Global Liquidity and Monetary Aggregates Rise while Corporate Debt Defaults Soar

By the Curmudgeon

Introduction:

Global liquidity, the U.S. monetary base, money supply, and excess reserves in the commercial banking system are all on the rise, despite the Fed’s seemingly “tight money” policy.

Lots and lots of money was created after the COVID-19 lock down in March 2020 and the reality is that most of that money created then is still floating around in the financial system. Even though the Fed’s high short term interest rates and Quantitative Tightening (QT) is two years old, there is still ample money around to fuel the financial markets.

Liquidity and Monetary Aggregates Increase:

1. Global liquidity measures the flow of cash savings and credit through the World’s financial system. In is a major driver of asset performance (3-9 months out) and real business activity (12-15 months ahead).

Michael Howell of Cross Border Capital reports that the latest weekly Global Liquidity data show a new peak of US $171 trillion.

2. The U.S. monetary base is the total of paper money and coin currency in circulation, plus bank reserves held by the Fed. Despite an elevated Fed Funds rate and QT, the monetary base grew from 5,321,600M in February 2023 to 5,843,700M in January 2024 (latest month available from St. Louis Fed). This is shown in this one-year chart of the U.S. Monetary Base:

3. Also, the velocity of the M2 money stock has been rising for several months.

4. There’s a "huge" amount of excess reserves in the commercial banking system. Excess reserves in the whole commercial banking system, on March 13, 2024, amounted to $3,523.2 billion, or, about $3.5 trillion.

The efforts of the Federal Reserve to "tighten" up on the banking system have left commercial banks with a massive amount of "spare" cash at their disposal.

Corporate Debt Defaults Soar:

According to S&P Global Ratings, corporate defaults are at now at the highest rate since global financial crisis. More companies have defaulted on their debt in 2024 than in any start to the year since the global financial crisis as inflationary pressures and high interest rates continue to weigh on the world’s riskiest borrowers.

This year’s global tally of corporate defaults stands at 29, the highest year-to-date count since the 36 recorded during the same period in 2009, according to the rating agency.

The increase in defaults is likely due to a number of factors, including high interest rates, inflation, subdued consumer demand, and rising wages. Most defaults have occurred in the U.S., but European bankruptcies have also been increasing.

Although most defaults were in the U.S., Europe’s eight since January is twice as many as in any year since 2008, and more than double the number seen in the same period of 2023.

“What’s going on is exactly what’s been going on since the [Federal Reserve] began to raise interest rates” in March 2022, said Torsten Slok, chief economist at investment group Apollo. “Default rates are rising . . . because higher interest rates continue to bite harder and harder on highly levered companies,” he added.

Companies to have defaulted in February included U.S. ferry and cruise operator Hornblower, U.S. software group GoTo and UK cinema group Vue Entertainment International.

Conclusions:

The surge in corporate debt defaults reflects a combination of economic challenges, credit quality, and changing market dynamics. Investors should carefully assess their bond holdings and consider diversification to manage default risk.

Lower quality junk bonds have the highest default risk, but because of excess financial liquidity their credit spreads (yield vs U.S. Treasuries) is very low at 3.59% which is above the mean of 5.38%.

The huge disconnect between excess global liquidity and very high default rates highlights the complex interplay of economic factors and is not easily explained.

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Stay healthy, good luck and success. Till next time……………...

The Curmudgeon
ajwdct@gmail.com

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Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies, and government policies.  Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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