what will signal an impending liquidation event?

[grapejelly]

Over at Prudent Bear, Doug Noland has an excellent Credit Bubble Bulletin commentary

...hedge fund assets in 1998 were “only” in the neighborhood of $240bn. Since then, the industry has ballooned more than six-fold, while total fund assets may very well increase in excess of $240bn just this year.
...


Notably, “Broker/Dealer” assets now approach $3.0 TN, after ending 1998 at $921bn. Commercial Banking Assets have grown from $5.63 TN to $10.20 TN, with Corporate and Foreign Bond holdings ballooning from $176bn to $781bn. Life Insurance Company Assets have increased from $2.77 TN to $4.71 TN. GSE Assets have doubled to $2.84 TN, and outstanding agency MBS has increased from $2.02 TN to $3.97 TN. Importantly, the ABS market has more than tripled in size from $1.16 TN to $3.60 TN. Money Market Fund Assets have increased from $1.33 TN to $2.31 TN. Over this period, the CDO market has exploded from inconsequential to untold Trillions. Total U.S. Credit Market Borrowings inflated from $23.3 TN to $44.6 TN.

...From Bank of International Settlement data, we know that the total notional value of global derivative positions ended 1998 at $80.3 TN – comprised of $18.0 TN Foreign Exchange; $50.0 TN Interest Rate; $1.5 TN Equity-Linked; $415bn Commodities; and $10.4 TN “Other”. Credit derivatives didn’t even have their own category. By the end of 2006, Total derivative positions had ballooned to $370 TN, with $38 TN Foreign Exchange; $262 TN Interest Rate; $6.8 TN Equity-Linked; $6.4 TN Commodities; $36 TN “Unallocated”; and $20.4 TN Credit Default Swaps (up more than 3-fold in 2 yrs).

...
Strangely, this international backdrop of synchronized Credit booms, massive outward dollar financial flows, and unprecedented speculation has created financial flows that are these days as robust and predictable as they were vulnerable and erratic back in 1998. This has all been possible only because foreign central banks have been willing dollar liquidity “buyers of last resort.” Foreign central bank reserves expanded an unprecedented $945bn over the past year. Amazingly, so far this year the growth in reserves (now surpassing $5 TN) has accelerated to about a 30% annualized pace.

...
At the same time, the dependable recycling of (literally) Trillions of “Bubble dollars” directly back into U.S. debt securities has promoted aggressive speculating in our markets. To be sure, the steadfast foreign central bank “backstop bid” profoundly altered the perceived risk vs. potential reward for leveraged speculation in U.S. Credit instruments and the dollar more generally. The resulting boom in leveraged debt market speculation – certainly including dollar-supporting yen and Swissy “carry trades” – then fostered unchecked Credit expansion throughout the markets and economy at predictable spreads to the pegged “fed funds” rate. These dynamics created Wall Street a once-in-a-lifetime opportunity to amass incredible wealth and power.

...
From this perspective, the unparalleled $500bn (or so) y-t-d increase in foreign central bank reserves is indicative of the inverse of 1998’s liquidity-constricting biases and dis-inflationary forces. Today, powerful expansionary biases foment only greater financial excess and historic asset and commodities inflation. At this point, the risk of irreparable system damage comes not from an unwind of leveraged speculations, but rather an all-encompassing frenzied expansion of global finance. [my bolding] About the only “de-leveraging” likely in this environment is buying associated with the covering of bearish hedges and speculations. One can think liquidity excess-induced marketplace dislocation or, perhaps, Mises’ “crackup boom” on a synchronized international scale.

Undoubtedly, such incredible excess sets the stage for an eventual devastating reversal of financial flows. While the inflated “Periphery” is no doubt vulnerable, the wildly distorted “Core” is at great and escalating danger. ...


When the eventual reversal of flows and dislocation arrives, it should be expected to have profound effects on the maladjusted U.S. economy and fragile U.S. and global Credit systems. I’ll venture a prediction that hedge fund de-leveraging will pale in comparison to the widespread tumult that will likely engulf currency, securitization, and derivatives markets – in risk intermediation generally. The derivatives markets are poised to falter into absolute liquidity nightmares, and this will not be a hedge fund-like de-leveraging issue easily resolved with aggressive rate cuts. And the longer current destabilizing flows are allowed to run roughshod – distorting prices, risk perceptions, and economic structures in the process - the more arduous the unavoidable adjustment period. That’s just the way it works.

It seems Doug is arguing (see my bolded portions) for a parabolic increase in credit-based "liquidity". With a "great unwind" to follow, a liquidation event of very large proportions.


My question is, what will signal that this is imminent?


Is it possible to know this is coming let's say within six months or three months?

[Sapiens]

Re: what will signal an impending liquidation event?

My question is, what will signal that this is imminent?

Unsustainable debt service. But you will not know when and it will not be evident, until default takes place.

Is it possible to know this is coming let's say within six months or three months?

Not quite, since it also depends on "policy", that's, if the Gov. wants to postpone the imminent by continuing to subsidize malinvestment.

[jk]

Re: what will signal an impending liquidation event?

whatever it is, after it happens we'll all feel stupid for not foreseeing it.

[rabot10]

Re: what will signal an impending liquidation event?

whatever it is, after it happens we'll all feel stupid for not foreseeing it.

Your correct about that, but at least we are looking. That's more than most can say.