Triggers for next Financial Crisis - a Rejoinder
While Satyajit Das makes some good points (Next financial crisis likely to centre on private markets, FT, 12 August 2022) the panoramic view he gives requires quite a few clarifications.
First things first: the one ‘asset class’ that experienced a near-death experience in the most recent past is hardly mentioned at all: Structured Credit Hedge Funds were confronted with a serious maturity mismatch when markets seized up as a consequence of the pandemic and lockdowns during early Spring 2020.
Without timely and aggressive intervention by the Fed quite a few would have failed.
Apart from this particular maturity mismatch Hedge Funds are the asset class least likely to cause a financial crisis. Many if not most are marked-to-market quite frequently and they also mostly invest in relatively liquid markets. That funds may have to halt redemptions in a market sell-off or panic is usually disclosed upfront.
While Das’ argument cannot be rejected outright, it is ironic that the markets he considers the most dangerous are unlikely to be traded on a short-term speculative basis. But that speculation is exactly the reason why sharp selloffs and market panics are likely to originate in the public securities markets where trades can be initiated by just pressing a button on a computer keyboard.
So it can be said that it is a bonus if some asset classes are illiquid. And is not one of the perennial complaints about capitalism and financialization that investments are not made with a longer time horizon?
Some of the REAL risks associated with the illiquid asset classes should get more attention:
Are valuations in Property taking account of the cost of depreciation? If not, all the nice return projections are nothing but pie in the sky – two to three percent of the asset valuation should be set aside each year – how much return is then left once the inflation slows down or comes to a halt?
Infrastructure is subject to an additional danger – political interference. For example, how long will governments allow (what they might consider) ‘excessive’ profits while service quality is declining?