Professional Documents
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by Tyler Durden
Nov 23, 2017 1:45 PM
6
SHARES
The holidays came early to the world's investor class, as instead of 12 Days of Christmas, Scott Minerd, Global CIO of Multi-billion-dollar Guggenheim Partners, dropped
his 12 lessons for today's meltup-market participants.
In a series of tweets, Minerd offers some clear-cut advice for the complacent many...
He begins by noting "The rally in risk assets is probably not over, but strength is an opportunity for investors to move towards the exits."
Scott Minerd
@ScottMinerd
3 10
Then explains...
Merkel's failure to effect a coalition increases the risks of longer QE from #ECB.
The myth of higher long term rates in the US ignores the risk that the business cycle's terminal rate may be lower than many think.
With the neutral rate stuck at zero, a December rate hike will move the #Fed into restrictive territory.
The Senate plan to delay a corporate tax cut into 2019 is likely to create a massive drag on the US economy. Bad policy!
The shape of the yield curve is telling us that we are on track for a recession and that monetary policy is becoming restrictive. The #tax bill is not a reason to
rethink this signal.
Market phase has moved from recovery to fundamental and now to speculative. There's little price appreciation now, just clipping coupons. It is time to
become more conservative and book gains.
To paraphrase Hemingway, credit downturns happen slowly and then all at once. Don't let yourselves be surprised by a sudden increase in spreads and defaults.
We are at a moment in time where complacency in the markets will be badly punished in accounts, bonds, and careers.
People who snooze will get run over by the bear market in risk assets.
The markets have had a great run, and it is easy to get complacent after such a long period of returns.
Ending with some crucial advice for everyone..."Everything is liquid until you NEED to sell. Plan accordingly."
Scott Minerd
@ScottMinerd
8 43 96
As Minerd concluded recently, based on the historical relationship between market cap to GDP ratios and subsequent 10-year returns, today’s market valuation suggests
that the annual return on a broad U.S. equity portfolio over the next 10 years is likely to be very disappointing.
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Wouldn't a crashing world market want anything on the Fed balance sheet that is suddenly being sold (or even any other US asset) than anything connected to
their own crashing market and, otherwise, in connection to China?
So, maybe there's just watching and waiting going on now - worldwide.
Just sayin'
http://www.zerohedge.com/news/2017-11-23/guggenheim-cio-warns-everything-liquid-until-you-need-sell 3/5
24/11/2017 Guggenheim CIO Warns "Everything Is Liquid Until You 'Need' To Sell" | Zero Hedge
Saw the illiquidity problems here early this year. Tried to move some money and it took four weeks.
My theory is that other creditors were in line before I was. Obviously the big banks have the actual liquidity. It takes a while for the money to trickle down
from above. If the money transfer doesn't originate from a bigger bank, you'll have to wait until they've settled their obligations with big banks who owe the
bank that owes you.
Another characteristic of a liquidity freeze is income tax payments. So tight are the banks with capital that they need to receive the income tax payments first
in order to pay off debt obligations. Without a huge thrust of tax payments in mid-January there was simply no liquidity available to pay off smaller
depositor's transfers in early January.
Doesn't matter if you're trying to transfer the money in or out. The end recipient will be the one unable to receive the wired funds for up to a month. If you're
lucky enough to receive money from a TBTF bank then yes, you'll be more likely to get your capital sooner than others. But even they suffer from periodic
liquidity crisis where they can't send funds out because they don't actually have them. They're actually more exposed but you can see the risk to the overall
system should they be unable to meet liquidity needs--it would cascade down the entire system.
Fractional reserve banking breeds these kinds of problems because banks only keep a small percentage of their depositor assets in liquid form. They're
encouraged to loan it out again and again yet this has become a seive for specualtion in the markets based on leverage-- a recipe for disaster.
Banks aren't investors and shouldn't be in the real estate business. But they are, speculating wildly in the same derivatives market that brought the '08-9
crisis--CDOs and other exotic investment products that greatly up market risk should any of the TBTF experience liquidity problems.
Like what happened with Lehman, should the first major financial entity lose their working capital then the Fed would step in. They've taken great efforts to
increase loan loss provisions and reserves in order to close any liquity holes in the system should they appear. This doesn't mean though that there might not
be periods where no cash is immediately available.
It's worth remembering that the cash isn't cash--it's a digital entry in a ledger. If no transfer is required and you have an account at a TBTF they can credit
that, knowing it probably won't be withdrawn (thus no need exists to actually have the cash transferred out as it is all internal.) The ledger dutifully records
every obligation, so even if you don't get the money, someone somewhere will have an IOU on their books and be obligated to pay it off...eventually.
Until the cash leaves the bank though, the IOU is only that an IOU. It has no redemption value. The Fed knows you're owed and where the liquidity problems
will be stacking up at those entities that suddenly lose all their cash reserves and all those who they owe and can't pay. The Fed will absorb the outstanding
IOUs directly if they have to.
Much can happen in the interim between the time you want your money and they send it to you. This period will result in great uncertainty and possible price
collapse in derivatives which will lack a robust and transparet market during a crisis. Maybe the Fed will step in and simply buy everything in sight for 100
cents on the dollar. This absorption would provide desired liquidity to the system but prevents price correction from occurring.
It's worth remembering that the Fed can correct balance sheet issues with easy money but that it still takes money going from them into the failing entities,
and the number of these will expand as they are interdependent on each other's balance sheet health. Prioritization of debt payments will happen along the
lines of something resembling debt seniorage--the banks in trouble will redeem IOUs to their friends first but if liquidity demands go high enough they'll
restrict outgoing transfers based on their overall ability to pay.
You can be owed and this liquidity freeze could mean you can't get your money. Most likely, the monetary inflation of a Fed QE to infinity--the likely policy
reaction--would spike gold and PM very quickly. This assumes that the metals are actually there at all, with so many claims to every ounce. Reallocation
would only be possible after the big boys get in at mid-crisis lows. You meanwhile would get your trade filled later, maybe even post-crisis.
Getting the money out of the intangibles into tangibles could be impossible. Although GLD poses as physical it can't produce the actual metals held on its
behalf and redemptions would take a while (force majeure clauses specify liquidation in cash equivalents, not the real metal, a fraud that permits fractional
reserve gold ownership.) This managerial risk could mean GLD and physical prices diverge quite radically as COMEX and other bank-dependent withdrawals
of physical can't occur and can only be filled with new borrowing from the Fed. This systemic risk might crash the price of GLD and Comex due to their
dependence on over-suscribed big bank PM holdings that don't exist but rather base the marketability of their paper-only existence on the implicit Fed
guarantee like any other TBTF liability, which is not where you'd want to be as a creditor--waiting for fresh fiat brought in to cover for the banks as physical
metal spikes.
http://www.zerohedge.com/news/2017-11-23/guggenheim-cio-warns-everything-liquid-until-you-need-sell 4/5
24/11/2017 Guggenheim CIO Warns "Everything Is Liquid Until You 'Need' To Sell" | Zero Hedge
http://www.zerohedge.com/news/2017-11-23/guggenheim-cio-warns-everything-liquid-until-you-need-sell 5/5