Why Are Exchange-Traded Funds Preparing For A ‘Liquidity Crisis’ And A ‘Market Meltdown’?
by Michael Snyder, The Economic Collapse Blog Some really weird things are happening in the financial world right now. If you go back to 2008, there was lots of turmoil bubbling just underneath the surface during the months leading up to the great stock market crash in the second half of that year. When Lehman Brothers finally did collapse, it was a total shock to most of the planet, but we later learned that their problems had been growing for a long time. I believe that we are in a similar period right now, and the second half of this year promises to be quite chaotic. Apparently, those that run some of the largest exchange-traded funds in the entire world agree with me, because as you will see below they are quietly preparing for a “liquidity crisis” and a “market meltdown”. About a month ago, I warned of an emerging “liquidity squeeze“, and now analysts all over the financial industry are talking about it. Could it be possible that the next great financial crisis is right around the corner?
According to Reuters, the companies that run some of the largest exchange-traded funds in existence are deeply concerned about what a lack of liquidity would mean for them during the next financial crash. So right now they are quietly “bolstering bank credit lines” so that they will be better positioned for “a market meltdown”…
The biggest providers of exchange-traded funds, which have been funneling billions of investor dollars into some little-traded corners of the bond market, are bolstering bank credit lines for cash to tap in the event of a market meltdown.
Vanguard Group, Guggenheim Investments and First Trust are among U.S. fund companies that have lined up new bank guarantees or expanded ones they already had, recent company filings show.
The measures come as the Federal Reserve and other U.S. regulators express concern about the ability of fund managers to withstand a wave of investor redemptions in the event of another financial crisis. They have pointed particularly to fixed-income ETFs, which tend to track less liquid markets such as high yield corporate bonds or bank loans.
So why are Vanguard Group, Guggenheim Investments and First Trust all making these kinds of preparations right now?
Do they know something that the rest of us do not?
Over recent months, I have been writing about how so many of the exact same patterns that we witnessed just prior to previous financial crashes seem to be repeating once again in 2015.
One of the things that we would expect to see happen just before a major event would be for the “smart money” to rush out of long-term bonds and into short-term bonds and other more liquid assets. This is something that had not been happening, but during the past couple of weeks there has been a major change. All of a sudden, long-term yields have been spiking dramatically. The following comes from Martin Armstrong…
The amount of cash rushing around on the short-end is stunning. Yields are collapsing into negative territory and this is the same flight to quality we began to see at the peak in the crisis back in 2009. The big money is selling the 10 year or greater paper and everyone is rushing into the short-term. There is not enough paper around to satisfy the demands. Capital is unwilling to hold long-term even the 10 year maturities of governments including Germany. This is illustrating the crisis that is unfolding and there is a collapse in liquidity.
There is that word “liquidity” once again. It is funny how that keeps popping up.