“Liquidity Is Now The New Leverage”

By: Kent Engelke | Capitol Securities

Goldman Sachs warned yesterday of “financial fragility,” the result of liquidity evaporating in periods of market distress. The root cause of this fragility is new regulations and technology based trading, trading that emphasizes more speed and less capital.

Goldman further writes the markets are perhaps in the nascent stage of breakdown, a breakdown not from a negative change in economic fundamentals, but from market mechanics and how such will respond.

Many times I have opined about the dangers of technology based trading, citing various regulatory bodies stating the “markets are imbalanced, benefiting only a few.”

The last several weeks I have referenced several technology based trading firms whose losses are considerably greater than expected, the result of a positive change in fundamentals… i.e. stronger than anticipated growth that changes monetary policy/interest rates assumptions.

Commenting further, Goldman states, “liquidity is the new leverage,” to describe today’s environment.

Wow! An incredible statement to make given the gazillion number of shares that hypothetically trade each day.

Changing topics, Monday I commented that total 2017 Internet sales amount to about 10% of total retail sales. Online sales in 2017 grew by 9% and overall retail sales were up about 4% according to the Commerce Department.

Yesterday, Bloomberg reported that Walmart’s prices on 20,000 items is just 1.8% higher than those found on Amazon. Because of rising costs, Amazon is pressuring its suppliers to absorb more costs to remain competitive with Walmart.

As noted many times, Amazon’s total sales are about 25% of Walmart’s, but Amazon is worth about three times more than Walmart. Moreover, Walmart makes in a year what Amazon has made since going public in 1997.

In 2017, Amazon rose about 56% and in 2018 Amazon is up another 34%. These exponential gains are the result of momentum based technology driven trading. I ask rhetorically, is there liquidity in Amazon shares if Amazon stumbles?

If history serves as a guise and if “liquidity is the new leverage,” then the answer is no.

Commenting upon yesterday’s market action, equities were mixed. Treasuries were nominally lower in price ahead of today’s conclusion of the Fed meeting. All are expecting a 0.25% increase, but it is the forward looking statement that is of considerable discussion.

Last night the foreign markets were down. London was down 0.42%, Paris was down 0.09% and Frankfurt was up 0.10%. China was down 0.29%, Japan was down 0.47% and Hang Sang was down 0.43%.

The Dow should open flat ahead of the conclusion of the FOMC meeting. Oil is up another 1% broaching 2018 and three year highs as inventories unexpectedly contracted. The 10-year is unchanged at 2.90%.