The liquidity’s coming! The liquidity’s coming!
If Paul Revere was alive today, he’d be driving his Cybertruck through the streets screaming that, instead of his silly warnings about the British, given how hyper-financialized our economy is.
Prior to every recession, we see major signals that almost never fail. Those signals include spikes in the unemployment rate (the Sahm Rule), and the inverted yield curve (where short-term rates are higher than long-term rates), declining consumer confidence, and falling manufacturing activity.
These recession signals are so strong and so consistent that I often make fun of the “this-time-is-different” crowd, as we hear that phrase prior to every recession from people telling us there will be no recession. In 1999, we heard, “The internet has ushered in a new economic paradigm.” In 2007, we heard, “The Fed will save us, sub-prime is contained, housing problems will be regional, and the economy’s strong.” Not so much…
But this time may in fact be very different because central banks and governments have figured out how to continually inject liquidity to prop up asset prices, per Raoul Pal.
Pal of course is not the only one to bring up liquidity over and over, as numerous other analysts do so as well. Chris Whalen and Darius Dale are two examples who brought it up on recent podcasts.
What Is Liquidity?
Liquidity is the injection of cash by central banks and governments through lower rates; incentivizing more bank lending (like we see in refinance booms); quantitative easing (where the Fed buys bonds and even stocks); bailouts (like the bank term funding program that bailed out banks in 2023); the forgiving of student loans or other debts to the government; the freezing of interest or rent payment obligations like we saw during COVID; government spending programs like the “Inflation Reduction Act;” and the draining of the Treasury General Account (the government’s checking account) at opportune times.
Raoul Pal discusses his theory in this short and interesting Julia La Roche podcast: The Economic Singularity: ‘We’ve Got 6 Years To Make As Much Money As We Possibly Can’ | Raoul Pal.
Here are some of Pal’s key points:
1. LIQUIDITY BECAME KING IN 2009:
Liquidity became the most important thing in the world after 2008 – when central banks injected more liquidity into the system than ever before (by factors of ten).
2. LIQUIDITY DROVE ASSET PRICES:
The runup in asset prices we’ve seen since 2008 directly correlates to liquidity, and Pal has the charts to prove it; he says they’re very accurate and can predict future price increases too.
3. 2022 WAS OUR RECESSION:
We already saw our “recession” of sorts in 2022 (a point repeated by other analysts often).
4. GOVERNMENTS CAN’T LET ASSET PRICES FALL:
Governments can’t ever let asset prices fall for political reasons and because entire economies are propped up by asset (stock, crypto, and real estate) prices. If asset prices ever correct significantly, we’ll see margin calls, loans fail, banks fail, tax receipts plummet, and deflation.
5. HUGE COST = CURRENCY DEBASEMENT:
This comes at a great cost, as currencies across the world are “debased” by an average of 8% per year – meaning they lose 8% of their effective value relative to goods and services at 8% per year.
6. COST AVOIDED BY WEALTHY INVESTORS:
The cost is not too great though for the wealthy who invest correctly and can earn more than enough to offset the 8% debasement. Pal LOVES crypto and tech stocks.
7. FED MUST LOWER RATES:
The Fed must lower rates because the Fed Funds Rate is almost 3% higher than the inflation rate – something that is highly unusual and far too restrictive for the economy and consumers in general.
8. INFLATION’S NOT A CONCERN:
Inflation is not a concern because technology finds ways to make things cheaper to offset devalued currencies, energy remains abundant, and populations are all aging, which limits demand pressure.
Three Most Important Points for the Purposes of This Blog:
1. LIQUIDITY DRIVES HOUSING PRICES:
Liquidity has been driving up home prices too.
2. RATE CUTS INCREASE HOUSING DEMAND:
The Fed’s coming rate cuts will only increase demand for housing and drive up prices even more.
3. HOMEBUYERS WHO WAIT WILL REGRET IT:
If first-time homebuyers don’t buy now, they will very much regret it because prices will climb (he tells that to podcast host Julia La Roche directly, as she still has not bought a house).
