Submitted by Jeffrey Snider via Alhambra Investment Partners, [4]
It looks like the reversal of Monday’s dramatic and frightful liquidation has held and gained in the past few days. From that we can infer, of only the near-term, that those forced repositions were enough to square the liquidity imbalance from the latest “dollar” run. The two words are related not just in a common semantic root, as liquidations are the necessary condition of illiquidity where base financial conditions are detrimentally misaligned. Every panic that has ever existed is in one form or another a systemic of near-systemic liquidation of financial positions in favor of present claims in the face of indiscriminately redirected basis (typically implosive). Even wholesale “supply” complications don’t change that but only perhaps enhance the instability of the reversions since there is no obvious and clear mechanical means (what is being converted to what? We know what is being redirected as a result, but that is derivative to the actual seeds of disruption deep within the aggregate eurodollar inner workings) to interpret the size and reach of the reversal.
The difference between such a liquidity “event” and full-blown crash is simply one of magnitude on both sides: gaping liquidity supply which forces disorderly, widespread and momentous squaring to some greatly diminished settled state. The relative degree of chaos is just the last resort method of that realignment.
[5]
Given the widespread nature of this latest disturbance, and especially the appearance of a broad-based fear bid (gold, franc and, actually, yen), this was the most disruptive to date; the larger the run the greater the liquidation, and the more raw fear focused on stark hedging, necessary to accomplish its end. Obviously, given that near-term end, the dominant, conventional position remains that there is nothing wrong except specific problems here and there. The state of denial survives as connecting the continuous ripples of liquidiations to a unified and decaying foundation is too far outside recency bias. The fact remains, however, that the next one continues to be bigger and sharper than the last.
It goes until the “big one” shows up “out of nowhere” because everyone studiously ignores these events as if they can’t possibly be what they so obviously are: continued warnings. This week’s GDP report truly won’t help because it seems to confirm the status quo even though it contains the seeds (inventory) of the big part of any contraction that may yet come; to which GDP hasn’t been close to the mark in the face of all the other accounts [6]. Anything comforting is still acceptable to the backward base case; anomalies are still taken as discrete anomalies no matter how frequent and regular, and very much linked; all those do is tighten the grip of self-delusion.
Until the dominant dynamic changes, the “dollar”, we should keep going until these warnings stop being warnings and start being “it.” It is impossible to say what the final turn will be, as you can’t predict the level of “necessary” liquidations going too far because liquidity supply is totally hidden and derivative. The fact that one central bank after another continues to fall victim to the same connecting degeneration [7] is cause for still deeper pause and reassessment, but that isn’t any fun for the bull bubble and the “easy money” mindset. In any case, when the yen functions as the last resort bid of safety, you can pretty well assess just how messed up everything got – and start to make some determination about just how close to the precipice.
