GLOBALT Spotlight: Who's Swimming Naked? | ETF Trends

By J. Keith Buchanan, CFA, Portfolio Manager

Increasing money supply seems to have a way of making new investment ideas and inventions appear worthy of lofty valuations and waves of capital.  However, the risk is not appreciated until excess liquidity begins to recede and the most egregious assets or asset classes appear so.   Warren Buffett has intimated the concept many times in newsletters to shareholders that only when the tide goes out do you see who is swimming naked.

We subscribe to this logic. As central banks open the money spigot to speed the healing of scars from the previous economic cycle, the new money supply flows into each nook and cranny of the economy just like any Newtonian fluid would. This marginal liquidity initially finds its way to sectors, assets, and ideas which, we believe, attract that capital for good reason.  Either those destinations are new promising concepts or proven, but undervalued ideas and assets, or some blend of the two.  However, with nowhere left to go, liquidity spills into the less traditional and questionably valued edges of the market. For example, how do you value a picture of a rock sold as a non-fungible token (NFT)? These investments are less easily accepted, seedy, or just outright suspicious.  Nevertheless, money will find a home.

At the same time, this increase in supply places downward pressure on the price of money, also referred to as interest rates. Interest rates have been on a secular downward trajectory for over a generation as money supply has increased with months and quarters of temporary moves higher.

However, there have been moments in which rates move marginally higher, pressuring the economy. That pressure has a way of testing the weaker hands of the bull market.  The more obscure corners of the market feel the pressure of even a minor reduction of liquidity first and most dramatically.  These are also moments when over-levered and even fraudulent investments become exposed.

Globalt - Who's Swimming Naked Investment

The chart shows the US 10-year Treasury rate over time.  Even though rates have generally moved lower since the early 1980s, cyclical shifts higher in rates have coincided with collapses in areas of the market which became highly valued or perhaps fraudulent. Temporarily higher rates occurred with the market crash of 1987, the savings and loan crisis in 1990, the Asian and Russian financial crises and the downfall of Long-Term Capital Management in the late 1990s, and the Great Financial Crisis of 2008. 

We have maintained that the increase in rates over the past year would place strains on economic demand and something may break.  The investing world heard cracking noises in the cryptocurrency world earlier in 2022, but the dramatic collapse of FTX last month is the latest in this string of complicatedly leveraged and/or potentially fraudulent entities that unravel when rates move higher.

Or, to put a twist on Buffet’s often quoted phrase, only when the liquidity tide goes out do you see who is swimming naked.

GLOBALT is an SEC Registered Investment Adviser since 1991 and, effective July 10, 2013, remains a Registered Investment Adviser through a separately identifiable division of Synovus Trust N.A., a nationally chartered trust company. This information has been prepared for educational purposes only, as general information and should not be considered a solicitation for the purchase or sale of any security. This does not constitute legal or professional advice, and is not tailored to the investment needs of any specific investor. Registration of an investment adviser does not imply any certain level of skill or training. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information may be required to make informed investment decisions, based on your individual investment objectives and suitability specifications. Investors should seek tailored advice and should understand that statements regarding future prospects of the financial market may not be realized, as past performance does not guarantee and/or is not indicative of future results. Content may not be reproduced, distributed, or transmitted in whole or in part by any means without written permission from GLOBALT. Regarding permission, as well as to receive a copy of GLOBALT’s Form ADV Part 2 and Part 3, contact GLOBALT’s Chief Compliance Officer, 3400 Overton Park Drive, Suite 200, Atlanta GA 30339.  You can obtain more information about GLOBALT Investments and its advisers via the Internet at, sponsored by the U.S. Securities and Exchange Commission.

The opinions and some comments contained herein reflect the judgment of the author, as of the date noted.

Investment products and services provided are offered through Synovus Securities, Inc. (SSI), a registered Broker-Dealer, member FINRA/SIPC and SEC Registered Investment Adviser, Synovus Trust Company, N.A. (STC), Creative Financial Group, a division of SSI. Trust services for Synovus are provided by STC.

Regarding the products and services provided by GLOBALT: