There is a “number one issue” that markets are worried about, says David Rosenberg.
“In two words: market liquidity.“
In a note to clients, Rosenberg, chief economist and strategist at Gluskin Sheff, echoes a top concern of Allianz’s Mohamed El-Erian, who said market liquidity is “one of the
most under-appreciated risk factors facing most investors today.”
What liquidity is, more or less, is the ability for investors to move in and out of positions without having to take big losses.
“The rapid swings in the foreign exchange, oil, equity, and bond markets have stamped an exclamation mark on this issue — and the Fed has not even begun to snug conditions and embark on its first tightening cycle ever with a balance sheet this big.
Not just that, but the regulations constricting the traditional banking sector’s market-making role — a classic case of shooting one’s self in the foot — is likely to end up creating wilder gyrations in asset prices of all types … and we are getting an early taste of what’s to come.
After all, corporate bond inventories at the banks have collapse by 75% in the U.S. and 50% in Europe in the past eight years, as one example.
So navigating through this situation of market illiquidity is going to be critical, and one area that is very highly exposed to disruption — beyond credit — is Emerging Markets, especially those in Latin America where we have been absent.”
Since Howard Marks wrote his big note to clients discussing the topic of liquidity, it has been at the top of investors’ minds.
And with the April jobs report coming up on Friday, markets are starting to act like the Fed’s first rate hike might be coming sooner than many had expected.