Tags: bubbles | treasurys | investing | risks

'The Larger a Bubble Becomes, the Harder It Is to Control'

Friday, 10 April 2015 07:48 AM Current | Bio | Archive

Japanese Economics Minister Akira Amari gave a rather "rare" comment when the Nikkei average shortly hit a 15-year high by saying: “If recent stock gains are signs of a mini-bubble, this is something I would welcome … The larger a bubble becomes, the harder it is to control…”

Experience has taught us all bubbles end badly.

Germany's Dax, which is the German blue chip stock market index, has entered unchartered territory making new historical highs “helped” to a large extend by the ECB's massive QE, which the Germans economically don’t need at all at present and which are much more concerned about where the euro is headed as it becomes clear central banks have started dumping their euro holdings.

Such a situation is politically unsustainable.

Elsewhere, Jamie Dimon, president and CEO of JPMorgan Chase (JPM), has released his annual letter to the bank's shareholders. The letter contains (alongside all the usual information on the bank’s performance and outlook) interesting views on situations in the general marketplace.

When talking about present and future risks in the marketplace, Mr. Dimon gave a very serious warning on what could, and probably will, threaten U.S. markets sometime in the future. “Market depth is far lower than it was, and we believe that is a precursor of liquidity…”

Never forget, markets that lack depth, as it is today the situation in the U.S. Treasurys market, usually are a main cause to liquidity crunches.

Investors could do well taking that into account when evaluating their current investment strategy.

At present the total inventory of Treasurys readily available to market-makers, stands at about $1.7 trillion in today’s $12.5 trillion Treasury market when in 2007, just before the latest crisis, market makers had $2.7 trillion ready-available Treasurys in a then $4.5 trillion market.

When the next crisis hits, Treasurys (which are absolutely necessary for providing “good” collateral to obtain liquidity in the markets), simply will not be available in sufficient amounts.

He also warns: “…Clearinghouses will be the repository of far more risk than they were in the last crisis because more derivatives will be cleared in central clearinghouses. It is important to remember that clearinghouses consolidate – but don’t necessarily eliminate – risk. That risk, however, is mitigated by proper (?) margining and collateral (!)…”

Finally: “The trigger to the next crisis will not be the same as the trigger to the last one – but there will be another crisis,” adding “in a crisis, everyone rushes into Treasurys to protect themselves. In the last crisis, many investors sold risky assets and added more than $2 trillion to their ownership of Treasurys. This will be even more true in the next crisis.”

My simple questions: “What amount of Treasurys will investors want to buy when the next crisis hits and “who” will be willing to sell their Treasurys at that moment?”

Believe me, there is no satisfying/reassuring answer to that key question.

In the meantime, Managing Director of the International Monetary Fund (IMF) Christine Lagarde, speaking ahead of next week’s spring meetings of the IMF and World Bank, warned “financial and geopolitical risks have increased” since last October.

The investor axiom is “sell in May and go away.” Sometime soon, we will be able to substitute "May" for any random month.

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I don’t know when precisely we will come to that point in time what “Sell in May and go away” stands for and wherein the month of May can be substituted by whatever month that comes later, but I have little doubt we’re closing in.
bubbles, treasurys, investing, risks
Friday, 10 April 2015 07:48 AM
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