Shrinking liquidity in credit markets?

[pmbug]

... 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.

...
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!

http://www.jsmineset.com/2015/07/05/what-exit-door/

That's some pretty alarmist stuff right there. I'm trying to get some confirmation from some plugged in traders as to the veracity of the credit market liquidity claims...

 

[pmbug]

So far, I'm unable to get any confirmation on this. A few bond traders have told me that they aren't seeing anything unusual (yet?).

 

[ancona]

I am reading a hell of a lot of anecdotal stuff from individual traders right now telling stories about their retail clients bailing in droves, yet buyers stepping in to pick up blocks og stocks throughout the day. One guy says he feels like there is a lot of back-door shenanigans going on and that one look at volume tells the truth of it all. For now he seems to be OK with it since he still gets his vig, but he sees the writing on the wall, and he's looking for a new gig. I feel like the end of the party is upon us, and with China banning their retirement funds from selling any stocks, they are clearly in shit-their-pants mode. They got a group of hedge funds to pony up around 19 billion dollars to buy up some stocks to halt the carnage, if only for a few hours, but we'll have to wait and see on that one. The Shanghai closed up about 2.5%, which is a mere blip on the screen compared to the total blood loss so far, but who knows, maybe retail will pick up the slack.

 

[rblong2us]

Yeah I got that email as well....
Drowning in liquidity caused by massive money printing operation but credit markets seizing up.

All makes perfect sense to me.

Probably picked up from a KWN headline (-;

So even when IT HAPPENS I will not be sure it has ......