JPMorgan Stunner: "The Current Episode Of Excess Liquidity Is The Most Extreme Ever"

Tyler Durden's picture

Curious why everything is being bought in the aftermath of last week's ECB's unprecedented announcement, and both bonds and stocks are either at or just shy of record highs ignoring completely the worst US nonfarm payroll print of 2014? JPM's Nikolaos Panigirtzoglou explains why.

From "The ECB's liquidity boost", here first is the background on where in the global central bank central-planning experiment we stand right now:

The ECB President stated in this week’s press conference that the ECB’s forthcoming programs, i.e. TLTROs coupled with ABS and covered bond purchases, could take the ECB’s balance sheet back to early 2012 levels, i.e. to €3tr from €2tr currently. These remarks, not only suggest that the ECB might have a target in mind regarding the size of its balance sheet, but raise questions about the boost to global liquidity from prospective ECB actions.


In aggregate, G4 central balance sheets started rising rapidly from the end of 2010 driven by the Fed’s QE2 followed by the BoE’s QE, ECB’s LTROs, Fed’s QE3 and BoJ’s QE. As a result of these central bank actions, G4 central bank balance sheets expanded by almost $4tr over 4 years i.e. by $1tr per year since the end of 2010 (Figure 1). With the ECB aiming at a €1tr expansion of its balance sheet, this $1tr per year pace in G4 central bank balance sheet expansion is likely to increase rather than decrease from here, despite the Fed’s tapering. The BoJ is already expanding its balance by close to $650bn per year, so adding a similar pace of increase for the ECB’s balance sheet (€500bn or $650bn per year) should result in an annual pace of G4 central bank balance sheet expansion of $1.3tr, even as the Fed ceases bonds purchases.



This ECB-driven quantitative expansion is hitting the global financial system at a time when liquidity is already very high. And this is true for both “narrow” or “banking sector liquidity” and “broad” or “non-bank sector” liquidity.


The G4 banking system is already flooded with excess reserves of around $4.5tr i.e. reserves commercial banks have with central banks in excess of what they need to meet usual liquidity needs. Given that the banking system cannot get rid of reserves in aggregate, these zero yielding reserves become the “hot potato” that banks try to pass to other each until the relative pricing is adjusted enough to remove the incentive for banks to get rid of these reserves. With the ECB aiming at increasing the amount of excess reserves even further via its TLTRO/bond purchase programs, G4 narrow or banking sector liquidity should exceed $5tr, exerting even more downward pressure on 2-5 year government bond yields of core countries, the preferred habitat of banks.

This is where global liquidity currently stands:

To assess excess money supply, we update the model we previously published in Flows & Liquidity, Apr 26th 2013. Beyond nominal GDP and financial wealth, i.e. the stock of tradable bonds and equities in the world, the model includes an uncertainty variable. Uncertainty is important as it makes agents hold more cash during periods of elevated risk perception, for precautionary reasons. We proxy uncertainty via the US monthly index constructed by Baker, Bloom and Davis. To measure policy-related economic uncertainty, they construct an index from three types of underlying components. One component quantifies newspaper coverage of policy-related economic uncertainty. A second component reflects the number of federal tax code provisions set to expire in future years. The third component uses disagreement among economic forecasters as a proxy for uncertainty. This uncertainty proxy is shown in Figure 2 along with its smoothed version. This uncertainty proxy declined sharply over the past two years and has completely unwound the post Lehman increase.


To estimate the gap between money supply and a medium-term demand target, we regress real money balances, global M2 deflated by global CPI, against 1) real GDP (i.e. the level of nominal GDP deflated by global CPI), 2) real financial wealth (i.e. the total capitalization of global bonds and equities deflated by global CPI), and 3) the uncertainty proxy described above. To remove the impact of FX changes from our global money stock measure, we aggregate the M2 stocks of various countries at constant (today’s) exchange rates. The regression results are shown in Figure 3. All three variables are statistically significant with a positive sign as predicted by theory.



Excess (i.e. the residual in our model) money supply is currently in record high positive territory. The current residual suggests that global money supply which stood at $68tr at the end of August is $5tr above our estimated medium-tem money demand target. The residual of the regression turned positive in May 2012 and has risen steadily since then. This is both because of real money supply increasing and money demand decreasing due to lower uncertainty (Figure 2: Global M2 reached $68tr in August this year and is up by $15tr or 29% since the end of 2010 when G4 central bank balance sheets started rising rapidly. The capitalization of both bonds and equities in the world had risen by a similar 31% over the same period and the current pace of M2 growth suggests that global equities and bonds should continue to grow by at least 6% per annum.


Of this $15tr increase in global M2 since end 2010, $5tr was due to G4 and the rest $10tr was due to the rest of the world, mostly EM. Strong credit growth in EM economies has boosted our measure of excess liquidity in recent years and this force led by China continues unabated. It is often mentioned that this Chinese or EM liquidity is trapped within EM. We disagree. It is true that domestic economic agents in China and other EM economies face restrictions in deploying their capital abroad. But domestic liquidity in China and EM is channeled to the rest of the world via reserve accumulation, i.e. via the official sector, as capital restrictions put upward pressure on EM currencies.

The punchline:

Prospective ECB actions are likely to widen the above $5tr estimated gap between global money supply and demand. That is, the ECB's quantitative expansion is hitting the financial system at a time when broad liquidity is also very high. The rise in excess liquidity, i.e. the residual in the model of Figure 3, is supportive of all assets outside cash, i.e. bonds, equities and real estate. The current episode of excess liquidity, which began in May 2012, appears to have been the most extreme ever in terms of its magnitude and the ECB actions have the potential to make it even more extreme, in our view. Before then, there were three major episodes of excess liquidity (i.e. positive residual) in our model: 1993-1995, 2001-2006 and Oct 2008-Sep 2010. These were periods of strong asset price inflation suggesting that excess liquidity could have been a factor supporting markets at the time.

You don't say.

It is also important to note that liquidity is not constrained by borders. For example, foreign institutions could also sell ABS or covered bonds to the ECB, so the prospective injection of liquidity by the ECB could reach foreign as well as domestic institutions. Anecdotally, both the Fed and the BoE have bought significant amount of bonds from foreign institutions during their QE operations. In addition, in a global and interlinked financial system, via arbitrage, the ECB operations can end up suppressing yields of higher yielding bond universes outside the euro area by more than domestic bonds.

Finally, add JPM to the long list of entities, from billionaires Icahn, Zell, Soros, Druckenmiller, to the BIS, to and increasing number of Fed presidents themselves, warning that the fun days of bubble inflation are almost over.

These liquidity boosts are not without risks. We note that they risk creating asset bubbles which when they burst can destroy wealth leading to adverse economic outcomes. Asset yields are mean reverting over long periods of time and thus historically low levels of yields in bonds, equities and real estate are unlikely to be sustained forever.


Translation: JPM is slowly but surely also getting out of dodge.

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AdvancingTime's picture

Money has become so cheap to borrow that many people are now arguing that you must take it even if you don't know what to do with it. It is hard to imagine how much this is distorting the economy, markets, and reality in general. A total disconnect between life on main street and the financial world is occurring and it is putting the economy in a very dangerous place.

It is often hard to determine what is true, but a report on Bloomberg that 32 Trillion dollars in funds were held in offshore accounts around the world made me shutter. How safe is this money, and what exactly is it doing? Can you say Cyprus? More on this subject in the article below.

Manthong's picture

“appears to have been the most extreme ever in terms of its magnitude

Shazam! They must have some real observant fellers over at that JPM place.

Xibalba's picture

All riched up (after looting the taxpayer) and ready to head to the yacht and pretend like "nobody could've seen it coming"

chumbawamba's picture

JPM Analyst: "Obvious things are obvious."

I am Chumbawamba.

gold-is-not-dead's picture

ATH liquidity, perfect time for whales to get their gains on equities. Short, anyone?

gold-is-not-dead's picture

Inflation through printing should be defined as forbiden form of slavery in the Jus Cogens of international law.

GetZeeGold's picture





I know it looks a long ways down'll be fine.

medium giraffe's picture

Groundbreaking stuff there JPM, let us know when you discover heliocentrism.

Save_America1st's picture

so printing Trillions of fiat out of thin air is a bad thing then, right?  Makes life soooooo difficult for all those pooooooor banksters to do stuff with it.  boo hoo...go suicide yourselves.

All Risk No Reward's picture


ekm1's picture

That is why I say there won't be any bailin.

Just unplug those offshore computers and easy peasy USD extinguishing

Escrava Isaura's picture

The price you pay to preserve the status quo

TeamDepends's picture

These are the End Times. "EXTREME" is "good".

GetZeeGold's picture



Just remember....chicks dig scars.

RaceToTheBottom's picture

Don't you know, DEBT is an asset to be maximized!?

/sarcasm for you mouth breathers


Dapper Dan's picture

I think I will be ok, all my debt is leveraged.

or is it diversified?

Hell,  I don't know my adviser said something about "going naked" 

that's a good thing right?

RaceToTheBottom's picture

Clothing should never be wasted on debt!!!  Always go naked!

JustObserving's picture
The Current Episode Of Excess Liquidity Is The Most Extreme Ever

That surely explains why gold and silver have fallen and have been languishing.

ekm1's picture

There is no actual real trading on supply demand

 Chinese and Russians took advantage of manipulation to import more real gold

nmewn's picture

If fiat "liquidity" were valued in gold & silver that wouldn't be the apparent case.

But gold isn't three fiddy an ounce anymore either ;-)

Bangalore Equity Trader's picture

Listen, Rabbi, Gold and Silver are immortal, as you know. But for the sake of argument Bit Coins must be considered during the transition so you can find fair value for your fiats.

Good luck!

nmewn's picture

I would offer you the services of a good jewish shrink if I knew one. But you should probably look into seeing one anyways, jewish or otherwise ;-)

Bangalore Equity Trader's picture

Listen, the best shrinks are at the USSA FED! They shrink your assets while inflating their own!

nmewn's picture

What does the extra "S" stand for in USSA?

Propaganda is such a wonderful art form of dichotomies I sometimes almost hate to expose its inconsistencies because of its uniqueness, like the Fed is actually a socialist-statist construct...

"Centralization of credit in the hands of the state, by means of a national bank with State capital and an exclusive monopoly."

...where did that come from?...but do carry on ;-)

hobopants's picture

Dichotomy always had the connotations of a shifting balance of opposing ideas to me, a sort or ying and yang kinda deal.

My take on Propaganda is that it seeks to eliminate dichotomy as a way of limiting freedom of thought...extinguishing the lines of divergence as it were.

Maybe it would be more correctly characterized as the art of destroying dichotomy (a la Newspeak)?

Or maybe I'm just reading you wrong eh? Care to elaborate?

All Risk No Reward's picture

I see the propaganda totally different...  they promote dichotomy and then finance both sides.  A few people still won't play along with their fake-*ss two party plantation, so they even finance the vast majority of stragglers organizations.

The real independents are never presented to the public, but they can be found if you look - and get a little lucky.

And even then, we all have limited knowledge, experience and understandings, so you still have to wade through the error of the folks really trying to figure this cesspool of fraud out.

hobopants's picture

Yeah, but that isn't the whole picture.

They operate off a version of the hegelian dialectic which means you have three stages




You create or exploit a conflict such as (black vs white red vs blue) and then you wait for the reaction to that conflict at which time you have a ready made solution set to take it's place.

The end result of that conflict is the destruction of the dichotomy (red vs blue) and a synthesis of their creation. I'll certainly agree with you that the bankers have made a killing off of the old conflict stage, but their end goal is for a synthesis (one world gov).

The game doesn't stop at divide and profit, its ultimate end is divide and conquer (e pluribus unum and all that). Of course you guys could be right and the nature of propaganda changes depending upon what stage you're in...Orwell was writing about post synthesis, while we are still pretty firmly in the conflict stage.

I would still maintain that Propaganda has the destruction of dichotomy as it's end goal.


LetThemEatRand's picture

There's a reason we're still talking about the Hegelian dialectic all of these thousands of years later.  I'm pretty sure they worshiped Atlas and Zeus back then, but the human brain is still susceptible to this simple technique.   Now if you put Machiavelli in the picture (he's relatively young at being born in the 1400's), and then you add mass media, you can come up with shit like we're seeing today.  And you'll even get some Atlas in there among the truly far gone.  Shrugging.

GetZeeGold's picture



Is there a Rabbi in the house?


I knew I should have worn a tie this morning.

nmewn's picture

Hobo, No I think we're on the same page.

Dichotomy: a division into two especially mutually exclusive or contradictory groups or entities <the dichotomy between theory and practice>; also :  the process or practice of making such a division

Or, as you say ying & yang, a lie & truth.

To me a truly good propagandist will take elements of the truth and incorporate them into his or her "work". So the work itself cannot be thought of as a complete lie, as there are elements of truth inside it that are easily defended by the propagandist but the entire body of the thing under consideration is meant as a deception away from what is truth.

Remember, we can appreciate the art form itself while despising what the art is used for.

The formation/existence of the Fed is a good subject to study this type of chicanery (propaganda). The normal state of affairs is, a government taxes and can spend no more than what it brings in from taxation. With the Fed in place, endless goodies can be doled out by .gov to corporations and to individuals. I think anyone of sound mind can agree up to this point.

Here's where the propagandist comes in.

They will say "The Fed is a creation of the banks, for the banks and the MIC!" but they will not acknowledge the individual welfare it enables that cannot be afforded by taxation alone. The Fed was created by an act of Congress, the very same Congress that loves to dole out endless goodies to individuals AND corporations.

The truth is, the Fed is a socialist-statist construct created for war AND welfare to benefit politicians long run and cannot exist without the imprimatur of law.

The element of truth to obscure the larger thing that can never be admitted to.

Tall Tom's picture

The Hegelian Dialectic strictly employs the use of the False Dilemma Logical Fallacy for effacacy.


It does not allow for the many other options to be considered as that exposes the weakness.


Most understand the thesis, antithesis, synthesis construct whereas they fail to understand the mechanism for the realization of the set goal. It is truly insidious and requires that one thinks outside of the architecture.

hobopants's picture

It's a subject I should spend more time studying, as it is (like it or not) a very big part of all our lives. Do you think the example you gave would actually be propaganda in the most literal sense though? or just people avoiding self reflection and looking around for a scape goat as they normally do when their world falls apart? 


"How did this happen? Who's to blame? Well certainly there are those more responsible than others, and they will be held accountable, but again truth be told, if you're looking for the guilty, you need only look into a mirror."

Tall Tom's picture

Listen, the best shrinks are at the USSA FED! They shrink your assets while inflating their own!


What are you smoking?


The last time that I looked the FED had $4 Trillion in liabilities on their books backed by some $80 Billion in assets?


The FED has been inflating their LIABILITIES and is technically INSOLVENT.


And as for you???


You are just TROLLING...pretending that you know something...when it is so apparent that you do not.


Get out of here Bangalore Equit. Your type is neither appreciated nor desired.


You are neither seeking truth nor exposing truth, but, instead, you are interested in promoting MISINFORMATION and promoting CONFUSION.

yogibear's picture

"The FED has been inflating their LIABILITIES and is technically INSOLVENT."

As confirmed by a coversation with a  Federal Reserve member  while meeting with Jim Rickard's.

It's all Federal Reserve smoke and mirrors now.

trulz4lulz's picture

Bit coin only works if you have electricity. Achillies heel.

Greenskeeper_Carl's picture

first of all, its "tree fiddy"....but ya, all that new fiat sloshing around the stock market will be looking for a new home eventually. Im not one of the ones on here who believes gold and silver are going to the moon any day now, but i do believe more and more people are getting wise to the scam going on and will be looking to have some of their savings in something tangible instead of it only existing on a computer. Unfortunately, they will probably wait until half their net worth gets wiped out for the second time in a decade before waking up.

Bossman1967's picture

if they didn't keep it low then the sheeple would know something was wrong so take the low prices as a gift to buy...

Cognitive Dissonance's picture

Regarding the global central bank fiat circle jerk, based upon the chart of central bank balances sheets since 2008 it is the ECB's turn to turn up the fiat flames of hell.

<Interestingly China is missing from that chart. I wonder why?>

Greenskeeper_Carl's picture

thats because the narrative around here is that everything in china is hunky dorry and this growth they have been having is real and sustainable, and revealing anything like that may disprove that idea

ThroxxOfVron's picture

Read the article carefully.  

$5t excess was generated by the G4.  

$10t excess was generated by the EM with China leading the EM parade.  Apparently China printed/QEased double what the US did.

All Risk No Reward's picture

They don't print.



Perhaps the anagnorisis of this fact is simply too emotionally devastating for most to even consider.

BTW, QE debts will be added once the losses on the toxic assets are tallied and THE TAX PAYERS WILL BE RESPONSIBLE.

Perhaps you ought to consider why the Bankster financed government is kicking people the h*ll off public lands...  preparing the way for the hand over of the public land as collateral on the inextinguishable debt.

They've done it every where else...  I'm not imagining this, I SIMPLY OBSERVE HOW THEY ACTUALLY OPERATE.

They claimed the rights to all Bolivian rain water...  and want to tax your exhalations!

himaroid's picture

"Hey daddy, why are all those rats jumping off the ship?"

limacon's picture

Buying from Universes-are-us would have saved a lot of bother . See

Duc888's picture

.....funny I must get 5 phone calls a week from solicitors trying to get me to take out business loans. Both from private banks as well as "government" loans.

OhNo's picture

Take all those loans move to gold,Put your book assets in someone you can trust,Say a honest hard working pillar of society type.Take it all its free for everyone!!!

Tall Tom's picture

Just because somebody steals from you does not justify stealing.


And you promote the same theft that others are doing?




The guillotine blade awaits you and your ilk.



kaa1016's picture

Get ready for a move up that hasn't been seen since 1998 - 2000. After that, I don't even want to know...