February 1, 2013

The Liquidity Curse—Searching for Alpha for February 2013

No one wants what anyone can have. Such is the case with free-flowing injections of money into the financial system. 

Cash is trash, after all. It's easy to come by, yet has little redeeming value for those who hold it.

The liquidity curse is the newest, coolest way to explain the rally in equity prices. Frustrated by low returns in CDs and Treasuries, investors will eventually give up and pour their money in the stock market. The result, according to pundits, is a nice steady rally in stock prices.

And the spigot is only half on. There is such a tremendous vacuum in equity flows that the stock market will act like a sponge. But like any type of "flow trade," even a temporary slowdown in volume could frustrate retail investors looking to re-enter the markets after experiencing a devastating 2008 and missing the subsequent run-up.

Don't get me wrong. I like stocks here, but a 5+% month is a bit extreme. One might want to exercise caution as they add to positions.

 

 

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