Too Much Liquidity with No Place to Go — New Stock Market Highs

And that’s a wrap on the first half of the year 2021, perhaps the last of the greatest bubble era. As Americans nurse their bacon, burger, and bourbon hangovers from Independence Day (when we showed the British the door in 1776), they can reflect on new stock market highs. It seems to be about the only thing that matters to many people.

But there IS a lot to celebrate. The S&P 500 closed at a record high on Friday (for the second day in a row). It was up 8.2% for the quarter and is now up 14.4% year-to-date. The Nasdaq — America’s technology bellwether, was down on the day. But it too, is up just under 14% for the year.

This is what life is like when seasonal COVID-19 infections are on the wane. Lockdown life eases up. And central banks get even busier. Their work? Pumping fake billions into the economy to keep stock prices high and bond yields low. Speaking of which…check out the chart below:


Federal Reserve Bank of New York

Source: Federal Reserve Bank of New York

[Click to open in a new window]

There is something gurgling in the guts of the financial system. The chart above shows the size of overnight reverse repurchase agreements with the Federal Reserve. A reverse repo is when a money market fund or large investor deposits cash with the Federal Reserve overnight. Last Thursday, reverse repo volume was nearly US$1 trillion.

What’s going on?

There’s too much liquidity with no place to go. That’s the problem. Most of the money in reverse repo market is from money market funds. Money market funds tend to invest in short-term government Treasury bills and corporate debt. Money market funds in the US currently have over US$4.5 trillion in assets under management.

Money market funds need to make a nominal yield on their cash holdings to cover their operating costs. But remember, the Fed is pumping US$120 billion into bond markets each month. That lowers yields on fixed income across the board. And THAT makes it harder for money market funds to find an adequate yield of the cash.

Three ‘Deep Value’ Stocks to Watch as the Market Recovers. Discover More.

So, they go to the reverse repo facility from the Fed. And as you can see from the chart, volumes are near the top of the chart. It means there’s too much cash chasing too little yield. In the guts of the American financial system, there’s a giant cash bomb.

In the meantime, if investors DO want higher returns, they have to take higher risks. And that’s what explains the new highs on the S&P 500 and Nasdaq. Fixed income has been cut off at the knees. Fund managers and asset gatherers have only one realistic strategy: buy stonks!

Stonks it is. But what kind of a world is it where there’s so much money that it has no place good to go? That’s the world central banks have created. O brave new world with such yields in it!

In the meantime, in the non-financial world, we’re beginning to reckon with the idea of lockdowns for other emergencies, like the so-called ‘climate emergency’. It’s a subject I took up in the latest Bonner-Denning Letter. Have authorities (financial and political) used COVID-19 to create a permanent state of emergency that justifies extraordinary interventions in your private and economic life?

Pretty obviously, the answer is yes. In fact, New South Wales Health Minister Brad Hazzard has warned of too much ‘kissing and cuddling’ in private homes during the outbreak of the ‘Delta variant’ in Australia. Not only is the government putting millions of Australians under virtual house arrest, but it’s also telling them what they can and can’t do inside the house (and under the doona).

Fascinating doctoral theses are going to be written about how public health experts managed to take a whole nation hostage. It couldn’t have been done without the help of a complicit media. And the leading cheerleaders for lockdowns are politicians and public service officials who are swimmingly drunk with their newfound power.

Now you can see why they’re talking about ‘climate lockdowns’. That’s where the government would have the authority to ban private vehicle use, commercial air travel, and even regulate the thermostat inside in your own home. All to save the planet from humans and climate change.

Once you go down this rabbit hole, there’s virtually no limit to what kind of ‘emergency’ the government could use to justify other lockdowns. Obesity lockdowns — closing fast food restaurants for fat people. Or booze lockdowns — where pubs and bars are closed to drunks. Or information lockdowns, where websites (or e-letters) spreading ‘misinformation’ and ‘conspiracy theories’ are shut down.

British microbiologist Siouxsie Wiles, who now works and lives in New Zealand, explained how this new government ‘soft power’ could be used to address all sorts of ‘emergencies’ in public life. She says:

I hope that you know, people take from our responses that we can do this for other things too, you know, we can do this for the other, ah diseases that we have here in New Zealand, we can do this for climate change, umm and I think we should not underestimate actually, the kind of soft power now that New Zealand has, that we can really be an exemplar for how to be a good society, how to use evidence in the right way, you know and we’re not doing it for everything, so I, I think we, you know, we can show actually, why wouldn’t we do this for other things?

Other things? What other things, Siouxsie? Who decides? Who makes the rules? Once the Rule of Law is gone, and once parliaments no longer hold executive power in check and accountable (here’s looking at you, Dan Andrews), there’s almost no limiting the policing power of government. Everything in your life becomes regulated (sometimes legal, sometimes not legal depending on the current emergency status).

Here from the sunny US on the Fourth of July, with the stock market booming and travel back to pre-COVID levels, it’s inconceivable that we could have ‘climate lockdowns’, much less ‘fat lockdowns’ or ‘booze lockdowns’. But winter is coming. And the fear of the Delta variant is being ramped up.

Until then,

Dan Denning Signature

Dan Denning,
Editor, The Rum Rebellion

PS: The Bonner-Denning Letter is co-authored by Port Phillip Publishing founder Dan Denning and legendary investment writer and publisher Bill Bonner. It connects the dots between markets, politics, and history as one of the only macroeconomic, ‘top-down’ newsletters in Australia. For a big picture perspective on the past, the present, and your investment future, click here for details on how to subscribe.


Dan Denning is the co-author of The Bonner-Denning Letter.

Dan was a founder of Port Phillip Publishing back in 2005, which quickly became the leading publisher of its kind for independent financial research and insights. In 2014 he left to head up Southbank Investment Research in the UK. Dan is also the author of the 2005 book, The Bull Hunter. Today, he’s based in his home state of Colorado. Each Monday in The Rum Rebellion you’ll get Dan’s unique contrarian thinking to provide insights you won’t find anywhere else.

Dan Denning’s belief in free markets, sound money, personal liberty, and small government have underpinned everything he’s done during his 23 years in the financial publishing industry.


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