Strategies for a liquidity crisis

The essence of a liquidity crisis is a flight from riskier assets to cash. The longer-term danger from a liquidity crisis is a prolonged deleveraging or debt-deflation process such as the US experienced in the 1929-1933 Depression, or that Japan experienced for more than a decade from 1990. By raisi...

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Bibliographic Details
Published in:ABA banking journal 2007-12, Vol.99 (12), p.60
Main Author: McGee, Robert T
Format: Magazinearticle
Language:English
Subjects:
American dollar
Chairman of the board
Commodity prices
Company business management
Currencies
Currency
Deflation
Economic conditions
Financial markets
Forecasts and trends
Growth stocks
Hedge funds
International finance
Investment policy
Large cap investments
Liquidity
Liquidity (Finance)
Management
Market trend/market analysis
Money markets
Recessions
Risk management
Small cap investments
Sovereign debt
Stock exchanges
Value stocks
Volatility
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Summary:The essence of a liquidity crisis is a flight from riskier assets to cash. The longer-term danger from a liquidity crisis is a prolonged deleveraging or debt-deflation process such as the US experienced in the 1929-1933 Depression, or that Japan experienced for more than a decade from 1990. By raising rates for borrowers and reducing the availability of credit, the crisis has sharply raised the risk of recession, prompting the Fed to ease aggressively over the past few months. The winners are sovereign debt and the currencies that have been shorted, or borrowed to finance leveraged positions -- mainly, the yen and the dollar. Another boost to the dollar has come as US investors liquidated some of their foreign asset investments. Large-cap growth stocks tend to outperform in tighter liquidity environments because of their relative ease in obtaining financing compared to smaller players with more volatile cash flows.
ISSN:0194-5947
2161-5101