The Liquidity Issue.

BCbuds sent in this commentary from the Wall Street Journal about the risk present in loose credit markets:

In 2006, a record 20.9% of new high-yield lending was to particularly credit-challenged borrowers, those with at least one rating starting with a “C.” So far this year, that figure is at 33%. No exaggeration is required to pronounce unequivocally that money is available today in quantities, at prices and on terms never before seen in the 100-plus years since U.S. financial markets reached full flower.

Led by private equity, borrowers have rushed to avail themselves of seemingly unlimited cheap credit. From a then-record $300 billion in 2005, new leveraged loans reached $500 billion last year and are pacing toward another quantum leap in 2007.

Even leading buyers of loans, such as Larry Fink, chief executive of BlackRock, say “we’re seeing the same thing in the credit markets” that set the stage for the fall of the subprime loan market.

That article will only be available to non-subscribers for a few days, but there are articles popping up all over on the same issue. Here’s one in the Globe and Mail:

“One of the biggest risks is the potential for a shift in liquidity,” Royal Bank of Canada president and chief executive officer Gordon Nixon said at the conference’s plenary session.

The furious pace in the growth of financial assets around the world – owing in no small part to the explosion of hedge funds and private equity – raises the risk that, for example, a sudden rise in interest rates could lead to the reduction or even the drying up of that liquidity, he said.

A tightening of credit and a drying up of liquidity would have an impact on all markets, from stocks to real estate. Is this really something to worry about, or are these voices just crying ‘wolf’?

oldest most voted
Inline Feedbacks
View all comments

Rents are correlated with prices only in the very long term. Take a look at the REBGV house price graph – do you really think rents follow a roller coaster like that? In fact they track household incomes. It seems like we are in a really weird spot right now because rentals are tight and lots of specuvestors are overextended and therefore ask more and they have a chance of getting it. This means some short term pressure on rents. My point was if this causes rents to go up the hammer is gonna come down because it will spark inflation and cause the BoC to raise interest rates.So in a way this bubble is only possible because rents don't track housing prices at all.


The agency has got to be RethinkHahah. I've done some work with them and I think you're probably right. I actually think some of their off-the-wall ideas are good, but sometimes they just come across as uncomfortable, you know, like sharing a mortgage. How do you know of them?


That ad with the 2 couples in the bed???Bob and Carol and Ted and Alice?If housing prices start putting upward pressure on rentsRents are correlated with prices only in the very long term. Take a look at the REBGV house price graph – do you really think rents follow a roller coaster like that? In fact they track household incomes.

Jade East

That ad with the 2 couples in the bed???FTF? The agency has got to be Rethink,they're not even trying to making it looklike a good idea.

Patiently Waiting

The mess may be contained on Wall St. but Main St. America is going to get ugly in the second half of this year. The ARM resets will be at a peak and foreclosures will shoot to the moon.


I think the real mess will be contained for a while. At least until the boys from Bear Stearns et al, manage to package and repackage what are now lower than junk bond grades, and most of their corporate and large clients have sold off the bulk of the MBS and the derivatives hidden in the hedge funds.I still maintain it’s a combo RE/Credit BubbleI'm keeping lots of cash on hand. Tick Tock, Tick Tock

mold city

Aleks – I guess there's a sucker born every minute, so thats a lot of potential 'customers'.Speaking of bank mortgage ads, does anybody know what the hell is going on with that Vancity 'mixer' mortgage with the two couples in bed?Its almost like they're showing all the ways that sharing a mortgage would be uncomfortable and a negative experience. How is this supposed to be a good thing?


Scotia Bank has an ad for a 100% mortgage with the tag line "You're richer than you think." I can't help feeling sorry for the suckers who would fall for something that transparent.


rentingsucks: More likely the housing bubble creates construction boom, which pushes up wages for certain sector, which pushes up rents. Rent relates to income and total supply.


"If housing prices start putting upward pressure on rents (and it seems they are) won't this spike inflation."This implies there are more people after fewer rentals à la Calgary. In Vancouver, anaemic population growth and looming supply overhang does what to rents exactly? The recent increases in rents could be a temporary blip due to a larger than average number of construction delays.


"Would be interesting to see where the dollar and long term bonds are headed…"More like: It WAS interesting to see where the dollar and long term bonds headed once the Chinese found a better place to put their reserves.The bond rate spike last week was no accident. Foreigners only bought 11% of bonds sent to auction.


If housing prices start putting upward pressure on rents (and it seems they are) won’t this spike inflation. In turn this would cause interest rates to rise and liquidity to dry up eventually causing house prices to go down.

In an ideal world this would trigger a vicious cycle of doom that would give prices the smackdown they deserve :-).


Theres a somewhat related article in the Globe about the IMF’s recent stand against currency manipulation, particularly the Chinese.

I’m not sure if this really means anything though, since they don’t have the power to do anything, merely ‘expose’ currency manipulation which everyone seems to already be aware of.


Generally speaking, liquidity dries up when it seeps into the consumer market, creating overall inflation on goods and services. The Chinese has been absorbing quite a bit of USD from the consumer market, supressing general inflation. Would be interesting to see where the dollar and long term bonds are headed once the Chinese find better place to put their reserves.


Sorry, 2004 not '05


Oh and for those who are curious I found a source for that stat this time, it's from 2005 but given the outlook it's likely even lower now.


-8% savings rate in BC.'nuff said.


First!I take a simplistic view of things, viz. that average Joe taking advantage of the liquidity thinks he's rich but that nothing of any real value has been created. So it simply has to collapse one day.As for investors, I think some of them are starting to catch on that they've undervalued risk. Witness the Bear Sterns mortgage headge fund implosion, which has the potential of becoming a tsunami.Liquidity is just a bunch of people borrowing from each other and proclaiming that they're wealthy. No new goods and services, just paper.Some might say my simplistic view is naive. I suggest that those who think you can create wealth without creating something real are naive.