for how long?

The Music I’m Listening to is Starting to Slow Down

Global growth has been propped up by so much liquidity, and even as more liquidity is being pumped in everywhere, growth is showing signs of serious fatigue.

The World Bank on Monday reported it expects growth in developing countries to slow to 5.4%, from its earlier estimates of 6.2% only a couple of months ago. “High income” countries were knocked down from 2.7% to 1.4% for all of 2012.

In the U.S., the Fed thinks that fourth-quarter growth, however positive it may appear, was a “last gasp” spurt and unlikely to continue into 2012. Hence the talk of more QE.

China, while still showing very positive growth metrics, is nonetheless showing signs of slowing down. The question the world is asking is whether China’s domestic growth can make up for falling exports to Europe and other developing countries.

China has also seen a rapid slowdown in foreign investment, which dropped 12.7% in December on a year-over-year basis after falling 9.8% in November.

Germany, the “engine of Europe,” today announced a ratcheting down of its own growth expectations for 2012. It expects to teeter near a dismal growth rate of only 0.7% in 2012, down from its previous forecast of 1% last month, which was lowered from 1.8% the precious month. Germany’s economy actually declined 0.4% in the fourth quarter.

Meanwhile, France is lowering its growth projections for 2012 to 1.7%. Before its downgrade last week, France warned of a “significant slowdown” that began in 2011’s fourth quarter.

Again, I love a party, and I’m dancing to the tune this one’s humming. But, as I said on Sunday, there’s an increasing disconnect here that reminds me of the summer of 2007.

So what do we do?

We need to keep our eyes glued to global growth.

If it continues to slip while massive liquidity pumps are flooding banks with cash, and sovereign borrowing costs begin to rise again to dangerous levels, that’s the end of the music and time for me to unwind my long positions, or at the very least, hedge everything I want to hold on to.

And speaking of “holding on”…

What’s with Mitt Romney?

Now, I know this is a charged issue, and I don’t want to offend anybody. And personally, my vote is still up in the air.

But I think it’s important we look at the facts behind a candidate’s words.

And Mitt Romney is beginning to look and sound like he’s out of things to say, and out of ideas for fixing what’s wrong with America.

Maybe that’s because he’s part of the problem

Could the guy come across as any more “wooden?” Or any more cavalier about the plight of average Americans?

How can a guy worth more than $250 million (supposedly) earn almost $400,000 for speaking to, well, whoever will pay him over $40,000 for an hour-long speech, and call that “not a lot of money?”

Is that insensitive or just plain ignorant?

If you ask me, it’s both.

I have plenty of issues with how a lot of leveraged buyout (LBO) deals are done and how they end up. But I’m not totally against the business model. However, I am against the outright lie that Romney created net 100,000 jobs while he was at Bain Capital.

And I’ll tell you why.

First of all, he’s a banker. So I take everything he says with a grain of salt.

Second, the LBO business doesn’t give a hoot about job creation. It’s all about profit creation – at any cost. Romney has not one iota of proof that he created any jobs, gross or net.

The South Carolina primary is going to be really interesting, to say the least. Romney has gone from the anointed Republican nominee to looking like a floundering fool in no time flat.

It’s the typical banker swagger that makes me livid. He’s not part of the solution; he’s part of the problem, masking as do-gooder capitalist making jobs and making America a more egalitarian country.


As if we’re not engaged in enough of a class warfare debate…

Romney, if nominated, is going to push America to the brink of a battle it’s not ready to fight.


3 Responses to Liquidity Liquor and the Battle Ahead

  1. Matt Gorsuch says:

    Just a “thanks!” for providing such a lively read; I always look forward to opening your very well-written posts. And too, I suppose that I’m feeling smug with myself that I share an “unflattering” opinion of Mr. Romney with such intelligent folks as yourself…

  2. Ben Zadegan says:

    Hello Mr. Gilani,

    I am asking you this specific question because so far, I have found you to be the only person who seems not to be afraid to speak his opinion. I have asked several other people who publish popular blogs the same questions, and their answer has unexceptionally been: “this is is too political”. So, I’m going to ask you the same questions with the hope of getting a reply this time around.

    What do you think about the many US citizens who have signed “security agreement” with the states they reside in and trying to use the UCC Law to regain their sovereign status? They are issuing Bills of Exchange on the Treasury of the state they reside in and profess what they are doing is the only legal remedy available for “redemption”. They say the legal basis for what they are doing is the HJR-192 (1933), declaration of “financial emergency” by FDR, and collateralization of everything there was (is) on the soil of the USA to restructure the federal debt in 1933.

    As a US citizen, I’d like to know if issuing Bill of Exchange on the Treasury of the state I’m residing and signing a security contract to regain my sovereign status is doable.

    Thanks for a straightforward reply.
    Ben Zadegan, PhD

  3. Serge says:


    Please, stop to send me your e-mails. I have no money to spend for investments!

    Regards / Serge Goeleven

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