Sunday, 17 July 2011

At critical times markets need disambiguation

Much of the time, during non-critical phases, capital markets will embrace the ambiguities being promulgated (spun) by central bankers, policy makers, and analysts, and this provides the basic disagreements about price and value 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 -as they are now with regard to the Eurozone crisis specifically, and to some extent with the US debt ceiling "crisis" (or melodrama) - market participants will immediately press for disambiguation on as many fronts as possible. Risk aversion moves to center stage, non-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 accompanied by a failure by policy makers to be decisive and provide unambiguous answers, the greater the risk of systemic accidents and a complete collapse in liquidity. When markets reach such critical stages - and we could be getting quite close to one in the mid summer of 2011 - the more likely it will be that there are no private bids only private sellers that ultimately will be seeking out public sector bids (i.e. bailouts).

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