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The danger of early warnings

Euromoney meets the chief executive of a specialist financial services firm recently bought out by management. Such deals are rare in a sector where most participants are inherently leveraged through their day-to-day operations. Is the firm’s capital structure not now rather strained? Not at all, says the CEO. It could ask its backers or other third parties for more money tomorrow and get as much as it wanted. Raising money isn’t the problem. Almost anyone can get funding right now. Identifying the right investments to build the business – that’s the tough part.

It’s the challenge the entire financial world faces today. Abundant global liquidity has supported all asset classes, boosting almost any investment offering a bit of yield. Commodities, equities, credit, anything and everything in emerging markets, flaky currencies, real estate, even the US dollar, have all been doing well – simultaneously.

It makes no sense, unless you are among the few who actually believe in new paradigms. Every investor, every trader, every margin lender is nervous, all ready to jump at the merest hint of the flashing red warning – a sell-off in the Icelandic króna, a correction in Gulf equities – that might mark the start of the great carry-trade unwind.

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