Let us go then you and I,
When the evening is spread out against the sky
Like a patient etherised upon a table;
Let us go, through certain half-deserted streets,
The muttering retreats
Of restless nights in one-night cheap hotels
And sawdust restaurants with oyster-shells:
Streets that follow like a tedious argument
Of insidious intent
To lead you to an overwhelming question ...
Oh, do not ask, 'What is it?'
Let us go and make our visit.
— T.S. Eliot, "The Love Song of J. Alfred Prufrock"
In the Here,-You're-Not-Beating-That-Dead-Horse-Properly,-Let-Me-Show-You-How-to-Do-It department, I was inspired to take keyboard (and cudgel) in hand by an article in the April Fools Day issue of The Deal by Vipal Monga, "Hooked on a Feeling." I just read the piece today, after my return from a relaxing spring break holiday en famille at a deluxe beachside resort outside Mogadishu. (The little Dealmakers really enjoyed skipping unexploded ordnance out over the coral reefs.)
VM's topic is clearly limned at the outset of the piece: "What is liquidity, and where does it come from? Why is it here and where will it go?" Unfortunately, after a great deal of journalistic hand-waving, Vipal concludes that liquidity equals confidence. Not that confidence inspires liquidity, or any other such reasonable sounding formulation, but that it is confidence. To be fair, few of the eminences grises quoted in the article come off sounding much better. James Grant of Grant's Interest Rate Observer, for example—who up until now I was under the misapprehension actually understood how to use the English language—comes up with this gem: "Liquidity is the expectation of not getting into trouble."
Perhaps I am being persnickety ("Duh," I hear you murmur), but I tend to get a little peevish when someone pens an article purporting to define or identify some concept, object, or issue of interest and then proceeds to disregard all proper usage of the common English verb "to be." Such articles, in my weary experience, tend to obscure more than they illuminate, and this doleful effect is almost always entirely due to the fact that the wastrel writing the piece is not careful in how he or she uses language. Being careful with words, in contrast, usually sheds some interesting light on troublesome topics and can often advance the state of common understanding.
Let me demonstrate.
The stalwarts at Merriam Webster define the adjective "liquid" as "flowing freely like water." Therefore, in common English usage, the noun "liquidity" can be unambiguously understood as "the property or condition of flowing freely like water." Accordingly, we can understand someone's comment that there is a lot of liquidity in the market to mean that a lot of something or other is sloshing about quite freely. Exactly what is sloshing about, and why, are separate questions worthy of their own answers.
The what, of course, we can assume to be capital, in the form of cash and securities, looking eagerly for new homes in the form of investment vehicles of various form and description. Exactly where this capital is coming from—China, India, Warren Buffett's mattress—is an interesting subsidiary question, as well, and if any of you Dear Readers has the answer, please do send it to Mr. Bernanke and his fellow central bankers so they can settle the betting pool they have been running for the last many moons. Drop me a bcc while you're at it, too.
(Some of you in the audience may question whether there is in fact an unusually large amount of capital sloshing about in the markets (i.e., volume) or whether we are just seeing the same $4,327.82 speeding by us repeatedly in a sort of high speed capital market spin cycle (i.e., velocity). However, anyone clever enough to perceive this conundrum is obviously too intelligent to waste his or her time mooning over my pathetic doodlings and has clearly stumbled on this blogsite in error while looking for the minutes of the last Federal Reserve Board Open Market Committee meeting. Nobody likes a cleverboots, so piss off.)
Why there is so much liquidity is the more interesting question.
If I have correctly translated the central conclusion of the Deal article from journalese into standard English, VM asserts that the markets are so liquid because market participants are confident, and, by extension, confident that they will be able to unload their (risky) securities and investment positions when and if the worm turns. This is the standard formulation, is it not, for an investment bubble?: Everybody but a few unfortunate knuckleheads knows there is a bubble which is bound to burst at any moment, but they are all (irrationally) confident that they can get out before the great unwinding.
Sorry, I just don't buy it.
In the late stages of any investment bubble, virtually everyone I know is grimly whistling past the graveyard, simultaneously trying to make as much hay as possible while the sun shines and completely certain it will all end in tears. Only the madly delusional, in my experience, plan to get out in one piece. (That some lucky souls do get off scott free in every bubble is impetus enough to encourage the next generation of knuckleheads. Thank you, Mark Cuban.) Why, then, do we continue to get caught in this trap of our own making?
Well, someone more clever than me could offer all sorts of contributory reasons, but I already told them to piss off a few paragraphs back, so I am afraid you are stuck with me. Sure, sure, there's moral hazard, structural institutional bias, and even sun spots to blame, but the real reason is that humans are pack animals (or herd animals, for you vegans out there). Millions of years of evolution have programmed our tiny little reptilian brains to feel safest when we are moving together, even when that movement is taking us collectively over a cliff. As long as we are wearing the right Hermes tie, belong to the right country club, and eat at the right restaurants, we feel safe, even if we do have negative equity in that third vacation home we bought in Las Vegas last year and our limited partnership stake in Blackstone Capital Partners XXVI winds up losing money. Better to be battered and bruised, but whole, together, than cut out from the herd and slaughtered alone.
Truly acting alone—and investing according to your own principles and no-one else's—is not easy or even natural for Homo sapiens. We Americans, in particular, admire those rugged individualists who follow the beat of their own drum, but we usually prefer to read about them in Time and Fortune, rather than share their lonely fate. We all admire Warren Buffett, but I am sure some of you can remember how foolish he looked a few years ago when the world was being transformed by technology and the NASDAQ Composite was marching inexorably to 30,000. Now he's a genius again.
Or at least until the next sun spot flares up.
© 2007 The Epicurean Dealmaker. All rights reserved.