Grand Illusion

But dont be fooled by the radio
The TV or the magazines
They show you photographs of how your life should be
But they're just someone else's fantasy
--Styx

'The world is awash in liquidty.' You hear this claim a lot right now. 'Liquidity' is often offered as the primary cause of bouyant asset prices around the globe. But REAL liquidity is cash driven and relatively stable. Instead, bid/ask spreads have narrowed due to debt and leverage (e.g., the yen carry trade). Speculation driven by leverage is fickle and can reverse in a heartbeat when debtors get fearful.

Leverage creates the illusion of liquidity. As long as folks are willing to speculate with those borrowed funds, then financial asset prices are supported. But if risk seeking behavior turns risk averse, then the 'liquidity' will rapidly vanish.

The real issue seems related to how long collective risk seeking behavior will last. History suggests that market groupthink is prone to reversals--often with little warning.