Awash with Growth?

There is something about Art Samberg and his comments during the recent Barrons' Roundtable (as excerpted in last week's The Asset Shufflers) that continues to linger - like part of a fennel seed wedged between two molars simultaneously providing slight discomfort and delicious taste.

Of the many memorable words that were spoken by Mr. Samberg during the discussion, today, there are but a few to be briefly pored over:

The world is awash with growth. It is awash with liquidity, and our markets can clear liquidity better than any others.

Was that a sort of Freudian slip?

Are growth and liquidity really interchangeable as it would appear above or was this a tacit admission that they are very different, though sometimes appearing to be the same?

This seems to be integral to the recent phenomenon of what some call uber-liquidity and its role in the global economic boom of recent years - a world of excessive money creation and credit expansion where caution is thrown to the wind, ordinary people become speculators, and the asset shufflers whistle as they shuffle to the bank.

The discomfort that this idea creates is brought to light in this recent story from the Financial Times:

The unease bubbling in today's brave new financial world
By Gillian Tett

Last week I received an e-mail that made chilling reading. The author claimed to be a senior banker with strong feelings about a column I wrote last week, suggesting that the explosion in structured finance could be exacerbating the current exuberance of the credit markets, by creating additional leverage.

"Hi Gillian," the message went. "I have been working in the leveraged credit and distressed debt sector for 20 years . . . and I have never seen anything quite like what is currently going on. Market participants have lost all memory of what risk is and are behaving as if the so-called wall of liquidity will last indefinitely and that volatility is a thing of the past.

"I don't think there has ever been a time in history when such a large proportion of the riskiest credit assets have been owned by such financially weak institutions . . . with very limited capacity to withstand adverse credit events and market downturns.

"I am not sure what is worse, talking to market players who generally believe that 'this time it's different', or to more seasoned players who . . . privately acknowledge that there is a bubble waiting to burst but . . . hope problems will not arise until after the next bonus round."

He then relates the case of a typical hedge fund, two times levered. That looks modest until you realise it is partly backed by fund of funds' money (which is three times levered) and investing in deeply subordinated tranches of collateralised debt obligations, which are nine times levered. "Thus every €1m of CDO bonds [acquired] is effectively supported by less than €20,000 of end investors' capital - a 2% price decline in the CDO paper wipes out the capital supporting it.

"The degree of leverage at work . . . is quite frankly frightening," he concludes. "Very few hedge funds I talk to have got a prayer in the next downturn. Even more worryingly, most of them don't even expect one."

There appear to be two possibilities to help explain the unease clearly expressed by the anonymous senior banker writing to the Times and shared by many others who observe financial markets from afar.

The first possibility is that we have truly entered an era where the combination of diversified risk and advancements in financial engineering have made the world so fundamentally different that some observers are uncomfortable with the change.

The second possibility is that it really isn't different this time - that excessive money creation and credit expansion have only produced a condition of super liquidity that is currently masquerading as economic growth.

It's all semantics and interpretation anyway - that is until something bad happens and the assignment of blame becomes important.

Whatever unease Mr. Samberg's unconscious mind may have been expressing when he commented on growth and liquidity, it probably won't affect his next bonus.

The one after that?

Maybe.