Mr. El-Erian has historically seemed to me to be one of the cooler talking heads in the market. Today he invoked the possibility of illiquidity events and disruption in market function. I wonder what he is seeing that I’m not positioned to see. I don’t like it.
https://www.bloomberg.com/opinion/articles/2022-05-19/stock-…
He says a few things that suggest he is concerned, as a bond trader, that risks of financial contagion are elevated.
Wednesday’s selloff had two particular characteristics that distinguished it from the recent market moves. First, consumer-related stocks led by Walmart Inc. and Target Corp. notably underperformed, losing even more value; and bond prices rose rather than fell as they had for the early phases of the selloff.
Bond prices have been falling with the sell off, raising rates, which is good for bond investors. Why would they suddenly start rising again?
there is a growing possibility for the one risk factor that has yet to play out — disruptions in market functioning, in which pockets of illiquidity frustrate investors’ ability to reposition.
So investors who are repositioning to bonds from stocks won’t be able to do so if bond prices are rising as stock prices are falling. It’s a pick your poison moment with the outcome being a death spiral from which there is no escape. Cash could be an escape, but if everyone suddenly decides to go to cash, who’s going to buy these assets?
there is a growing possibility for the one risk factor that has yet to play out — disruptions in market functioning, in which pockets of illiquidity frustrate investors’ ability to reposition.
You can see how this could unfold in a sudden rush to cash. With everyone looking to sell stocks and bidding up bonds as an alternative, cash becomes the only real alternative. But if everyone is rushing to cash, liquidity for stock and bond purchases will dry up. Unless, that is, prices drop far enough to attract risk.
Market-functioning stress does more than erode investor confidence. It also fuels two sources of contagion: generalized spillovers — be it in the form of investors being forced to sell less threatened assets simply to obtain liquidity
and a collapse in consumer confidence. Recession on.
If you already have a large cash position then your best bet in this hypothesis is to wait for the major bottom signal to trigger after the big money suffers this predicted liquidity crisis.
With so much capital in risky high growth stocks and FAANG stalwarts, I’ll be waiting for the forced selling before jumping in with both feet.
If you already have a large cash position then your best bet in this hypothesis is to wait for the major bottom signal to trigger after the big money suffers this predicted liquidity crisis.
With so much capital in risky high growth stocks and FAANG stalwarts, I’ll be waiting for the forced selling before jumping in with both feet.
This T/A enthusiast backs up your macro view here with my charts saying the same exact thing.
El Erian also has been hitting on a “junk bond” waterfall breaking in lowered ratings by the ratings agencies.
As Pink Floyd advised, “Careful With That Axe, Eugene.”
- Rock on a rainy day in the jungles of the Florida Keys.