– Thoughts on Strategy and Management

Endless liquidity?

Two weeks ago Dagmar discussed some important issues of the real estate business in Germany. Hence I would like to present some interesting data that explain supporting factors for this development. So let’s look at liquidity.

Presently we face an amazing level of financial liquidity; we could argue that the world rolls in money. Hence a wave of liquidity – the free floating capital – searches for investment opportunities on the entire planet. (Not to forget all the liquidity that can be created by leveraged finance transactions) Hence we see that all major asset segments increase in their value, no matter they are real estate, equities or noble metals…Don’t forget Dagmar’s post: Real estate in Germany belong to those assets, too.

So what is the matter? The world has started to establish some interesting records:
Some figures illustrate the problem

  • Economic growth between 1995 and 2005: 52 % (1)
  • Increase of market capitalization of equities on all stock exchanges between 1995 and 2005: 500 %
  • New market capitalization of equities on all stock exchanges 2005: 500 trillion US-Dollars
  • Economic growth between 1996 and 2006: 60 % (2)
  • Increase of volume of money in circulation between 1996 and 2006: 90 %
  • Volume of acquisitions of companies (entire) 2006: 1.15 trillion US-Dollar
  • Volume of acquisitions of companies in the first 6 month (!) 2007: 2.3 trillion US-Dollar

So where does the money come from? Some new sources can be identified

  1. Investments of capital by nations: The Peoples Republic of China gains foreign currency reserves about 1.3 trillion US-Dollars per year. Oil exporting countries gains foreign currency reserves about 1.2 trillion US-Dollars per year.
  2. Carry trade transaction between Nippon and other countries: 0.5 trillion US-Dollars
  3. Credit derivates
    – Volume of credit derivates in 1998: 180 million US-Dollars
    – Volume of credit derivates in 2006: 3.000.000 million US-Dollars (3 trillion)

So, what’s left?
Between 1998 and 2001 “we” thought to experience a new type of economy, a world of low inflation ratios and endless flow of venture capital. This time we can observe similar indicators. It is very unlikely that all these above mentioned developments and growth rates are endless. Both the focus on returns and the fear to lose money are major factors that influence financial decisions. A shift from one perspective to another will take place very fast.
(1) Bank for international settlements
(2) Source: Deutsche Bank