According to this article from Seeking Alpha an index of closed end funds maintained by Thomas Herzfeld moved to a premium for what might be the first time ever (the article is not clear whether this has happened before or not).
This is another anecdote about how much liquidity there is in the world these days. Too much liquidity creates risks. There may or may not be a consequence to this risk but it exists nonetheless.
This has been on my mind for a while but not something I have yet figured out how to reconcile. Clearly if this turns out to be a harbinger for bad things it could still be several years before the liquidity issue causes any harm. And again nothing may come of it ever.
I just think there is something to this but I'm not sure exactly what.
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8 comments:
Check out this site for historical price/NAV info. http://www.etfconnect.com/
Seems to be the other side of the credit bubble thesis: A lot of money is being created and there is a relative shortage of quality financial assets available globally so a rather specific form of demand-push inflation is occurring; additionally second tier financial assets (including a fair amount of garbage) is being bid up far beyond its intrinsic value; i.e., virtually everything is selling at a premium w/ risk essentially discounted to zero.
Apparently those who are really 'in the know' don't worry about any of this because the money remains easy to get and there are all kinds of new derivatives, swaps, etc available to shift the risk of loss to someone else anyway.
And of course those of us who actually do worry about it are mocked and/or maligned as stupid bears and/or warned that we foolishly risk falling behind the market indexes (guess that means we could still feel a sense of accomplishment if the S&P fell 30% and our portfolio only lost 25%, eh?).
Almost sounds like a conspiracy doesn't it.
Can't speak for others but I've seen this kind of scenario before (albeit never on this scale) and while obviously not having any clear sense of timing none-the-less continue to emphasize defense. FWIW
I have been reducing my exposure to many CEFs now trading at premiums which I purchased at discounts. The idea of holding or even buying leveraged funds which invest in additional leveraged products, and doing so by paying a premium, doesn’t make much sense to me.
Perhaps those ‘in the know’ that RW refers to are correct, and risk can always be shifted to someone else and that the easy money will continue to flow. I would rather be mocked for worrying and be more than happy to sell my risk to someone else at a premium.
Good comments, RW ~ it does sound like a conspiracy.
I have heard the term liquidity crisis used in the past - referring to a lack of same. Now too much is bad. What is the right amount? How do we get there? Who's in charge of getting us there?
you won't like my reply because there is no answer to your question. exess, either too much or not enough lquidity both cause problems, different problems. its no ones job per se. If there is too much liquidity most people will blame the Fed under Greenspan for keeping 1% too long.
Someone probably needs to enlighten me: My understanding has always been that credit and liquidity are entirely different concepts.
As I understand it a "liquidity crisis" can refer to an inability to pay debt, an insufficiency of cash for capital development or other constructive need, or an imbalance in financial ratios (possibly leading to a violation of some agreement or accepted accounting protocol). If I have sufficient cash on hand I do not need credit to deal with any of this although, for various reasons, I might prefer to use leverage rather than my cash (but that doesn't constitute a crisis).
It is quite possible to worsen a liquidity crisis in the case of easy credit if credit is primarily being used to leverage asset prices higher and/or if the cause of the crisis was inability to pay debt in the first place; similarly it is possible to worsen a liquidity crisis if credit is tight because a necessary capital project can not proceed as planned or an imbalance has occurred that can not be corrected.
That's the way I've always understood it but I'll gladly accept correction if I've got it wrong.
lest anyone think i claim to have all the answers but my take is that if credit it too easy more money is created. if more money becomes too much money/liquidity problems will likely ensue. private equity deals are having a mania in part because of the ease of leveraging up, IMO
http://seekingalpha.com/article/26798
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