Don’t be fooled by the widespread illusion of liquidity

Mohamed E-Erian says once the Fed begins the tightening cycle they will “work hard to convince the markets that the pace of subsequent hikes will be slow, hesitant and subject to course correction. However El-Erian warns… “A tightening policy that is too loose could make it difficult to prevent the kinds of excessive financial risk-taking that would be disruptive in the absence of materially stronger growth. This concern is amplified by the widespread market illusion of liquidity: the belief that liquidity will be available to allow overexposed investors to reposition at reasonable prices and with appropriate timing in the event of a market shift. Due to both regulatory and market forces, the risk-absorption capabilities of broker-dealers are likely to fall short of what end investors believe are necessary and have been used to.”

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