Thursday, June 24, 2010

Swimming in liquidity

A US fund manager was asked by CNBC on TV what position he would take amid the recent sovereign debt crisis in Europe. With no hesitation, he replied, ‘Raising cash levels.’ When probed further, he said his fund will raise its cash position to 5% from the normal 3%. Great stuff, that! Read on.

A Japanese fund manager was quoted in Bloomberg recently about the liquidity position taken by the Japanese. He said that major corporations in Japan and Japanese households have raised their cash levels to about 60% by not investing, and by selling stocks and bonds fearing for the worst amid the ongoing European debt crisis. He said they are ‘swimming’ [in liquidity]. In the same article, Bloomberg mentioned that the US banks and corporate titans are collectively holding a few trillion in cash.

Those familiar with financial management or are regular readers of the Financial Times would know that profitability does not equate to liquidity. What is the point of generating paper profits but no cash flow?

As the Book of Changes told me last year about ‘Pigs cry, fish laughs’, it meant something. While the message of ‘Pigs cry’ has been previously discussed in detail, ‘Fish laughs’ was mentioned in passing as those investors who had sold their stocks and holding cash escaping the recent plunges in the global stock markets.

In case Yi students do not know, the Chinese sometimes refer to cash and money as Shui (pinyin for water). We all know for a fact that fishes live and swim in water. The Japanese fund manager brought up a good reference point when he said that those Japanese who hold a high cash level of 60% are swimming, since Shui or water is liquid.

The current situation in the world is this. The pigs mired in debt or highly geared because of greed or reckless spending will cry while the fish swimming in water or cash (Shui) may laugh after cashing out just before their (stocks / property / debt) markets crash, counting themselves among the fortunate and the able.

Whether world renowned economic advisers currently urging further spending by borrowing more or those advising austerity would be proven right depends on what happens to the global economy in the foreseeable future. Each group has a right to voice their opinions or concerns, not unlike the Daoists, Buddhists, and Confucians in forums.

In line with the Yi prognostications, this fry is swimming in more water than those Japanese.


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