Liquidity Can Overcome Common Sense For Only So Long

Submitted by Mark J. Grant, author of Out of the Box,

Testifying before the British Parliament yesterday:

"Let's be clear. We've intentionally blown the biggest government bond bubble in history... If I were to single out what for me would be biggest risk to global financial stability right now it would be a disorderly reversion in the yields of government bonds globally," adding there have been "shades of that" in recent weeks.
              -Andrew Haldane, Bank of England Director of Financial Stability

Here may be the most open and truthful statement by any central banker since 2009. His comments indicate a number of things besides the first blush read. First and foremost it is an admission of global manipulation by all of the major central banks which is a position that I have expressed for quite some time. Mr. Haldane’s comments here and other remarks he made leave little doubt that the central banks have operated in collusion.
Second he flatly reinforced my long held opinion that the world has been living in the largest bubble in all of history. Every asset class, bonds, equities, commodities have been held up by the tremendous flow of liquidity created by these fellows. The world has been awash in capital and so much so that the liquidity overcame the economic fundamentals of the countries and markets that supported the prices and rationalized the levels. All of this was blown-out by the money that was created and put into the financial system with wild abandon.
So where do we stand today? First I think the “liquidity effect” is wearing off and secondly I believe that the economic fundamentals, far from improving, are rapidly getting worse.
Spain reported out its housing numbers this morning. Down the most since the Spanish agency began calculating the numbers. They dropped 6.6% in the last quarter and 14.3% from a year earlier. It is not just the Spanish bad bank but the securitizations at the ECB, guaranteed by Spain, that are bundled in a sea of red ink.
Then consider the promise of Japan’s central bank. An initial market reaction similar to the Draghi “Save the World” speech which has now deteriorated into a nightmare as the yen is pounded and their stock market gets hammered day after day. The Japanese hoopla has not matched the European hoopla by any stretch of the imagination. Their stock market was down 6.4% overnight which would equate to a 960 point drop for the Dow.
European sovereign yields are beginning to rise once again and you can sense a change of attitude in the marketplace.
Liquidity overcame common sense and economic fundamentals for a time. A lot of money was made and a huge amount of leverage was put on. Everything rose with the tide. Look around you though; look carefully.
I think the tide is beginning to go out. I believe recession in Europe will spread to America as the severity of the European crisis becomes more and more apparent. Upcoming economic data in France is also going to be quite troubling in my opinion and the contagion will become apparent in the United States.
You better watch out,

You better not cry,

Better not pout,

I'm telling you why
Santa Claus is about to head out of Dodge