$1 Trillion In Liquidity Is Leaving: "This Will Be The Market's First Crash-Test In 10 Years"

In his latest presentation, Francesco Filia of Fasanara Capital discusses how years of monumental liquidity injections by major Central Banks ($15 trillion since 2009) successfully avoided a circuit break after the Global Financial Crisis, but failed to deliver on the core promise of economic growth through the 'wealth effect', which instead became an 'inequality effect', exacerbating populism and representing a constant threat to the status quo.

Fasanara discusses how elusive, over-fitting economic narratives are used ex-post to legitimize the "fake markets" - as defined previously by the hedge fund - induced by artificial flows. Meanwhile, as an unintended consequence, such money flows produced a dangerous market structure, dominated by both passive-aggressive investment vehicles and a high-beta long-only momentum community ($8 trn and rising rapidly), oftentimes under the commercial disguise of brands such as behavioral Alternative Risk Premia, factor investing, risk parity funds, low vol / short vol vehicles, trend-chasing algos, machine learning.

However as Filia, and many others before him, writes, only when the tide goes out, will we discover who has been swimming naked, and how big of a momentum/crowding trap was built up in the process. The undoing of loose monetary policies (NIRP, ZIRP), and the transitioning from 'Peak Quantitative Easing' to Quantitative Tightening, will create a liquidity withdrawal of over $1 trillion in 2018 alone. The reaction of the passive community will determine the speed of the adjustment in the pricing for both safe and risk assets.

And, echoing what Deutsche Bank said last week, when it warned that central bank liquiidty injections will collapse from $2 trillion now to 0 in 12 months, a "most worrying" turn of events, Fasanara doubles down that "such liquidity withdrawal will represent the first real crash-test for markets in 10 years." 

Filia concludes that "the big opportunity in today's markets is to position for such moment of adjustment, as it is totally priced out despite its potential for severe disruption, thus offering the most pronounced asymmetric profile."

Below are the key slides from Fasanara's presentation:

 

The full, must read presentation is below (link):

Comments

Rapunzal Raffie Wed, 10/18/2017 - 13:07 Permalink

Wait and see, plz no comments about how dumb central bankers are.
This is all a very well organized and controlled demolition of our society.

The central bankers control everything, the politicians, courts, attorneys, press, Hollywood, music and entertainment, sports.

Nothing is a coincidence, I know it sounds crazy. But easy to understand when you see and understand the pyramid. Everything is top down.

In reply to by Raffie

Thinkpad Antifaschistische Wed, 10/18/2017 - 16:12 Permalink

FED owns about 45% in treasuries the rest in mortgages agency debt and other. China consortium offered cash for a 5% interest in Aramco which makes sense for a massive country that has no oil. No decision has been reached Two senior industry sources said Riyadh was keen on China, its biggest buyer of oil, becoming a cornerstone investor in Aramco. But no decision has yet been taken on whether to accept China’s offer, or how much stock could be offered to cornerstone investors, the sources said.China is creating a consortium made up of state-owned oil firms, banks and its sovereign wealth fund to act as a cornerstone investor in the IPO, people with knowledge of the discussions told Reuters in April.Sources told Reuters on Friday that Saudi Aramco was now evaluating a private placement of shares to a Chinese investor as a precursor to an international IPO, which could be delayed beyond 2018.But allowing China to buy 5 percent 

In reply to by Antifaschistische

jaxville BullyBearish Wed, 10/18/2017 - 15:20 Permalink

  Actually central banks bought assets (liabilities) to create liquidity.  That move also served to suppress interest rates. At some point those dubious assets would have to be taken off the books.  Do you know what a normalization of interest rates will look like to our economies in the years ahead? People say that the Fed or other central banks can't raise rates.  It is no longer a matter of choice.

In reply to by BullyBearish

HardAssets Rapunzal Wed, 10/18/2017 - 13:32 Permalink

The article is more 'blah, blah, blah'

The bankster shysters print (or keystroke) debt 'money'. That creates asset bubbles that they benefit from.
Later they crash the bubbles by reducing the debt 'money' in their system. They use those times to grab real wealth from those who can not pay the 'debt' they conjured up outta thin air.

All the rest is obfuscation. Their objective is to put everyone as deep into their made up 'debt' as possible. Any politicians who don't go to this heart of the matter are frauds.

In reply to by Rapunzal

Thinkpad agstacks Wed, 10/18/2017 - 17:55 Permalink

Collateral damage due to the intense heat of the twin towers and burning debris. Videos can now be seen due to freedom of information act of Bldg 7 infrastructure melting a reporter was standing in front until he had to bolt because it was collapsing.

In reply to by agstacks

Thinkpad HRClinton Wed, 10/18/2017 - 17:51 Permalink

Freedom of information act in 2011 a video was released showing WTC7 melting due to the heat and it wasn't spontaneous that coupled with friends of mine that were in the building confirms beyond doubt it wasn't deliberately demolished by the US Govt and what ever multi alphabet agency contrary to your long disclaimed conspiracy theory

In reply to by HRClinton

Diatom Rapunzal Wed, 10/18/2017 - 15:35 Permalink

/* Style Definitions */
table.MsoNormalTable
{mso-style-name:"Table Normal";
mso-tstyle-rowband-size:0;
mso-tstyle-colband-size:0;
mso-style-noshow:yes;
mso-style-priority:99;
mso-style-parent:"";
mso-padding-alt:0cm 5.4pt 0cm 5.4pt;
mso-para-margin-top:0cm;
mso-para-margin-right:0cm;
mso-para-margin-bottom:10.0pt;
mso-para-margin-left:0cm;
line-height:115%;
mso-pagination:widow-orphan;
font-size:11.0pt;
font-family:"Calibri","sans-serif";
mso-ascii-font-family:Calibri;
mso-ascii-theme-font:minor-latin;
mso-hansi-font-family:Calibri;
mso-hansi-theme-font:minor-latin;
mso-fareast-language:EN-US;}
For we are opposed around the world by a monolithic and ruthless conspiracy that relies primarily on covert means for expanding its sphere of influence, on infiltration instead of invasion, on subversion instead of elections, on intimidation instead of free choice, on guerrillas by night instead of armies by day.   It is a system which has conscripted vast human and material resources into the building of a tightly knit highly efficient machine that combines military, diplomatic, intelligence, economic, scientific and political operations. Its preparations are concealed, not published. It’s mistakes are buried, not headlined. Its dissenters are silenced, not praised. No expenditure is questioned, no rumor is printed, no secret is revealed. JFK lives...

In reply to by Rapunzal

JohnGaltUk Raffie Wed, 10/18/2017 - 13:42 Permalink

News on the street is that there has been a large sell off of Spanish bonds since Catalan and it seems that Euro bonds are not that liquid.Mario will have to keep buying to infinity and beyond until confidence totally collapses and then it is game over.I personally hope they give Mario the Musillini treatment.

In reply to by Raffie

gatorengineer Wed, 10/18/2017 - 13:04 Permalink

Its been comming..... one trillion, I wonder how that compares to how much there is in annual buybacks....  All that buyback money that is printed when the money is borrowed, would go a long way to offset this.  not entirely but I bet globablly it s 500 billion a year.

JohnGaltUk gatorengineer Wed, 10/18/2017 - 14:34 Permalink

Stop looking at the stock market!!!!The problem is in the bond markets. By law pension funds have to buy a certian % of sovereign bonds and now the baby boomers are retiring and will want to be cashed out, should get interesting throughout the WHOLE west.Look what happened in Houston when there were rumours that they were going to limit lump sum payouts.

In reply to by gatorengineer

Soph Wed, 10/18/2017 - 13:07 Permalink

meh....nothing to see here.At worse, a 5-10% correction, then the centralbanks will fire up the liquidity pumps. They WILL NOT let the equity markets tank, they've shown this repeatedly.It is different this tme, sorry. Markets are nationalized on a global level and propped by central banks. That's the new normal, that's not going to change (it'll only increase), and that's what will assure the S & P march to infinity. The market is far from "Fragile"...it's more backstopped than it ever has been.

Clowns on Acid Soph Wed, 10/18/2017 - 13:26 Permalink

Very true and thats why VIX is has been sold repeatedly. Its free cash to the sellers. VIX should be at 1.0 instead of 20, but then everybody would know that the US is operating under de facto socialism now....since 2008/09...and subsequent QE.The Fed has to keep VIX over 8....just like interest rates could never be negative without the masses figuring out the criminality involved.

In reply to by Soph