The WSJ published a very interesting article concerning winners and losers in the bond market following Dodd/Frank. Not surprisingly, it was determined that bigger is better. No kidding, but the real tale is the switch in the nature of the market makers or perhaps a better phrase would be the participants in the market because market maker implies a very specific function. I'm not sure the nature of the business remains the same and as I have written this could, through the lack of future liquidity, present multiple problems. This is the real importance of the WSJ story.
We have gone over the importance of being able to move paper, in size, particularly during periods of market upset, and there is no need to replow that field again. However, what has not been discussed is the very simple delineation between banks and other financial corporation and it is almost as simple as Paul Volker's observation that, "Banks are different." What's the difference between Citibank and a hedge fund or a private equity fund...or for that matter even an enormous funds manager such as Blackstone? The association with the Federal Reserve. These days the Fed doesn't like to point that out but in the end, it is the last refuge in a desperate situation, BUT to take advantage of what the Fed offers you have to be a bank. Make a market? That means you use your capital often when it inconvenient to so do. What's the difference between capital and liquidity? In certain conditions, not much. At the end of it it comes down to the Fed and if you can't go there...well, you don't make a market which if the condition is enough widespread, exacerbates the problem. So thanks, WSJ. Between us we might fix this thing. Of course we might need the Fed to own up to some basic truths out there in Realville. That could really help.
Showing posts with label Liquidity. Show all posts
Showing posts with label Liquidity. Show all posts
Thursday, June 22, 2017
Thursday, November 17, 2016
A MIDNIGHT CONVERSATION
He Who Knows All Things called late last night.
"You know why he saying those things, don't you?"
"Who?"
"Stan of course. What are you, drunk."
"No, I'm asleep."
"Oh. Anyway, do you know why?"
"NO, I DON'T KNOW WHY!" Alright, alright, because he has to. Happy?"
"Actually, yes. I'm rather pleased you came so close. I would not say 'had to' but 'needed to'."
'Like there's a difference?"
"Oh yes, there's quite a difference. "Had" implies a need, while 'needed" implies a conscious choice. You see..."
"No you may see, but at midnight not only don't I see but..."
"...You see, what Stan was saying is, "look gang, we are thinking about these issues and you had better be thinking about them as well.'"
"Hummmmmm."
"Just what do mean by Hummmmm?"
"That means I'm thinking. Problem is I don't have a solution to the problem if there is a problem."
"Oh, there's a problem all right and the other problem is that no one knows if the Fed has one either." Oh for that matter if any one there is working on a solution."
"A cry in the wilderness, then?"
"Not quite but certainly a suggestion what with the new administration in town if there is to be a solution now is the time to find it."
"And for this you called me at midnight?"
"Not for me, Charlie, I'm somewhere East of Suez. Middle of the day here."
"What the hell are you doing there."
"Solving problems, Ol' Son, solving problems."
I hung up. GOD! He's a pain, but as usual he was right.
------------------------------------
Ten Year was all over the place today closing at 2.30%. Let's hope we don't have an "event."
"You know why he saying those things, don't you?"
"Who?"
"Stan of course. What are you, drunk."
"No, I'm asleep."
"Oh. Anyway, do you know why?"
"NO, I DON'T KNOW WHY!" Alright, alright, because he has to. Happy?"
"Actually, yes. I'm rather pleased you came so close. I would not say 'had to' but 'needed to'."
'Like there's a difference?"
"Oh yes, there's quite a difference. "Had" implies a need, while 'needed" implies a conscious choice. You see..."
"No you may see, but at midnight not only don't I see but..."
"...You see, what Stan was saying is, "look gang, we are thinking about these issues and you had better be thinking about them as well.'"
"Hummmmmm."
"Just what do mean by Hummmmm?"
"That means I'm thinking. Problem is I don't have a solution to the problem if there is a problem."
"Oh, there's a problem all right and the other problem is that no one knows if the Fed has one either." Oh for that matter if any one there is working on a solution."
"A cry in the wilderness, then?"
"Not quite but certainly a suggestion what with the new administration in town if there is to be a solution now is the time to find it."
"And for this you called me at midnight?"
"Not for me, Charlie, I'm somewhere East of Suez. Middle of the day here."
"What the hell are you doing there."
"Solving problems, Ol' Son, solving problems."
I hung up. GOD! He's a pain, but as usual he was right.
------------------------------------
Ten Year was all over the place today closing at 2.30%. Let's hope we don't have an "event."
Wednesday, November 16, 2016
ANOTHER STANLEY CHAT
Stan Fisher was at Brookings yesterday. Subject? Market liquidity. I urge you to read the text as I think it is one of the most important topic that we shall face in the coming months. I wouldn't dare to paraphrase Mr. Fisher nor disagree with him but the latter course, if one were bold or dumb enough to take it is not really necessary in this case. I must say, Mr. Fisher is like an Alan Greenspan squared from the standpoint of trying to determine his real position on a subject. The difference is he lays out the arguments so clearly and consistently on both sides, dropping hints here and there, leading the listener or reader to what appears to be the "Ah Ha" moment only to remove it in the next three lines.
It's really a terrific piece for those who have an interest in these things.
In the end, Stan reaches the opinion that liquidity in today's markets is "adequate." Of course what "adequate" really is is not fully understood. His arguments are data driven but he freely admits that while there may be more trading today (volume) there is also much more product that ten years ago. And while there are "flash events" they seem to have been handled by the system and while there is undoubtedly less market action by banks the slack has probably been taken up by other players such as hedge funds. All well and good and supported by, as mentioned, the data. Mr. Fisher has said precisely what the Vice Chairman of the Fed should say, but I suspect--and one finds it in the tone of this speech--that he has not said it all.
In the past eight years, there really has been one way traffic in the markets and while there have been a few twists and turns, the general trend has been towards massive increases in debt both governmental and sovereign, declining interest rates and reasonable if not low volatility except for brief periods of disorder and "flash events." Not to be forgotten is that inflation despite monetary creation on the part of central banks has for all practical purposes been non-existent due to a variety of factors not the least of which have been low energy prices and a severe decline in economic growth in mature economies due primarily to governmental policies. That is about to change or at least the markets, over the past month or so seem to believe that things are changing.
It is one thing to say that in such a benine period what we have is doing just fine and quite another thing to expect that markets will react in the same manner in a period of heightened and continuous stress. Liquidity is never really an issue unless you need it...and then it is the only issue. And where I would take exception to Stan's analysis is in this: Paul Volker once said, "Banks are different." Banks and certain street firms were true market makers. Solomon Bros. was probably the best of the lot. In any issue in which they were a market maker there was always a bid...you might not have liked where it was but there was always a bid. If you needed to move Treasuries, there was always a bid from houses like J.P. Morgan, and Bankers Trust and others. Hedge Funds are not banks. There will not always be a bid and that becomes important not in times such as we have just experienced but in the future which by definition is unknown but about which warnings are being issued by the very people who might require the liquidity and...which is the true irony of the situation...may themselves be creating the need through the fear of circumstances which few of them have experienced. Stan mentioned in his talk that inventories at reporting institutions are down nearly 50% in the past eight years. Yet the amount of debt outstanding has doubled. If the VIX is any indication, risk has increased. So has the chance of a "tail event" which is the new catch-word of today. It seems that "Black Swan" tended to scare the crap out of people. By definition, you cannot prepare for whateever you want to call it. But you may be able to mitigate its consequences. We weren't ready in 2009. For a variety of reasons 2017 may be a really rough ride.
It's really a terrific piece for those who have an interest in these things.
In the end, Stan reaches the opinion that liquidity in today's markets is "adequate." Of course what "adequate" really is is not fully understood. His arguments are data driven but he freely admits that while there may be more trading today (volume) there is also much more product that ten years ago. And while there are "flash events" they seem to have been handled by the system and while there is undoubtedly less market action by banks the slack has probably been taken up by other players such as hedge funds. All well and good and supported by, as mentioned, the data. Mr. Fisher has said precisely what the Vice Chairman of the Fed should say, but I suspect--and one finds it in the tone of this speech--that he has not said it all.
In the past eight years, there really has been one way traffic in the markets and while there have been a few twists and turns, the general trend has been towards massive increases in debt both governmental and sovereign, declining interest rates and reasonable if not low volatility except for brief periods of disorder and "flash events." Not to be forgotten is that inflation despite monetary creation on the part of central banks has for all practical purposes been non-existent due to a variety of factors not the least of which have been low energy prices and a severe decline in economic growth in mature economies due primarily to governmental policies. That is about to change or at least the markets, over the past month or so seem to believe that things are changing.
It is one thing to say that in such a benine period what we have is doing just fine and quite another thing to expect that markets will react in the same manner in a period of heightened and continuous stress. Liquidity is never really an issue unless you need it...and then it is the only issue. And where I would take exception to Stan's analysis is in this: Paul Volker once said, "Banks are different." Banks and certain street firms were true market makers. Solomon Bros. was probably the best of the lot. In any issue in which they were a market maker there was always a bid...you might not have liked where it was but there was always a bid. If you needed to move Treasuries, there was always a bid from houses like J.P. Morgan, and Bankers Trust and others. Hedge Funds are not banks. There will not always be a bid and that becomes important not in times such as we have just experienced but in the future which by definition is unknown but about which warnings are being issued by the very people who might require the liquidity and...which is the true irony of the situation...may themselves be creating the need through the fear of circumstances which few of them have experienced. Stan mentioned in his talk that inventories at reporting institutions are down nearly 50% in the past eight years. Yet the amount of debt outstanding has doubled. If the VIX is any indication, risk has increased. So has the chance of a "tail event" which is the new catch-word of today. It seems that "Black Swan" tended to scare the crap out of people. By definition, you cannot prepare for whateever you want to call it. But you may be able to mitigate its consequences. We weren't ready in 2009. For a variety of reasons 2017 may be a really rough ride.
Wednesday, September 16, 2015
A LIQUIDITY REVISIT
We're heading back East tomorrow for a christening so I may be off the air for a few days--except for commenting on what the Fed does tomorrow--but afore I go I wanted to come back to the issue of market liquidity on which I have been harping.
About a month ago, an analyst from Citibank wrote a thoughtful and interesting piece on the subject which I have been thinking about ever since. Taking out the graphs and charts his thesis, reduced to simplicity, is that it is not so much the reduction or absence of market making functions about which we should be worried but the very nature of the financial markets themselves. In his mind the individual investment decision making process has somehow become one of the herd concept of investing: one big cow moves in one direction and all the cows follow. At the end of the day there is little distinction in the portfolios of the major players and as a result--having learned from the same playbook, if one moves, all move in exactly the same direction. Or to put it another way, if you want to sell it's a pretty safe bet that so does everyone else. Result? No bids.
I think he's right but the theory, with a bit of a different take, is not new. It is a variation on the theme that has worried many of us for years, especially when we hear the stertorous tones of the talking heads on TV telling us that the first rule of investing is to diversify. Yeah? With whom, since every mutual fund out there is holding the same thing. Well, between different strategies is the answer--a little of this, a little of that. Financials, emerging markets etc., etc. OK that's fine but these days it seems when the market decides to move in one direction, everything moves. Mind you, it takes a pretty big event to have that happen but...SURPRISE!...right after the publication of this paper we had one called China. But on the way back towards stability, a funny thing happened.
I remember watching CNBC as the equity markets imploded and hearing their best and brightest breathlessly report that Treasuries had not moved...nor had Bunds, nor had any public sector fixed income. "What illiquidity," was the cry. "Surely there has to be a flight to quality but Treasuries have held firm." In fact the 10 year hardly budged, nor did the 2 year and I said to myself, "boy, are you wrong about this liquidity thing." And I forgot about it for a day or two and then I literally woke up with a start. Dummy, the reason nothing is moving was that somebody was selling into the thing and doing it very well and with great care. Yep, surely there were our old friends the Chinese unloading Treasuries and other things to raise cash--a lot of it--and obviously getting help in so doing. DUH! Candidate for dope of the year.
Now I couldn't find anyone to admit it but I'm as certain as I can be that it was the Fed, which as far as I am concerned is just fine. After today's outburst from Goldman's Chairman Mr. Blankfein concerning the "ham-handed Chinese," I would also be prepared to wager some serious money that Goldie was not in on the trade. In fact, I'd be prepared to further wager that Goldie was long and seriously wrong when all this went down. Couldn't happen to a finer group of people. In any case, there's your liquidity provider in the biggest mess we have seen in years, The People's Republic, and as we used to say in the old days, they deal in sizzzze.
But stop a minute. In this case we had an entire market looking to buy and one big player looking to sell, a player so big that it provided the liquidity as a result of an event that had really very little to do with the market in Treasuries itself. Kismet. But if you have been keeping track, one of the unsettling changes that has occurred as of late is a reversal of conditions and behavior in all of the emerging markets. For years this class has been doing reasonably well and accumulating reserves. As of late they are doing not so well and seeing their reserves fall: from deliberate monetary actions to protect their currencies and through the switch from current accounts surpluses to deficit positions across the board. In recent weeks, this trend has accelerated. As of yet, there is no end in sight. If it continues, will there be the buyers needed when the emerging markets all come looking for a bid? And how would a Fed move affect this scenario? Will credit spreads rise for this class of borrower (many are highly indebted) and cause an acceleration of cash raising and capital flight? More importantly, I wonder if anyone is thinking about this. Certainly not the equity guys. DOW was up 160 at the close. OUT, OUT DAMNED QUARTER PER CENT! The bet on the street is the Fed stays pat. The New York Times has told them to do that, and today Larry Summers did the same. You can be sure Janet and Billy the Dud are looking for cover and now they have it. I bet no but what do I know.
Let you have a few brief thoughts tomorrow...or Friday. Hard to get there from here.
About a month ago, an analyst from Citibank wrote a thoughtful and interesting piece on the subject which I have been thinking about ever since. Taking out the graphs and charts his thesis, reduced to simplicity, is that it is not so much the reduction or absence of market making functions about which we should be worried but the very nature of the financial markets themselves. In his mind the individual investment decision making process has somehow become one of the herd concept of investing: one big cow moves in one direction and all the cows follow. At the end of the day there is little distinction in the portfolios of the major players and as a result--having learned from the same playbook, if one moves, all move in exactly the same direction. Or to put it another way, if you want to sell it's a pretty safe bet that so does everyone else. Result? No bids.
I think he's right but the theory, with a bit of a different take, is not new. It is a variation on the theme that has worried many of us for years, especially when we hear the stertorous tones of the talking heads on TV telling us that the first rule of investing is to diversify. Yeah? With whom, since every mutual fund out there is holding the same thing. Well, between different strategies is the answer--a little of this, a little of that. Financials, emerging markets etc., etc. OK that's fine but these days it seems when the market decides to move in one direction, everything moves. Mind you, it takes a pretty big event to have that happen but...SURPRISE!...right after the publication of this paper we had one called China. But on the way back towards stability, a funny thing happened.
I remember watching CNBC as the equity markets imploded and hearing their best and brightest breathlessly report that Treasuries had not moved...nor had Bunds, nor had any public sector fixed income. "What illiquidity," was the cry. "Surely there has to be a flight to quality but Treasuries have held firm." In fact the 10 year hardly budged, nor did the 2 year and I said to myself, "boy, are you wrong about this liquidity thing." And I forgot about it for a day or two and then I literally woke up with a start. Dummy, the reason nothing is moving was that somebody was selling into the thing and doing it very well and with great care. Yep, surely there were our old friends the Chinese unloading Treasuries and other things to raise cash--a lot of it--and obviously getting help in so doing. DUH! Candidate for dope of the year.
Now I couldn't find anyone to admit it but I'm as certain as I can be that it was the Fed, which as far as I am concerned is just fine. After today's outburst from Goldman's Chairman Mr. Blankfein concerning the "ham-handed Chinese," I would also be prepared to wager some serious money that Goldie was not in on the trade. In fact, I'd be prepared to further wager that Goldie was long and seriously wrong when all this went down. Couldn't happen to a finer group of people. In any case, there's your liquidity provider in the biggest mess we have seen in years, The People's Republic, and as we used to say in the old days, they deal in sizzzze.
But stop a minute. In this case we had an entire market looking to buy and one big player looking to sell, a player so big that it provided the liquidity as a result of an event that had really very little to do with the market in Treasuries itself. Kismet. But if you have been keeping track, one of the unsettling changes that has occurred as of late is a reversal of conditions and behavior in all of the emerging markets. For years this class has been doing reasonably well and accumulating reserves. As of late they are doing not so well and seeing their reserves fall: from deliberate monetary actions to protect their currencies and through the switch from current accounts surpluses to deficit positions across the board. In recent weeks, this trend has accelerated. As of yet, there is no end in sight. If it continues, will there be the buyers needed when the emerging markets all come looking for a bid? And how would a Fed move affect this scenario? Will credit spreads rise for this class of borrower (many are highly indebted) and cause an acceleration of cash raising and capital flight? More importantly, I wonder if anyone is thinking about this. Certainly not the equity guys. DOW was up 160 at the close. OUT, OUT DAMNED QUARTER PER CENT! The bet on the street is the Fed stays pat. The New York Times has told them to do that, and today Larry Summers did the same. You can be sure Janet and Billy the Dud are looking for cover and now they have it. I bet no but what do I know.
Let you have a few brief thoughts tomorrow...or Friday. Hard to get there from here.
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