... Below is an e-mail I received last Thursday from a friend. I have the utmost respect for his thought process and his knowledge. The writer is "plugged in" if you will, he has very high and powerful contacts in both China and London while he operates out of North America. The following is chilling to say the least because it comes from someone who "knows", it is not a speculation on his part because he is seeing it real time! I will add my comments afterward.
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Credit markets are almost closed, I am being told! I REPEAT again the CREDIT markets are almost closed! Trades are happening by appointment and to even move 1MM EM bonds (at an opening price) is almost impossible. It is not uncommon to hear an indication only to trade and a 2% trade away from from opening, assuming you are able to trade, and desire to trade is no guarantee of a sale. NO ONE is standing up to market prices and to liquidate even a small portfolio can take weeks. It is important that you cannot any longer trade the basis as value is dropping and there no point to partially selling specific bonds unless you can clear a given position! Because once there is a traded price ALL holders of same or similar will have to remark the book. That is unless you are a bank where the Balance Sheet is not a Mark-to-Market approach on a daily basis for the book being held. Think holding government debt at par for the likes of Italy or Spain knowing they can never clear the debt, and knowing that no one will buy at market. So what is the true value of a large portfolio? ...
So there you have it. This is something I have been saying for quite some time, we are living in the greatest credit bubble of all time…and it is bursting. It is bursting because liquidity is drying up. The point made regarding the inability to offload bonds speaks to just how small the "exit door" really is in the most crowded trade in all of history! I hope you did not miss what was said about "marking to market". The sale of a measly $1 million worth of bonds at any discount affects the pricing of BILLIONS which then acts as a further liquidity restriction on bank balance sheets.
To this point we have not seen much weakness in U.S. markets BUT we are witnessing the "volume" dry up drastically. This lack of volume also speaks to the size of the exit door. Without volume, how does one sell if they want to? Better yet, without sufficient volume, how does one sell if they HAVE TO or are FORCED TO? In Asia, China’s stock market has collapsed over 20% in just three weeks. They are living a real life margin call! What is most humorous to me is China has now instituted rules where stock market margin calls can be met by posting real estate as collateral! Meeting margin with an already margined asset is the recipe for disaster!
Please understand this, "policy" and central banks are doing whatever they can to keep investors away from the exit door because they know there isn’t one. Central banks all over the world are "buyers" of nearly all things paper, do we really have "markets"? Anywhere? Let me finish with this, it is written in the Bible "and on the third day He rose again". Here on Earth I believe we will soon find out after credit breaks, "and on the third day …nothing opened". I truly believe this is possible. I do not believe the Earth can spin more than twice after a true break in the credit markets before a COMPLETE SHUTDOWN will occur. Nothing "paper" will be spared!