RE:What's up..que tal?Good morning Dfly: The following are 2 comments that I made in an oil&gas investor group that I belong to on Meesenger: Comment#1 - A note of caution: The following is an excerpt from the latest BIS (Bank for International Settlements) Quarterly Review December 2021. The key takeaway is that Non-bank financial intermediaries (NBFIs) can unleash hidden liquidity problems when redemptions are suddenly greater than cash on hand. NBFIs are things like crypto, ETFs etc. When investors run for cover en masse serious liquidy problems can result forcing investors to sell otherwise solid assets to raise cash.
The full discussion is in the quarterly review. Highly technical and over my head but I get the gist of it. Traditional market analysis doesn't really give you a good idea of market liquidity which you need to take into account as well in your forecasts. Other metrics do measure liquidity and are discussed in the quarterly review.
Anyway here is an excerpt from the review: "Non-bank financial intermediaries (NBFIs) have massively increased their footprint since the Great Financial Crisis (GFC). In part, this represents a long-term structural trend; it has also been a response to retrenchment by banks. NBFIs offer a broad range of investment and funding opportunities; as such, they are a healthy source of diversity in external financing. They cover areas that banks do not, they enhance innovation and economic growth, and they can help make the financial system more resilient to credit risk. Given their heft, NBFIs have attracted increasing policy attention. While their activities have obvious implications for investor protection, their impact is more far- reaching. When things go wrong, NBFIs can trigger or amplify market stress. And they affect how monetary policy is transmitted to the economy, how it is implemented on a day-to-day basis, and even how it is calibrated and communicated. Recent ructions in government bond markets, covered by this Quarterly Review, are the latest illustration of how NBFIs can have a material effect even on the US government yield curve a primary focus of policy and the benchmark for asset pricing worldwide. Crucially, NBFIs have risen to prominence in policy discussions because they can be, and have been, a source of financial instability. In March 2020 and in previous episodes of similar market turmoil, the NBFI sector amplified stress through inherent structural vulnerabilities, notably liquidity mismatches and hidden leverage. With system-wide stability under threat, massive central bank support was necessary to restore the calm. Such repeated occurrences suggest that the status quo is unacceptable. Fundamental adjustments to the regulatory framework for NBFIs are called for, to make it fully fit for purpose. This issue of the BIS Quarterly Review delves into selected aspects of the NBFI ecosystem, with the aim of shedding light on the challenges involved. Its special features focus on factors that could undermine financial stability, including in fast- growing areas such as sustainable finance and the crypto universe. The purpose is to inform policy discussions on how to design NBFI regulation from a system-wide perspective."
Comment #2 - Life is a leap of faith in general Lol. You can go down so many different paths and most don't offer much visibility into the future. At least here, I have better influence on future events as long as I stay healthy.
My buddy got all nervous when the DOW sold off in March 2020 dropping from 29,000 to about 19,000 if memory serves. So he sold and kissed off tens of thousands of dollars. Then the DOW bounced back but he didn't get back in. People up there take huge leaps in faith as well. I live here because I have better control of downside risks.
Back in March 2020 a serious liquidity problem emerged in global markets. "Liquidity mismatch" they call it. People feared the start of another 2008 Great Financial Crisis. But the Fed, Trump et al came up 1 trillion real quick to inject liquidity into the financial system. The Fed bailed out Wall Street yet again. Without the Fed coming to the rescue the markets would have continued to implode.
My buddy, who lost piles of money said that he didn't get back in because he doesn't think that the Fed can "pull another rabbit out of the hat". He sleeps much better these days.
Anyway, as long as yield spreads remain compressed between corporate debt and US treasuries then market liquidity is healthy. Even for higher risk corporate bonds the yield on the same maturity corporate bonds as US treasury remains compressed according to the BIS. So a 2 year high risk corporate bond yields a bit more than a 2 year US Treasury bond. This indicates investor faith in the issuer of the high yield corporate bond to deliver because the safest bonds on the planet are US Treasuries. If investors lose faith in high yield corporate bonds they will sell them to buy treasuries widening the yield spread.
So people are watching the yield spread closely as well as other indicators like cost of default insurance which are traded as well in a financial instrument called credit default swaps (CDS). So far apparently everything is stable. Lots of liquidity. But I can't verify that. I have zero access to that info.
Ray Dalio would have access. He's on Bloomberg TV a lot. I take him very seriously. He makes great predictions. Though he has been keeping an eye on the when this current credit expansion might end. One other commentator asked why it couldn't keep on expanding like the ever expanding universe. Yet another commentator noted that hopefully everything doesn't end up collapsing into a black hole.
I don't know man. I love watching and learning about this stuff but at my age I wouldn't bet the farm on what might happen. Let's say that they do regulate crypto. That's a major source of funding for many compsnies. Yeah a lot of the crypto money has questionable sources but crypto is a way to to put it to work but it seems to have become a major provider of money to companies. If you start regulating crypto then you will materially affect the bond yield spreads, CDSs etc and trigger domino effects in the broader equity and credit markets because you will be creating a liquidity or cash flow bottleneck.
But the retail investor won't see it coming. Others, like Dalio, will. They'll short, short interest will shoot up, retail investors will see that but by then it's too late because bid interest will drop creating a long squeeze where longs can't sell because doing so drops the share price even more.