Displaying items by tag: liquidity

(New York)

You may not know the name Michael Burry off hand, but you probably should. He was one of the investors who made a fortune as part of the “big short” during the Financial Crisis. Well, he has come back into the limelight this week with an eye-opening warning. He argues that ETFs, and indexing generally, are essentially the same as CDOs were before the crisis. He explains that the massive capital inflows into ETFs have eliminated any realistic pricing mechanism for underlying stocks, just like huge demand for structured credit inflated all asset prices before 2008. Additionally, the daily liquidity underlying many of the stocks in index funds is vastly lower than the index funds themselves (again, just like CDOs). Burry uses a theater metaphor, saying that the theater has grown much more crowded, but the exits are still the same size.

FINSUM: This is a great argument, and one that seems to have fundamental truth to it. However, even Burry admits that he has no idea when this “bubble” might actually burst.

(New York)

The muni market seems healthy. Other than the cases where budgets are exploding, the market as a whole has characteristically low yields and looks stable, especially because of excess investor demand from the recent tax changes. However, there are structural concerns about the market. Nuveen and Vanguard have come to dominate the market through their funds, sucking up to two-thirds of all the Dollars flowing into the market in the last decade. This is because investors have been increasingly buying muni funds, not individual securities. However, according to UBS, this is a big risk. “When everyone runs for the exit at the same time…no one wants to be the buyer of last resort … The concentration in large municipal asset managers will have ramifications during volatile times in that it will make the swings greater one way or another”.

FINSUM: Everyone has been warning about big runs on fixed income funds in a market downturn, but evidence of such has yet to materialize.

(New York)

On the one hand the market looks very healthy (new all-time highs every day), but if you look more deeply there are some signs of dysfunction that appear as though they may spill out into the biggest indexes. Demand for risk assets looks quite weak. Consider for instance that the Russell 2000 is hurting even as large caps rise. Similarly, junk bonds are not doing well despite the seeming risk-on environment. Both of those developments show that liquidity is lacking. “Small caps are more sensitive to liquidity issues, both good and bad”, says a market strategist.

FINSUM: The weakness is small caps and junk bonds shows that more investors are sitting on the sidelines right now, but that does not necessarily mean trouble more broadly.

(New York)

Bond ETFs ae set to break a landmark record this year—$1 tn in AUM. The number is a big deal for bond ETFs, which got off to a slower start than their equity counterparts. In recent years, though, bond ETFs have seen huge inflows as they allow investors a more liquid option for both strategic and longer-term allocations. The market is also seeing a good deal of innovation, with more nuanced approaches spreading much like they have in equities.

FINSUM: Overall this is excellent news for investors. More AUM means more liquidity, more options, and lower costs. There are still some fears about a liquidity mismatch between the ETF and the underlying blowing up during a crisis, but those have never materialized.

(New York)

JP Morgan is telling investors to get ready for a “new normal” of volatility. The bank’s CEO, Jamie Dimon is warning investors that global headwinds and liquidity constraints because of tighter regulations will mean there are bigger price swings in markets from now on. Dimon cited the Fed’s policy change, Germany’s slowdown, Brexit, and the US-China trade war.

FINSUM: We are so tired of this argument that tighter bank regulation hurts liquidity and leads to bigger market swings. Bank-provided liquidity is the great myth of the post-Dodd-Frank era. When markets get tough, bank trading desks often step away from the market, meaning liquidity vanishes just when you need it most.