Excess Liquidity and Sly Stallone: Too Much Growth Can Be A Bad Thing

We now have an important clue about the development of the massive bull market in global financial assets. It will continue.

Global currency reserves are at $5 trillion. Last year there was $4 trillion in M&A deals. Already this year we’ve seen $2 trillion in deals. Central banks are largely powerless to stop these cross-border capital flows with monetary policy. In fact, they are contributing to the phenomenon.

“To the extent that you have central banks intervening to keep the value of their currency at a competitive level by accumulating dollar reserves at a rapid pace, that is going to boost liquidity and be one of the factors contributing to M&A activity,” says Nick Bennenbroek of Wells Fargo Bank in New York. “We believe the liquidity that results from the currency system fuels the strength in asset prices, the strength in global growth and the strength in M&A activity.” Says Steve Barrow, currency strategist at Bear Stearns.

When does strength lead to instability? When is too much growth no longer a good thing? And did Sylvester Stallone really need to take human growth hormone to make us believe that Rocky Balboa was still a champion?

In China, if the bubble is not successfully transplanted to new soil, it would have grievous consequences for the whole world, China first. “The central bank is increasingly concerned about asset bubbles,” says Jun Ma, an economist at Deutsche Bank. “The social implications could be huge if there is a major correction. Most of the new investors in China are poor, low- income people and they will be hit the most.”

Those who have the most to lose are usually the last into a mania. We saw this in the U.S. subprime market. Are we now seeing it as Chinese farmers send their hard-earned savings to speculate on U.S stocks?

And just who can survive a global financial meltdown anyway? In looking for the business answer, we turn to the natural world and our friend the roach. Each night we see a few here and there in our redoubt at Charnwood oaks. Roaches exist everywhere on the planet but at the poles, where it is too cold for even their hardy souls. They have survived and thrived on the planet for over 300 million years, adapting to all conditions.

Not much kills a roach. Radiation won’t work. Blunt force will. And so too, strangely, will dehydration.

In studying our adversary we learn that many roach-killing products effectively block up a roach’s pores so it slowly dehydrates, which sounds cruel. It appears to be effective. This is bad news for us, at least for the next 449 days. There is plenty of liquidity to go around.

Dan Denning
Markets and Money

Dan Denning

Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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