The Cycling Of Money

Tyler Durden's picture

Via Mark J. Grant, author of Out of the Box,

“Money may not buy you happiness but it certainly will let you be unhappy in nice places.”
 
                         -The Wizard
 
In one sense the trajectory of money is similar to what recently occurred with Lance Armstrong which is that he admitted to doping. The financial markets have been living on the drugs provided by the world’s central banks and that has been more and more and ever more money pumped into the system. We have become addicted to the stuff and never mind that more pieces of green and blue paper decrease the value of the currency because, with the possible exception of gold, there is nowhere else to go and so the global slosh of capital keeps driving the markets higher; all of the markets.
 
“It takes money to look this cheap.”
 
                     -Dolly Parton
 
Many point to the rise in the markets as a sign that conditions are improving but this is not the case. If things were getting better then the fundamentals would be telling a very different story but they are not and when one answer doesn’t make sense then another answer must be found. All of our current run-up has an explanation; just not the one that is commonly presented. The explanation is simple enough; the wide open spigot of printing and creating money which must go somewhere because it gets invested and does not lie placidly on the floors of the bank vaults. If you consider the financial progress of the United States you see a limping dog and not a Greyhound that is springing to new all-time highs. The continuing bond compression and the new highs in equities are not based upon any improving financial conditions, not at all, but they solely rest upon the green ink that has been loosened upon the world and must be used somewhere and so it has.
 
“Dance like it hurts, love like you need money, work when people are watching you.”
 
                       -Dilbert
 
In Europe it is even more obvious. The economies in Spain, Italy, Cyprus, Portugal and Ireland are worsening, unemployment is rising and the financial conditions of these countries are deteriorating and yet sovereign yields are falling, most are able to fund in the markets and the Europeans are waving the flag of improved conditions. This, however, is not the case. They would like you to believe this is the reason of course and the spin everything possible in that direction but it is not the truth. In Europe there are just two factors that buoy all of the recent run-up and that is the Draghi promise, yet untested, and the cycling of money which is on the constant search for yield and appreciation and so, as time distances us from our last financial crisis, as safe credits have been pushed to no-yields and as riskier credits have compressed to almost no yields and as equities have forged their way into higher ground the hunt continues for yield and appreciation and it has reached European sovereigns and banks as one of the last places left to go. There is a term for this and it is the “cycling of money.” It fills up one pot, goes on to the next, fills it up and then arrives at the next container. There is no good reason why equities are back at their all-time highs until you realize just how much capital has been pumped into the system. Now the stock markets are where they are and there is no denial and fortunes have been made and lost as usual but if you lose sight of the reason for all of this then you may not do so well when the central bank spigots are gradually turned off. That will be the moment to run for the hills because the flood waters of the Fed and the other central banks have been all that has been floating the Ark.
 
“The governments in Europe sit in the rain and inform everyone that it is sunny. They make up numbers and provide debt to GDP ratios that can only be found in a Hans Christen Andersen fairy tale. The tires are punctured, the transmission is shot, the motor was stolen by the Greeks and yet they assure us that the car will be running momentarily. Politically they are the largest bunch of pimps on Earth and make no apologies for it. Then there is the negative side.
 
                       -Princess, The Sage
 
Now one can make the argument, and it is an interesting argument academically, that why can’t the central banks, who currently have a total of $14 trillion in assets/liabilities, have $41 trillion or $140 trillion on their balance sheets. In other words, why can’t this game keep going on forever? Relative values would stay the same afterall and it would only be intrinsic values and absolute values that would be suspect. The answer is a matter of faith. The Great Game is run on faith and, when lost, the capital filled balloon of the marketplaces will get pricked with such a great whooshing sound that no other noise will be heard or appreciated. So far, as indicated by the markets, so good; and I and my clients have reaped the rewards but soon, quite soon in my estimation, the air at these lofty heights will become harder to breathe, the trudge will be more difficult and the reasons we are here will become more difficult to find and rationalize. It may be the March 1 imposition of automatic spending cuts in the United States or it could be Greece and the rest lining up for more money which gets refused by some nation or it could be a bank failure somewhere but someone or something will show up with pin in hand. You can count on it and then be prepared to run as fast and as far as your legs will carry you because it will not be quick or far enough. What the markets give they can take away and when lofty heights have been attained almost solely upon the printing of paper then the downward slope will be the furious rush of some waterslide in Disneyland.
 
Since our last financial crisis I have spent a lot of money on Grand Marnier, large houses, women, yachts and fast cars. The rest I just squandered.