Dear Reader,

Right now, most eyes are on oil.

Most eyes are on energy stocks.

Most eyes are on inflation.

This makes sense.

When a war breaks out in the Middle East, oil is the first thing people look at.

They want to know how much crude is going to spike…what that will do to gas prices…and what that might mean for the stock market and the economy.

Sure, all those matter.

But because most eyeballs are pointed in that direction…

They’re missing a crisis that could be potentially bubbling under the surface…

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A crisis that could prove to be the biggest risk of all. I’m talking about:

The Risk of a Major Liquidity Crisis

A liquidity crisis is when people, banks, and businesses suddenly need cash all at once… and can’t get it without dumping assets fast.

Now, this may seem counterintuitive at first.

How would war in the Middle East and an oil shock lead to a liquidity crisis?

But just look at what’s been happening in the market lately.

Gold sold off – falling as much as 25% in the first few weeks of March.

Silver sold off – plunging nearly 40% over that same period.

Even long-term Treasuries sold off – dropping 6%, which is an absolute monster move for the benchmark “risk-free” asset.

As I said in a previous newsletter on the gold selloff…

“In volatile markets, investors often sell what they can sell – not just what they want to sell.

And gold is one of the most liquid assets in the world.

So when traders need cash, when portfolios are under stress, or when margin calls start hitting elsewhere, gold often gets sold simply because it can be sold quickly.

Even accounting for the current drop, gold is still up nearly 50% from a year ago…

Meaning plenty of investors are still sitting on gains – making gold one of the easiest sources of liquidity when markets get stressed.”

When energy and raw material prices spike, companies all over the world suddenly have bigger bills to pay.

At the same time, trade flows get disrupted and cross-border cash starts moving more slowly.

So instead of calmly holding assets, people start selling whatever they can to raise dollars and meet expenses.

Now, you may be asking – so what?

Well, the real danger is that:

Liquidity Crises are What Take Down Financial Systems

Think about the classic “run on the bank”.

Everyone lines up to withdraw their cash – which of course, the bank doesn’t have on hand (most banks only keep a tiny fraction of customer deposits available as cash).

The bank either gets bailed out – or it goes under.

That’s an example of a small-scale liquidity crisis bringing down a relatively contained financial system.

And when we extrapolate that over the broader financial system…

That’s when we get events like the Global Financial Crisis.

Few think of it this way, but the collapse of Bear Stearns and Lehman Brothers were both liquidity crunches.

These firms could not use their collateral to generate the liquidity they needed to keep operating.

The subprime mortgage-linked assets they were using as collateral were suddenly being marked down – and no one trusted them anymore.

Which meant they could not make the overnight payments they needed to make…

Putting them on the fast track to insolvency.

But liquidity crunches can spread through the entire system – faster than most people think.

You see, the financial system is like a giant system of pipes carrying water under pressure.

If one section of pipe gets clogged, the pressure builds behind it and the parts further down the line stop getting what they need.

So when one institution fails to make a payment…

The next institution that was relying on that payment suddenly has a problem too.

And then the next. And the next.

Like a series of falling dominos, it can quickly spiral into a systemic meltdown.

As the International Monetary Fund notes:

“Severe disruption to funding and a liquidity crunch are central features of almost all systemic banking crises.

A major fire can break out when a small spark lands on combustible material – so long as there is oxygen available.

Likewise, a financial crisis often starts with some relatively minor disturbance to an already-vulnerable system, which is propagated and amplified by liquidity strains.”

So, the question is:

Are We About to Spiral Into Another Liquidity Crisis?

One early warning sign is the Treasury market.

For a while now, the long end of the Treasury curve has been under pressure.

There has not been much appetite for locking in long-dated U.S. debt at current yields.

That is one reason so much issuance has been concentrated at the short end.

That’s where the demand still was.

But we’re increasingly seeing weaker demand even for this shorter-dated debt…

With primary dealers – essentially big institutions like JPMorgan, Goldman Sachs, and Citigroup – forced to absorb more of the supply.

This could be an early sign of liquidity drying up.

Another sign is stress in the private credit market, which I talk about extensively in the video below.

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Now, despite these early signs, I do not believe we are in a full-blown liquidity crisis right now.

So far, there are no major signs of severe stress – at least not yet.

Things like repo usage and swap line usage – basically emergency short-term dollar funding from the Fed and foreign central banks when markets get stressed – are still low.

But “not yet” is not the same thing as “not a risk”.

And if we walk into another full-blown liquidity crisis – things could get real bad, real fast.

It would be a true Black Swan event.

But of course, things aren’t binary.

We don’t need to see a large-scale liquidity crisis to see some major market volatility.

And you don’t need to wait for the alarms to go off to start positioning yourself to protect – and even profit – from all this volatility.

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