You may have recently read the remarks of J.P. Morgan Chase CEO Jamie Dimon with regard to his view that a Treasury bond shortage will exacerbate any future economic crisis. Dimon’s view was echoed by former Treasury Secretary Larry Summers. Go here and here to read more about Dimon’s concerns over the potential threats posed by a lack of liquidity.
A lack of liquidity could refer to a company that has inadequate working capital on its balance sheet to carry on day to day operations. That is, there’s just not enough “near-cash” assets to pay the day to day operating bills in a timely manner.
A lack of liquidity can also refer to a lack of trading volume on a marketable security like a stock or bond. This is the meaning of lack of liquidity applicable to Dimon’s concern. This liquidity concept is easier to understand when considering the kind of companies that typically turn up via my stock screen described in my book, “Choose Stocks Wisely.” The cheap, high quality companies I’m looking for generally are found only in the small company stock world where its possible to find undiscovered potential gems.
Yet, with small valuable companies you often find a lack of trading liquidity (volume of shares traded daily). With low volume trading, the price swings can be more volatile because it doesn’t take much demand or supply to shift the price significantly.
Warren Buffett actually found early success in the small cap stock world. You might find this article interesting as to where he would still fish for stocks today if he was investing a million dollars instead of billions.
A lack of trading liquidity in the world of small company stocks is to be expected. But a lack of trading liquidity in the treasury markets is quite another thing. I can see Dimon’s concern. It surely stands to reason that highly volatile action in the bond markets would be unnerving to the broad markets.
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