Master Rider Blog

Surge of Liquidity!

September 20th, 2007 NW Teong

All else being equal, with the more aggressive cut of Fed funds rate, there will be a surge of liquidity flow into equity markets, at least in the short term. This is a classic case of “creation of asset bubble” due to a surge in liquidity! We have to bear in mind that, the world is not short of liquidity prior to the rates cut. On the contrary, we have plenty of liquidity. The sudden disappearance of liquidity is simply a confidence issue due to the explosion of sub-prime crisis in US. In short, all financial institutions are reluctant to lend for fear of further defaults. If this issue is not handled properly, it will eventually lead to a total collapse of financial system which of course has serious repercussion on the world economy. With the pre-emptive move of Fed, the liquidity may find its ways back into the stock markets simply due to the perception that we are now further from a financial meltdown. The key beneficiary would be the emerging markets, especially those booming economies in Asia. We have to bear in mind that, a surge in liquidity can drive the stock markets crazy despite a gradual slow down in US economy.

With this as a back drop, I am not surprise to see regional markets to test the recent historical records. Even US markets may test their recent peaks which were achieved in mid July 2007. Ride on this liquidity play and perhaps have a good harvest at the end of the year.

Sorry for my late blog today as I am on a business trip to Bangkok at the moment. I may or may not blog in the next few days depending on my business schedule. Cheers!

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Entry Filed under: Macro, Stocks, Singapore