Grant Williams: The Rising Danger Of A Bidless Market

Grant Williams, veteran portfolio and strategy advisor, as well as proprietor of the economic blog Things That Make You Go Hmmm returns to the podcast this week to discuss his great concern about the liquidity risk underlying financial markets long-addicted to central bank rescue stimulus.

Through life, behavior is reinforced by consequences. And since 2008, everything possible has been done to avoid the consequences.

 

So it’s no great surprise to me to that investors are back here again so soon, because what should have happened in '08-09 was not allowed to run its course. Given the speed with which trillions of dollars of printed money brought things back to where they were before, people did not really feel the consequences. At the time people lost jobs and that’s real — that problem is still working itself out — but in the markets, investors were basically back-stopped by governments and central banks and so they did not feel those consequences. It's like the kid falling out of the tree and getting caught: well, he's going to climb the tree again. If he had fallen out and broken his leg, he'd think twice about doing it again.

 

And so a band-aid was put over the first problem without really addressing the cause of it: too much debt in the world. So what have we done? We've gone and added another $60-70 trillion dollars of debt onto the amount that caused the problems in 2008. Everything that has been done has been intended to stave off an outbreak of reality. Unfortunately, history is replete with examples that there's really not much you can do to stop natural, cyclical forces. You may be able to suspend them for a time — which is what they've done — but ultimately, they end up expressing themselves in ways and places that are far more dangerous than they were to begin with.

 

Look, we've got a bunch of people now who are essentially paid to believe central banks. Guys who invest assets, whether it be in mutual funds or pension funds. They've been forced into equity markets these days because they've been willing to accept capital gain as a substitute for income in the bond markets for the last few years. That's coming to an end. We've reached negative rates now. You can argue that we could go further negative, but realistically the upside for rates is unlimited, whereas the downside has a limit on it. They've nearly reached that lower limit and so capital managers have been forced to move into the equity market where there's some semblance of a return.

 

The danger to me has become one of liquidity. In a rising market, I will always find you an offer. If you want to buy shares in a rising market, there are always some for sale. I don't know what the price may be, maybe it's a little bit higher as people get greedy, but there's always stuff for sale. What people have forgotten since 2008 — which was such a sharp wakeup call — is: in really full markets, there are sometimes no bids. Every flash crash that we've seen in the last five or six years has been a preview of what's going to happen when confidence goes, because people will move to the exits. Everything that's been done — again we come back to these rules that put in place to deflect the last crisis: Dodd-Frank, Basel III, banks being forced not to mark-to-market anymore — we will see all the unintended consequences of these actions come out when people want to hit a bid and there's not a bid there. It could get ugly.

 

This is not a time for panic, but it is absolutely a time for a great deal of caution. You need to understand A) Why you're still invested in markets and B) What your plan is to get out of them if you suffer a shock. Because if a shock comes and we get a move down like we did in January/February, and it's one that coincides with a whole-scale or widespread loss of confidence in central banks, they're not going to be able to turn this thing around. People need to have a plan at that point.

Click the play button below to listen to Chris' interview with Grant Williams (58m:38s). And after listening to the podcast, be sure to watch Grant's new video Crazy which does an excellent job laying out the unsustainable state of the "long rescue" the world's central banks have been engineers.