BOJ central banks credit ECB Markets

Going ‘Ex Liquidity’ And A Macabre Celebration At TINA’s Funeral

" 'embarrassed' so many asset classes in 2018."

Listen, if your question is “when will everyone stop reveling in the fact that 2018 was the year that ‘cash’ outperformed pretty much every asset on the planet?” the answer is “no time soon, apparently.”

This perverse fascination with charts that illustrate the triumphant resurgence of cash as an investable asset class is somewhat understandable. After all, it’s been a while and for some investors who were in high school for Lehman, cash hasn’t been any semblance of viable for the entirety of their adults lives.

Still, the sheer amount of interest in this topic from people who you have to know probably lost money as a result of the dynamics that made cash “great again” (God, I’m sorry), is remarkable. You’d almost think everyone had a bad relationship with a girl named “Tina” at one point and are now keen on celebrating the gruesome death of an investment meme that shares her name.

In any case, the last time we indulged readers in their “cash beat everything last year” obsession was (checks notes) six days ago in a click-bait-ish post called “2018 Summed Up In One Simple Chart…

I hate titles like that, but I was in a hurry and if memory serves, I was irritated about something or other, so I slapped that unimaginative headline on a piece the sole point of which was to roll out the visual below from Goldman.



In case it’s not clear enough, Exhibit 4 shows that, to quote the bank, “nearly all assets returned less than US T-Bills – in the last 100 years there have been very few times when this has happened to the same degree.”

Well, one person who you can count on to produce colorful charts that poignantly illustrate the effects of the rolling back of central bank liquidity is BofAML’s Barnaby Martin, who was out on Thursday with a piece so chock-full of notable visuals and soundbites that figuring out where to start is well nigh impossible.

In cases like that, I just latch on to whatever the most accessible theme is, pen 300 or so words that put it in context and then go from there. You just read those 300 words, so let me get to some quotes and charts from Martin.

He writes European credit strategy for BofAML, so everything is seen through that lens, but his points are usually applicable across assets and across locales – his latest piece is no exception.

After noting that the regime change across the pond (i.e., the end of PSPP/ CSPP net buying, leaving just the reinvestment flows which, for corporate credit, are relatively small) marks an epochal shift, Martin suggests that the scars (so to speak) of 2018 will likely keep investors gun shy in the new year. This is where we get to sate readers’ appetite for more “cash” charts.

“We think risk appetite will be low in the early part of this year as cash ’embarrassed’ so many asset classes in 2018”, he writes, before marveling at the fact that, as the chart in the right pane below shows, “only 9% of assets across the globe posted better total returns than 3m US Libor last year.”



The implication is that not only do the dynamics that led to that state of affairs still exist, but the fact that last year turned out like it did means investors are likely to be wary of taking risks lest they should end up on the wrong end of things if 2019 ends up being a repeat of 2018 in terms of cash outperforming 90% of global assets.

Martin goes on to roll out the by-now-familiar chart of YoY central bank balance sheet contraction. “After years of central bank purchases crowding investors into risky assets, this dynamic will now reverse”, he reminds you (and hopefully you did not need that reminder).

“The upshot of this, in our view, is that markets will continue to experience more ‘corrections’ than normal”, he adds. He calls this the world going “ex liquidity”.



What’s particularly disconcerting about 2018 is that it’s not exactly like the world went cold turkey off central bank accommodation. The ECB was still expanding the balance sheet, the BoJ was still doing what the BoJ does (“stealth taper” notwithstanding) and policy was still extremely loose in, for instance, Sweden and Norway (which both finally hiked). You could argue that none of that is enough to offset a determined Fed that appeared oblivious to the risks of hiking into an uncertain macro backdrop and running down the balance sheet into a deluge of new Treasury supply, but still – it’s alarming how sensitive markets proved to be to the first halting steps towards ending accommodation.

In any case, Martin goes on to warn that this has ramifications outside of financial markets. To wit:

More broadly, though, we worry that a deteriorating liquidity backdrop will weigh on economic growth. As chart 4 highlights, global money supply has declined rapidly over the last year and a half. In fact, global money supply growth (using M1) is flirting with the lows seen in mid-2008. While some economies, such as China, are now pivoting back to supportive measures, high global debt will constrain economies’ enthusiasm for engaging in further rounds of stimulus, we think. And as chart 4 suggests, lower money supply growth has often pointed to weaker global economic momentum going forward.


Ultimately, this is all part and parcel of the same narrative. Policymakers are tightening (albeit in what would historically count as “small” doses or “baby steps”) and they’re doing so against a backdrop where trade frictions and geopolitical uncertainty are running high and undercutting risk sentiment.

Meanwhile, asset prices are proving to be far more sensitive to the withdrawal of liquidity than a lot folks imagined, which raises serious questions about what we can expect going forward. And that’s just “top-down” liquidity (if you will). “Bottom-up” liquidity (where that means diminishing market depth, etc.) is deteriorating as well, which creates its own set of problems.

Of course none of this is “new”, per se. And certainly not to BofAML’s Martin, whose notes are always worth a read and who is quite adept at picking up on the themes that people want to read about and turning them into engaging pieces of research.

And I guess the fact that it’s not new and that serious people have been writing about it for years is what makes it so frustrating to watch, on Twitter, as the entire world suddenly wakes up to all of this and proceeds to pen over-the-top missives couched in terms that make many of the people who used to downplay the impact of central bank accommodation sound just as hyperbolic and insane as the doomsday bloggers they used to spend all day mocking.

But alas, such is life. Balanced takes are hard to come by. Creative writing is hard to do. Sanity is forever and always in short supply – just like liquidity.



1 comment on “Going ‘Ex Liquidity’ And A Macabre Celebration At TINA’s Funeral

  1. It looks like #MAGA again on the stock market though…. At this point cash is under-performing.

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