Markets And Liquidity – Alienation, Fragmentation and Futility

This post was written a week ago for, a site targeting high net worth individuals in Singapore.

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“You will never get out of life alive”, a quote from a touching graduation speech by a NZ class senior, Jake Bailey, who was diagnosed with cancer shortly before his graduation.

And the scene from Apocalypse Now replays in my head, Colonel Kurtz’s last words, “the horror… the horror…” to the news on terrorism in Paris. Terrorists who are alienated from society, driven to acts of savagery on innocent masses, prompting populist governments to declare war on terrorism, against an enemy unseen, undefined and unleashed by further alienation.

The theme of alienation resonates with what I have been trying hard to conceptualise as what is unfolding in the market we had concurred since last year that a liquidity crisis has hit the bond markets that is evident in the heightened concerns of regulators around the globe as central banks run on a tight rope between economic stimulation and interventions against the US Federal Reserve on a tightening cycle.

“Shocks may originate in advanced or emerging markets and, combined with unaddressed system vulnerabilities, could lead to a global asset market disruption and a sudden drying up of market liquidity in many asset classes,” the IMF report warned.

We all know that the main reason behind the collapse in liquidity is regulatory, rules preventing proprietary trading in banks; rules requiring the “too big to fail banks”, domestic and global, to bolster their balance sheets either by shrinking it or through capital raising; and all those rules to safeguard customer interests which meant it was cheaper not to do business sometimes.

The Great Divide In Access To Liquidity

I am not sure if many people have noticed the growing divide between those who have the access to funds and those who do not. From ground level, we see lending guidelines target the masses, restricting their ability to property/asset ownership and yet, “landlords” have access to capital aplenty. Giants like Apple is able to raise money at near rates while struggling commodity and shipping companies are unable to pay their dues. Indeed, Apple Inc managed 2 bond issues in 2015 at lower rates than their last lowest borrowing of 0.45% for 3 year USD in 2013 – ¥2.5 trillion 5Y at 0.35% and CHF 875 million 9.5Y at 0.375%, which is to be contrasted to companies like Cheung Wo Intl Holdings which had to pay 20% for just US$ 20 mio for 3Y with a call next month.

The Great Divide In Investment Liquidity


The great divide extends to investments as Morningstar noted recently that 80% of the turnover for bonds is concentrated in 20% of corporate issues, shutting the rest of the market out which is not a new phenomenon at all and in fact similar to pre-crisis levels given that 20% of corporate issues account for 80% of market size.

Alienation - Markets And Liquidity

Yet this big difference this time is that debt ownership has largely shifted into the hands of the retail folk who are vested directly, or via mutual funds and ETFs which are oft indexed to the 20% liquid issues with high turnovers.

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It is happening in equity space as well as Goldman Sachs notes that “Five firms – AMZN, GOOGL, MSFT, FB, and GE – totaling 9% of the equity cap of the index have accounted for more than 100% of the S&P 500 YTD return.” This is a sign of narrowing market breadth which has been calculated to be near its lowest levels in 30 years although the report is inconclusive as to the end result from history.


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And it is not just in the US. China is indulging in the “I buy you and you buy me” game as Bloomberg reports that the “Public Goes Missing from Hong Kong IPOs as State Giants Buy”, giving IPOs an illusion of success.

“China’s government-owned enterprises have dominated both the buy side and the sell side of Hong Kong IPOs this year. State sellers accounted for 77 percent of the $19.3 billion in proceeds from deals above $1 billion, while government buyers comprised 62 percent of the cornerstone shares.”

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Similarly, in the ETF world, the top 4 ETFs account for 45% of total turnover with a single ETF, the SPY US taking up the lion’s share of 1/3 of total volumes.


… are plentiful as we hear about corporate bond markets in deep freeze with helpless investors in Singapore watching prices plummet without so much as a mere bid in sight with private banks resorting to trading amongst themselves, brokering bonds between investors as distressed bond desks sniff about greedily in the background.

IPOs run scarce, with the exception of China and Japan, and those ‘cornerstoned” by respectable anchor investors just like Singapore’s largest IPO for 2015, chilli crab restaurant, Jumbo Group, which succeeded based on sovereign wealth fund support.

On a global scale, alarm bells are ringing as statistical anomalies rise in frequency with liquidity being blamed by many.

“statistical anomalies have been happening more frequently, with short-term moves in many assets exceeding historical norms.

Barnaby Martin, a credit strategist at Bank of America Merrill Lynch, made this point earlier this year. The number of assets registering large moves—four or more standard deviations away from their normal trading range—has been increasing. Such moves would normally be expected to happen once every 62 years.”


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