Liquidity parked

The main word in world stock markets today is a simple "sell".

Pessimism on the economy, business problems (more or less serious, but often considered as irreversible), uncertainty and fear about the future are the keywords that seem in themselves to justify what is happening and, especially, seem to hide any fundamental consideration.

Let assume that, but for how long it can continue?

This is the question asked to me more and more frequently in those hours and that is certainly difficult to try to answer, leaving aside the emotion at least for a moment.

But I try to make some comments, starting from a point that I feel bring together Finance and Physics: that is the "law" that nothing is created and nothing is destroyed, but everything is transformed (note: I'm not a physicist, I hope not to have set out in a wrong way!).

I mean that, regardless of the price at which any financial transaction is close, together with a seller there is - necessarily - someone who buys and thus, at the system level, there is always those who lose in the face of those who gains, and vice versa, in a so-called "zero sum" game.

Not only that, but you may also consider that the liquidity arising from sales in some way remains within the financial system (invested in equities, bonds, cash or anything else, or consumed, but, also for that way, it remains or can quickly returns to circulation).

That said, it is clear that sales of these days and months are generating an enormous amount of liquidity that does not return immediately in stock market, or in risky assets, but finds different uses.

Excluding that the preferred harbour in these days can be represented by corporate bonds or hedge funds or commodities, and also considering the limited appeal of medium-to-long term government bonds, I think that a large part of this liquidity is still parked in cash or, however, in money market instruments, waiting for better times.

My opinion is confirmed by graphs like the following:

Money market funds currently hold U.S. assets for a total value equal to 75% of the entire capitalization of the stock market!

This is a long term peak, certainly in part due to the substantial decline of the stock market capitalization, but also due to the increase in short-term investments, considered as a "safe" parking of the available cash. In any case it seems to me a very interesting information for its future implications.

I want to say that sooner or later investors that are today fearful and risk-adverse, will be unpleased to "benefit" of the security offered by the money markets, gaining only 1% or so, to search for alternatives maybe more risky (but always less, continuing the long trend of depreciation), but also described by a potential performance perspective increasingly attractive, such as the stock market or the credit market (of high quality).

The incentives to do so seem to be already enormous, probably it's becoming only a matter of timing.

Original post: Liquidità parcheggiata