Monday, June 08, 2015

Does Roubini finally make sense?

Today a friend forwarded a May 31 article by Nouriel Robini entitled "The Liquidity Time Bomb". Before this post begins in earnest, making some positive comments, it should be noted that the article ends with the sentence "market illiquidity WILL eventually trigger a bust and collapse".  Classic Roubini, as he does not say COULD or MAY.  Also during the article he gives a mere one example of a liquidity meltdown in equities, the brief flash crash in 2010, and two examples, one in 2014 and one in 2013, of precipitous short term increases in interest rates in discreet markets.

He does give four valid reasons for concerns about market liquidity.  First, the increased prevalence of automated high frequency trading.  Second, the heightened popularity of open ended bond mutual funds funded by illiquid, in the very short term at least, medium term or at times longer term bonds. Third, the large number of esoteric or specialized bonds that only trade in over the counter markets that are not immediately liquid by nature. Then fourth, the loss of commercial banks as a deep pocketed market makers due to short sighted Dodd Frank rules that have capital charges that are far too high for banks to continue in that important market stabilizing role.  Market making in treasuries had nothing to do with the 2008-2009 great recession.

Roubini's thesis is that the almost, at best, zero short term interest rate policies that have handcuffed the fixed income markets and have led to increased macro liquidity but risk severe market illiquidity.

This is all something to think about, maybe to worry about.  Roubini's thoughts do not include the ability of central banks, governments, and major investment pools to have ways to counter a panic if one occurs and they do not include any suggestion of what to do with money that needs to be invested.  His warning is far more focused on the bond market, but as we all have learned no market exists in isolation.

I would classify these Roubini comments as interesting reading, but not words to live by, since that would be, practically speaking, almost impossible.


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