Zero Liquidity
``There are securities which simply can't be priced because there is no trading in them,'' Timothy Ghriskey, chief investment officer at Solaris Asset Management LLC in Bedford Hills, New York, said in an interview today. ``There are no bids for them. Asset-backed securities, mortgage loans, especially subprime loans, don't have any buyers.''
BNP Paribas announced that it was halting withdrawals on three of its funds with investments in the sub-prime market. The reason for this is that it would be unable to cashout redemptions in these funds. To cash out redemptions from a fund normally you would have to sell a percentage of your portfolio. Unfortunately, for BNP, and more unfortunately for the unitholders in its funds, those assets are essentially worthless. The quaint euphamism "total lack of liquidity" is the equivalent of saying "absolutely worthless".
This is the point in markets where greed really does turn into fear. If you are an investor in any of these funds it is the first one out who stands a chance to recover all or part of your investment value. Whereas "Cash is Trash" has been the motto for investors over the last five years it is rapidly becoming the very opposite.
Is this a healthy market correction driven by an overdue re-rating of risk; or the small of smoke before the house burns down? Watch closely.
posted by Peter at 9:30 am
3 Comments:
http://www.forbes.com/opinions/2007/08/20/croesus-chronicles-liquidity-oped-cz_rl_0820croesus.html?partner=moreover?partner=moreover
"This "horror show" will take time to work its way through the financial system. Expect to see huge losses taken by banks and other investors around the globe that will underscore the excesses of the past few years of reaching for yield without a clear understanding of what they were buying"
I tend to share the view expoused in this article. I suspect that the market will go through a series of mini-crises that progressively step down confidence in the market.
We have just witnessed round one. I suspect global equity markets may have peaked but you can't discount the chance of a dead cat bounce. I certainly don't think that the liquidity crunch has played out yet, nor is it priced into the equity markets at all.
The Dilemma
Isn’t Perception a wonderful thing?
Like any sporting event, we may come to the same result, but there are many ways to get there!
Some would say, this is as good as it gets!
Others would say, we are knocking at the doors of a nightmare.
The likely truth is that we are in transit between both.
The Dilemma Is!
If we continue the 1945 to 2000 population growth trend, we will decimate the planets natural resources and climate, by the end of this century and the survival of future generations will be at great peril.
The alternative is to slow or actually reverse the population trend, which may save the planet and humanity. However, the world economy would go into recession, followed by depression, before eventually recovering after a very long time.
How did we get here?
It took all of history, up to the year 1800 AD, to get our first Billion people.
Baby Boomers, were the 3rd and 4th Billion and we are now past 6 billion.
The population explosion really took off in 1945, it Peaked in 1956, then levelled out, before slowing dramatically.
Over the last 60 years, we have seen the upside of that population explosion, as an economic wave gathered momentum, increasing to a Tsunami over the last 15 years.
Where are we now?
In economic terms, the primary driver of the real global economy is consumer demand.
The largest demand driver is the 45-55 age group, primarily in the USA, due their big earning and spending capacity.
However, the economic benefits created by the Boomer generation have Peaked, as Boomers move into retirement saving mode.
Global consumer demand is starting to decline, as the people numbers and wealth of the generations following the Baby Boomers, are substantially less. Costs are also increasing, due to the pension and medical benefits that go with an aging population.
We also have a major supply side problem, as Oil has also Peaked, again causing consumer demand to slow and costs to increase.
We are now, at the top of a once in history Population Growth Mega Cycle.
What of the future?
If some things don’t seem to fit past patterns, it’s because this has never happened before.
Whatever the future outcomes, previous growth patterns are about to end.
Beyond Peak Oil and as Baby Boomers retire, then leave us in increasing numbers, is a re-balancing of Demographic and Economic levels, on a massive scale.
The very basis of modern life will be shaken, the magnitude of the quake, will be 9.9.
As always we have choices, but this Tsunami wave is about to come ashore and we are leaving it very late!
Good luck and watch your debt!
From The Economist:
http://www.economist.com/displayStory.cfm?story_id=9708455&fsrc=RSS
"The process of flushing out losses among banks, hedge funds, insurers and others who devoured asset-backed debt during the securitisation spree may have only just begun. If so, the relief of recent days will prove fleeting."
I share the view that the breakdown in confidence will likely occur in a series of steps; each progressively undermining market confidence.
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