Monday, April 2, 2007

. William Rhodes. "A market correction is coming, this time for real", Financial Times

Citibank's Bill Rhodes is full of praise for the performance of the world economy during the past few years. However, developments on the liquidity front are likely to signify the end of the "Goldilocks economy":

... much of the good news has come as a result of extraordinary levels of liquidity pouring into opportunities around the globe. To a large extent this is due to the Federal Reserve's expansionary monetary policies early in the decade and the US administration's fiscal stimulus. The yen carry trade has also facilitated the buoyant expansion of investments and leverage evident everywhere today. The low spreads, the tremendous build-up of liquidity, the reach for yield and the lack of differentiation among borrowers have stimulated both dynamic growth and some real concerns.

Thus the main culprit, on the upside, is the Federal Reserve. On the downside, however, it is investors and lenders who are likely to cause liquidity to decelerate: "As lenders and investors inevitably become more discriminating, liquidity will recede and a number of problems will surface". Rhodes concludes with a pessimistic outlook. "Against that background", he adds, "I believe that over the next 12 months a market correction will occur and this time it will be a real correction".

Towards the end of the piece, concerns about liquidity resurface. This time, the focus is on market liquidity:

The primary worry of many who make or regulate the market is not inflation or growth or interest rates, but instead the coming adjustment and the possible destabilising effect these new players could have on the functioning of international markets as liquidity recedes. It is also possible that they could provide relief for markets that face shortages of liquidity.

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