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Experts predicting increased ilIiquidity and link it to the climate that led to the 2008 crisis

According to a recent report by Morgan Stanley “market liquidity across assets is in decline” and  “low liquidity were the fundamental triggers of the 2008 crisis.”  Those bankruptcy practitioners that had first hand experience of the 2008-2010 turmoil, will recall the frustration of not being able to help clients workout of a distressed situation because of the lack of liquidity (e.g., alternatives).  Often bankruptcy was the only alternative and even that option was less than optimal because the market for additional capital or options was broken.  Liquidation was often the only option.    One example cited by Morgan Stanley relates to corporate bonds.  According to their report: “Dealer holdings of corporate bonds have shrunk from 3% of the market to just 0.3% today. While this means that dealers themselves have less to liquidate, their capacity to move risk to a new buyer may be limited and require larger repricing of the asset class in times of stress.”  The repricing is likely to mean reduced value for corporate bonds and may result in other strategies for offloading such positions.  One such strategy might be vulture buying of this asset class and potentially an “own to loan” strategy or a liquidation strategy for certain asset classes.   Morgan Stanley cites another example related to public debt.  According to Morgan Stanley, in the recent past, central banks built large positions in bonds.  “As central banks built these positions, liquidity in the affected assets was excellent. It’s hard to imagine anything better for liquidity than the presence of a steady, deep, well-telegraphed bid. But these forces are now swinging in the other direction. The Fed’s purchases have already begun to reverse, the ECB’s are likely to over the next six months, and with close to half of its bond market already owned by the BoJ, it will eventually face a constraint.” Given that the U.S. economy is in the late stages of an extended recovery that is close to a record-setting duration, and given the near certainty that the economy operates like a pendulum, the open question is not “if” but “when” will the U.S. economy stumble, how bad will it get and what will it mean for bankruptcy and other workout professionals.     If you would like more information regarding bankruptcy filings and would like to speak to one of our experienced attorneys, please call (312) 878-6976 or fill out a contact form here. Read More
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America is heading for a level of income inequality that hasn't been seen since 1928

Economists have noted that the level of income inequality between the top 1% and the rest of the country is approaching levels last seen in 1928, which, of course, was just before the tragic financial meltdown that pre-dated, or even caused, massive impacts in the U.S. and the rest of the world. The obvious implication of this data is that another meltdown looms on the horizon.  For further insight into this dynamic, FactorLaw recommends the this article published in Money Watch. Read More
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Is a Recession on the Horizon

According to an article in the Business Insider, a key metric for the onset of a recession is leaning towards a downturn. In this case, the yield on 10-year US Treasury notes declined for a fifth consecutive week and is close to the yield on a 2-year Treasury. According to the article: “Treasury yields don’t automatically trigger recessions, of course. But there has been a worrying historical correlation between the moment that the percentage yield on the two-year Treasury becomes greater than the yield on the 10-year note. That phenomenon is called a “yield curve inversion,” and it means that investors are so worried that they’re much less likely than normal to bet on short-term assets.When the opposite happens and investors signal that the short term feels riskier than the long term, something must be wrong. If investors say they have less idea of what’s going to happen in two years than in 10 years, then they must be very worried about the near term — and that is a pretty good signal of an impending recession.When the two-year exceeds the 10-year, recessions tend to follow in short order.” There is one reason not to panic. The yield curve doesn’t say that a recession will come imminently. Just sometime soon. The Macquarie analyst Ric Deverell and his team told clients recently that even if the curve were inverted, a recession might not show up until 2019, based on the historical record. “Indeed, each of the five most recent recessions were preceded within two years by an ‘inverted’ yield curve, with only one false signal (the yield curve very briefly dipped into negative territory in mid-1998, during the Russia crisis and the collapse of Long Term Capital Management, around 33 months before the cyclical peak). “On average, the lag between yield curve inversion and the onset of a recession is around 15 months … Even if the current trend pace of flattening since 2014 were to persist, the curve would not invert until the middle of 2019.” While the 10-year yield still exceeds the 2-year yield, the differential is small — 25 basis points on Monday, the flattest since 2007. If you would like more information regarding bankruptcy filings and would like to speak to one of our experienced attorneys, please call (312) 878-6976 or fill out a contact form here. Read More
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