Ambrose Evans-Pritchard: JPM sees 'most extreme excess' of global liquidity ever

By Ambrose Evans-Pritchard
The Telegraph, London
Tuesday, October 29, 2013

http://blogs.telegraph.co.uk/finance/ambrosee...100025974/jp...

If you think there is far too much money sloshing through the global financial system and causing unstable asset booms, you are not alone.

A new report by JP Morgan says the bank's measure of excess global money supply has reached an all-time high.

"The current episode of excess liquidity, which began in May 2012, appears to have been the most extreme ever in terms of its magnitude," said the report, written by Nikolaos Panigirtzoglu and Matthew Lehmann from the bank's global asset allocation team.

They said the latest surge is far beyond anything seen in the last three episodes of excess liquidity: 1993-1995, 2001-2006, and during the Lehman emergency response from October 2008 to September 2010, all of which set off a blistering rise in asset prices.

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My own view on all this is somewhat different, so I pass on the report's findings for readers to make their own judgment.

They are argue that the global M2 money supply has risen by $3 trillion this year, up 4.6 percent in just nine months to $66 trillion. Roughly $1 trillion is showing up in the G4 bloc of the US, eurozone, Japan, and the UK.

Most, some $2 trillion, is showing up in emerging markets where credit continued to surge at $170 billion a month in July and August despite the Fed taper scare earlier that hit the Fragile Five (Brazil, India, Indonesia, South Africa, and Turkey). Mr Panigirtzoglu said there is an internal credit boom in emerging markets that is running in parallel to QE in the West.

My guess is that China has accounted for a fair chunk of the latest growth since it has reverted to excess credit yet again, shoveling loans at the state behemoths, hoping to squeeze a lit more juice out of that exhausted catch-up model. I also think that this $2 trillion jump is linked to QE by the Fed, Bank of England, the Bank of Japan, and to the ECB's back-door support for Club Med bonds. Money has been pushed out into Asia, Latin America, and Africa, but this can be overstated.

Determining levels of excess money is no easy task. The devil is in the detail. JP Morgan measures "broad liquidity" held by firms, pension funds, and households (etc.) as well as banks. They say correctly (a crucial point often missed) that QE bond purchases from banks do not necessarily boost the broad money supply. You have to buy outside the banks.

In very crude terms, excess liquidity is the gap between "money demand and money supply." When confidence returns, demand for money falls, so it finds a home elsewhere in stocks, property, and such.

If JP Morgan is right, you can see why the BIS, the IMF, and Fed hawks are biting their fingernails worrying about the next train wreck. There is clearly a huge problem with the way QE has been conducted.

The wash of money has set off another asset boom, yet the world economy has failed to achieve "escape velocity," and is arguably still in a contained depression. Global trade volumes contracted by 0.8 percent in August. (It would have been a lot worse without QE, of course, though we can never prove it.)

If we ever need more QE it should go straight into the veins of the economy by direct deficit financing of big investment projects (fiscal dominance) and damn the torpedoes, and the taboos. Just print money to build houses for the poor and solve two problems at once. Remember, I said "if," before you Austro-liquidationists and coupon rentiers all scream abuse at once.

Interestingly, JP Morgan also said that Norway's sovereign wealth fund ($800 billion) stopped buying equities in the third quarter, becoming net sellers.

It is currently 63.6 percent invested in equities, above its 60 percent target. This implies more selling. Other such funds are likely to be in the same position. Interpret that as you want. Sounds to me like there is now a sovereign wealth fund "call" on global equities markets. They will sell into the rallies.

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