Sunday, 15 March 2009

More musings on liquidity

Much of the time (i.e. during non critical phases) markets will embrace the ambiguities being spun by corporate executives, central bankers and other policy makers, analysts, and pundits etc. and this provides the basic fractiousness amongst traders and investors which promotes liquidity. There is no urgent demand for transparency or unequivocal clarification of systemic information. Risk appetites and complacency levels are relatively high.

But from time to time, when a disruptive event occurs or when markets have moved into a critical phase (e.g. attainment of a new high/low, unexpected macro-economic developments or a major default), market participants will immediately press for dis-ambiguation on as many fronts as possible. Risk aversion moves to center stage, equivocation is demanded, and the fractiousness which enables liquidity, is replaced by a coherent viewpoint which results in markets becoming lopsided with a subsequent (and sudden) drop in liquidity.

The longer the demand for disambiguation goes without being satisfied by further recitals from the policy makers of the ambiguity laden mantras that underpin the prevailing "philosophy" of the market place the greater the risk of systemic meltdown and a complete collapse in liquidity. There are no private bids only private sellers that ultimately will be seeking out public sector bids (i.e. bailouts).

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