David Roche writes in a compelling artcicle in today’s FT about the changing liquidity landscape that in his view, we are starting to see. Focus points of the article include: the stock of all global assets and related funding is estimated at 10 years of Global GDP; the ‘new monetarism’ of today’s markets driven by securitised debt and derivatives, rather than central bank policy; the nature of risk has changed as derivatives have spawned more credit, loans have shifted off bank balance sheets and into a diversified pool of investors; more credit equals more liquidity; the insurance function role of derivatives whereby risk is ’sliced and diced’, freeing up banks to make more loans; the growth in liquidity mirrors closely the exponential rise in asset prices with lower volatility; the drivers of credit are 1. risk appetite 2. long term cost of capital 3. low volatility.
David Roche sees all three of the above drivers as vulnerable to change. This is the ‘three bears test’.
