In an article in the UK's The Telegraph, the author highlights a research report published by the global asset allocation team at JP Morgan that say's the bank's measure of excess global money supply has reached an all-time high. The implications, of course, is that previous periods of excess liquidity provided to global markets have all been coincident with the inflation of unstable asset bubbles.
The latest surge in liquidity has surpassed the last three episodes of excess liquidity: 1993-1995, 2001-2006, and during the emergency response to the financial crisis between October 2008 - September 2010.
The flood of excess liquidity has sparked another asset boom, while the global economy continues to sputter along. This disconnect between asset prices and fundamentals is a dangerous game of chicken being played by global central bankers, as the hangover of recent asset booms has been devastating for many investors.
With returns from safe assets near zero, investors this year have chased higher risk investments like stocks - fund flows into stock funds have been 10 times the level of inflows to bond funds.
Global stock markets are now responding daily to whispers about the Federal Reserve's intentions. When Chairman Bernanke announced in early summer that the Fed was looking to begin tapering QE as early as this fall, stocks immediately corrected 5%. This also caused a mild panic around the globe with emerging market stocks dropping 15% and gold tumbling 20% as currency volatility spiked.
Interest rates on government debt rose from 1.6% to 3.0%, causing bond prices to drop sharply. The Fed's decision to delay tapering when it was widely expected at their September meeting caused risk assets to surge.
But we now know what is likely to be the reaction to a reduction in monetary accommodation in the months to come and some "smart money" investors are beginning to position their portfolios accordingly. Blackstone, the world's largest private equity fund, said in the Spring that they are selling everything that is not bolted down. Norway's sovereign wealth fund reportedly stopped buying stocks in the third quarter and is now a net seller.
