Tuesday, July 10, 2007

[Latest Global Dollar Liquidity Measure: +15.5% annual growth rate; latest Endogenous Liquidity Index: +2.0%]

This is, hands down, the liquidity story du jour. Chuck Prince, the Citigroup CEO, tells the Financial Times that he feels confident enough to dismiss fears that the music is about to stop for the cheap credit-fuelled buy-out boom, declaring that Citigroup is "still dancing". And he adds: "...the party [will] end at some point but there [is] so much liquidity at the moment it would not be disrupted by the turmoil in the US subprime mortgage market".

When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing ... The depth of the pools of liquidity is so much larger than it used to be that a disruptive event now needs to be much more disruptive than it used to be. At some point, the disruptive event will be so significant that instead of liquidity filling in, the liquidity will go the other way. I don't think we're at that point ... The way big Wall Street banks and large hedge funds [have] been picking up troubled subprime mortgage lenders [is] an example of how "liquidity rushes in" to fill the gap as others spot a buying opportunity.

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