Liquidity is the topic du jour – the received wisdom is the world is awash with money, sending asset prices through the roof and credit spreads through the floor. But David Gaffen at the Wall Street Journal thinks there’s another side to this equation – supply.
The amount of stock available to investors has fallen in recent years, writes Gaffen, so investors are chasing fewer assets. “This reduction in float is in some ways more responsible for the sharp run-up in assets that has resulted in a decline in credit spreads to record levels, the big gains in stock prices, and the money that seems to push a different commodity to a record high every week,” he says.
Gaffen lists three reasons for the decline:
- Share buybacks — “issuance of corporate equities declined by a seasonally adjusted annual rate of $579 billion as of the third quarter, according to the Federal Reserve”
- Buyouts – “The percentage of cash-only deals world-wide has increased sharply, from 39% in 2000, when high stock prices and lots of tech-related M&A meant companies were using stock to purchase other companies, to 73% in 2006, according to Dealogic”
- Increase in regulations – “particularly the Sarbanes-Oxley Act, has resulted in a decline in initial public offerings in the US”
Gaffen says that US markets aren’t the only ones experiencing a supply crunch – the LSE’s float has fallen by $50bn since July. But new shares are being issued – in Hong Kong, where they are “expanding really quickly,” Vincent Deluard, global equities analyst at Trimtabs Research told the WSJ. But the bull run won’t last forever, writes Gaffen. He cites analysts at Bianco: “It is bearish in the long-term. The reasons for the reduction of supply are a regulatory constraint and a potential mania in private equity,” they write. “Both of these factors will continue to push stocks higher over the near-term, but left unchecked they can lead to overvaluation and unnecessary costs.”