Golden age of liquidity is drying up

Around the Markets: Golden age of liquidity is drying up

"Liquidity surged in the past decade, fueled by relaxed monetary policies by central banks, globalization, new technologies and such exotic financial instruments as derivatives. They in turn drove down interest rates and bond yields and encouraged investors to pump more money into riskier assets, propelling stock markets."

"No more."

"Rising inflationary expectations, growing political risks and, most especially, actual and anticipated increases in interest rates are combining to make investing and speculation more expensive."

""The era of underpriced capital in constant supply is ending," said David Roche, president of Independent Strategy, a global economic and financial consulting firm in London. "The global cost of capital is rising, and risk appetite will diminish." He warned that if liquidity kept shrinking, it would "squeeze asset prices and damage economic growth.""

""The sell-off in risky assets is a sign that global excess liquidity, which has been buoyant for many years, has finally begun to shrink," said Joachim Fels, chief fixed-income economist at Morgan Stanley in London."

"Both the 1994 crash in the bond market and the bursting of the technology bubble in 2000 were preceded by sharp contractions in excess liquidity"