Thread by @TihoBrkan

When you hear people say phrases like:

“trillions in institutional dry powder”
“huge liquidity sloshing around”
“wall of cash on the sidelines”
“more capital available than ever”

You should know we are closer to the point of maximum optimism, which is THE sell signal.

Here is a brief side story.

I started investing in 2006 and the world was experiencing an unprecedented global boom.

Emerging markets were booming, US consumer was riding a household & RE wealth bubble as credit was in abundance.

Every time I’d tune into CNBC or Bloomberg...

...some market pundit, private equity firm or hedge fund manager what say one of those 4 lines above,

describing the unbelievable amounts of liquidity in the market place.

Being young & inexperienced, I was thinking: how can markets even correct more than -5% to -10% at most?

The amount of liquidity that was in the system, or so they kept telling us, was incredible.

Any slight drop in asset prices would see this wall of cash be used almost automatically, as everyone was looking for new opportunities to park their cash.

The interesting thing I learned was there isn’t a never ending wall of cash ready to be deployed and the whole market operates on confidence — and confidence alone.

It was only a few months later that subprime fears started to appear on front pages of FT & WSJ.

It was Feb 2007.

The so called “wall of cash” or “trillions in institutional dry powder” was nowhere to be seen.

I was shocked. Only months ago, I was sure markets couldn’t even fall by -5%.

It was as if “liquidity” completely evaporated almost overnight.

Fear took over & the GFC started.

At first the selling pressure was mainly focused in the troubled real estate & financial sectors.

Subordinated debt, unsecured loans & junk bonds were under huge pressure.

It eventually spread to all markets, in all parts of the world.

So much for “more capital than ever.”