Number One Reason China Has Begun to Scare Me

chinese-15511_640I haven’t really been too concerned with the recent market gyrations the past few days, but yesterday’s news that China is lowering interest rates again and is now easing bank reserve requirements by 0.5% is, quite frankly, troubling.

A few weeks ago I wrote in a LinkedIn Pulse piece that “…confidence in Beijing’s ability to support the equity markets may be fading, and the real issue is the underlying Chinese economy” but that we didn’t expect a sustained wider sell-off. Last week’s downturn, just as many started their end-of-summer vacations, set off what began to look like a wave of follow-the-sun mini-crises. Yesterday’s move shows just how immature China’s economic policy making really is.

To read why it’s so immature, click here to see the whole text in LinkedIn.

 

 

 

5 Financial Risks to Keep an Eye On This Summer

oil_rigs (2)This summer is no time to take your eye off the risk management ball as the uncertainty and volatility in financial markets won’t take much of a holiday.

There are five financial risk focus areas we suggest you continue to monitor through the dog days of summer: Oil, China, Rate Hike, Liquidity and Loans. Although Greece seems to have settled down – for now – and the EuroZone has avoided its most recent crisis, it’s likely to come back at some point since the solution kicks the can without really addressing the underlying differences in the EU’s constituent economies and cultures. For now, there are bigger market risks to watch for.

To read about these top 5 sources of risk, click here to see the whole text in LinkedIn.

Liquidity-at-Risk

This article originally appeared in Risk.net, co-authored with my good friend Ken Akoundi, President of ASPN Solutions. Ken and I will be speaking at the RiskHedge conference in NYC on July 8 on the topic of Liquidity Risk.

Market liquidity, when not taken for granted, is a complex topic that has no quick and easy explanation, measure or analysis. Without liquidity, a market cannot really exist, so most economic, valuation and risk models assume a high level of liquidity. Any other assumption is just too messy: how exactly does one go about modelling a market when one of its required characteristics – liquidity – is in short supply or non-existent?

Both the Wall Street Journal and Investopedia define liquidity similarly: the degree to which a security can be easily bought or sold without materially changing its price. Liquidity is not just the ability to buy or sell – liquidity is about the ability to do so without moving the market. That last bit means that to be truly liquid, a security needs plentiful buyers and sellers so anyone can transact at nearby prices, leading to one of the most common measures of liquidity: volume. But high volume alone does not mean you can always transact without moving the market: what if all that volume is dominated by buyers when there are few sellers – a strategy used by some hedge funds in frontier markets. Without plentiful sellers, just one buyer can and will move the market. The mirror image is also true. Size matters: small quantities can often be easily bought or sold and therefore some would describe the security as ‘liquid’, but the same security at larger quantities may not find a market at all.

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