Market Liquidity Drought Could Spark "Bloodbath"

The headlines with blaring warnings are everywhere.  If chaos, collapse and major unrest actually DO break out in America and spread to the rest of the civilized world, it will be very disingenuous to stand with our mouths open and say, "I had absolutely no idea!  It just came out of nowhere!"

Ummmm.....no, it certainly DID NOT come our of nowhere.  The warnings that America and the Western world are teetering on the edge of an abyss are daily news if you open your eyes.

"But Dennis, I don't watch, read or listen to the news...because it's all only bad news and it makes me depressed."

OK, I get that...but there has to be some sort of happy medium there....because Jesus told us to "Watch!" and that means understanding that ISIS is killing Christians, Iran is threatening Israel with annihilation, Muslims are killing everyone while believing they are offering a service to Allah and nature seems about ready to cut loose in droughts, volcanoes and floods.

On the financial front we find more verbal warnings from some of the smartest people on earth.  The warnings they are sounding are saying that the current global financial market is on the edge of the abyss...and that levers have pulled to "fix" it that they have no idea what happens when they get pulled.

Investors face a “painful” adjustment in a world of evaporating liquidity and higher US interest rates that will trigger huge market swings with potentially catastrophic consequences, the Institute of International Finance has warned.

Timothy Adams, the chief executive of the IIF, which represents the world’s biggest banks, described liquidity as the “top issue” at high level meetings of central bankers, chief executives and other financial institutions.

He warned that the raft of regulation introduced in the wake of the 2008 crisis could potentially cause market gyrations larger than last October’s “flash crash” in US Treasuries.

While Mr Adams supports tougher rules that have made the banks more resilient, he said a complex web of regulatory reform may have left banks less able to respond to the next crisis.

“There’s just less capacity for making markets,” he said. “Officials will say: we expect some volatility and this was part of this broader scheme of regulatory reform. But for the private sector there is this issue of: is the total effect of all of these various regulatory changes likely to produce outcomes larger than each individual regulatory reform and its consequences?

"The cumulative unintended could end up being much larger than the one-off intended - we just don’t know.”

The "flash crash" in US Treasuries, captured by the International Monetary Fund. Jamie Dimon, the chief executive of JP Morgan, said the move of 37 basis points on October 15 was “an event that is supposed to happen only once in every 3 billion years or so” (Source: IMF)

"There are some concerns that a couple of events that we have seen is function of these regulatory changes, that may or may not be the case, but watching over the next year or two, and will we have similar events [to the flash crash] – if not larger - that may then warrant further investigation and looking at the cumulative effect of these regulatory changes.

Dame Clara Furse, an external member of the Bank of England's Financial Policy Committee (FPC), which is in charge of financial stability, said in February that liquidity in some markets had "become more fragile", which could result in "unforeseen consequences" for markets.

The Bank, led by Governor Mark Carney, will work with market participants and industry bodies such as the IIF to assess whether asset managers could cope with a rapid change in market conditions.
Mr Adams said policymakers were now facing the challenge of navigating the new financial order.

"I grew up in the 1970s and 80s when it was all about trying to get inflation down, you had a steep yield curve and it just feels like we’re in a very different and foreign place," he said. "At the same time we’re re-engineering the financial architecture, so we just don’t know what the linkages are.

"As you turn the dials of policy, you don’t know how much to turn it in order to get a certain amount of impact, so you’re making it up as you go along, and that’s a bit frightening if you’re in a position of accountability.

In terms of volatility, officials will say they want a two-way market. They argue that there's been too much complacency. But it’s like saying, I want to get on a rollercoaster because I want to have fun. Well you'd better make sure you’re ready and you’re strapped in and this is a rollercoaster that you understand."

Here;  http://www.telegraph.co.uk/finance/markets/11581820/Liquidity-drought-could-spark-market-bloodbath-warns-IIF.html

Significant warnings are there for us to NOT BE SURPRISED if one day we wake up in America  to discover that some events happened overnight that the stock market won't like.  The first day it may be down 500...the next day it drops by 700...and then some profit takers decide they better lock in some of their gains and sell before the market gives back 2 years of returns in a few days, and this causes it to go down 450 more.

Next the pundits start talking on the morning news shows and wondering aloud to their audiences of millions if we are heading for a bear market.  Next those same pundits will start looking real close at RETAIL SALES and EMPLOYMENT and they will come to the conclusion that retail numbers are "off" from the past 4 years and job creation was "less than expected".

Next ISIS blows up a theater in Texas and kills 65 people...and the stock market really starts to tumble.

Average Joe is now concerned about the $100,000 he has in his 401k because he believes "it's all in that stock market thing!"...so he picks up the phone to Vanguard and moves his money out of stocks and into cash thereby driving the stock market down more.

And before you know it, the markets have tanked by 50% or more and everyone is standing around looking gloomy and saying, "I never had any idea the stock and bond markets could go down so much!  Now how am I going to retire to Phoenix?...and WHO is gonna pay for my nursing home care now?"

Sadly, as a nation we spend WAY more time thinking about what the DOW and S & P 500 Indexes have done in the past day instead of focusing on eternal things that we should be DOING in service for Jesus Christ while there is still light to work.