The term liquidity is a financial one meaning the availability of free flowing cash for a given purpose. If you won a stock with good liquidity it is said to be easy to buy and sell because it is liquid. The opposite of liquid is solid and as pertains to assets being solid it means those will take more time and in some cases very long to convert into cash. The speed and ease of conversion to cash is it gauge of liquidity.
The most liquid asset is cash. Gold and Silver are liquid. Real Estate is not liquid though in the sense of getting cash via a loan on it, it could be considered liquid.
In situations where lenders need cash, think their liquidity, they borrow against assets. some of this borrowing occurs overnight and is short term. They ask another bank or the Federal Reserve itself to lend them $1B overnight using their Bond holding or other assets as collateral. if no one is willing or able to lend to them then they experinec a liquidity crisis. That is more or less what closed up Silicon Valley Bank…one day it is fine, the next it is closed. Of course in that case the Fed bailed everyone out BEYOND THE FDIC INSURED AMOUNTS. Why? to prevent a panic. The next one or two or 100 such events may be a challenge for the Fed to save and bail ins could become the solution.
- Dodd-Frank Act: This law, passed after the 2008 financial crisis, is the primary legislation that makes bail-ins a legal option for resolving failing large financial institutions in the U.S..
- Purpose: The goal is to protect taxpayers by ending "too big to fail" bailouts. By converting the bank's debt into equity, the bank is recapitalized without government funding.
- Mechanism: The process involves shareholders and certain creditors, including unsecured creditors like some depositors, having their claims converted into equity to increase the bank's capital.
- FDIC Insurance: It's important to note that for U.S. depositors, the Federal Deposit Insurance Corporation (FDIC) covers accounts up to $250,000. This insurance is not subject to a bail-in.
This very well could be coming to a bank near you.
In times of lousy liquidity, cash becomes king simply in terms of it having become less available or at such rates as to make it unobtainable. There is a term that says it becomes UNOBTANIUM…like an element that cannot be gotten at any price. Think about what you'd pay for water when in the desert for 3 days without it? That will be the way interest rates go.
I suggest that you consider knowing your liquidity. If you holds bonds, they are pretty liquid but not necessarily at the price you think. If you have Gold and Silver, a local pawn or coin shop will pay you cash but maybe not at what you think is their value. If you cash, that is liquid. If you have real estate, perhaps take out a loan on it now and DO NOT spend the proceeds. just keep the cash in hand for a liquidity crisis solution. The cost will be the interest you pay.
Get some liquidity now while the gettin' is good. If you are leveraged and have margins loans, close those positions, especially if in the money. Margin calls suck. Do not get one.
Best,
Donn Marier
DM-Your Own CFO