Contrarian Optimism

Mostly because it's fun, I am going to stick by my liquidity guns for a while longer. This has been a scary week for those who follow the credit markets. Many of my friends who run fixed-income portfolios are not even returning phone calls, they are so busy managing their affairs, presumably looking for exit ramps and downside protection. We have seen stories cascading out of the US sub-prime mortgage lending debacle: LBO financing arrangements are stalling en masse, credit default protection for large investment bank debt is getting much more expensive, US Treasury bill prices are sky-rocketing, emerging market spreads are widening drastically. Everybody is fleeing to quality, we are told.

Other developments are making the media and investors even breathier. Stock markets are plunging. US housing sales are way off. Government officials and market gurus are telling us that these developments may be the beginning of a serious market correction. People reading about these developments are getting even more scared, which must be causing even more selling and even more price declines.

I cannot deny that these developments are large and important. I doubt that my limited window into the credit markets makes me smarter than the experts and the investing herd. Still, being a contrarian type, and seeing nothing that has changed my earlier-posted liquidity analysis, I am going to remain of the view that these developments are not (yet) the beginning of a major correction. I am not sure where all the sovereign wealth funds are going to deploy their vast sums in the next months and years. But I have to imagine that the relatively recent trend of these sovereigns pursuing greater investment diversification will continue. I imagine that diversification may slow somewhat, as sovereigns may find that greater sums need to be invested - say in US treasuries, even at the newly inflated prices - in order to pursue policy goals, such as currency pegs.

But all that money, not to mention the amount of private capital that is also on the side-lines at the moment, has to go somewhere. And the recent market dips must have some appeal as buying opportunities. If not, I have a large mattress at home that I might be able to roadshow successfully in Beijing, Singapore, and Dubai.