Citibank's Rhodes: A market Correction Looms

Discussion in 'Wall St. News' started by blast19, Mar 30, 2007.

  1. blast19


    Citi’s Rhodes: a market correction looms

    Bill Rhodes, Citi vice chairman and Citibank chief, plays Cassandra with an article in Thursday’s FT warning of a looming market correction - something that could, perhaps, help explain Citigroup’s new plan, revealed this week, to slash costs by more than $2bn a year, cut jobs and consolidate some of its international operations.

    The recent market turmoil should not have been unexpected, reasons Mr Rhodes. Times have been good — mainly due to extraordinary levels of liquidity pouring into opportunities around the globe. This is largely due to the Federal Reserve’s earlier expansionary monetary policies and US fiscal stimulus. The yen carry trade has also been a factor.

    But low spreads, high liquidity, the reach for yield and the lack of differentiation among borrowers point to real concerns. Pockets of excess are becoming harder to ignore — consider the problems in the US subprime mortgage sector. As lenders and investors inevitably become more discriminating, liquidity will recede. Too many countries and companies with vastly different risk profiles are still commanding similar pricing, he notes.

    Periods of economic expansion tend to last five to seven years, and the US is now entering its sixth year of expansion, says Mr Rhodes. Against that background, a material market correction will occur over the next 12 months and this time, it will be a real correction.

    Today, hedge funds, private equity and those involved in credit derivatives play important, and as yet largely untested, roles. The primary worry of many who make or regulate the market is not inflation or growth or interest rates but instead, the coming adjustment and the possible destabilising effect these new players could have on the functioning of international markets as liquidity recedes.

    It is also possible such players could provide relief for markets that face shortages of liquidity. Either way, this clearly is the time to exercise greater prudence in lending and in investing, and to resist any temptation to relax standards.

    Chuck Prince - take note.

    This entry was posted on Thursday, March 29th, 2007 at 8:15 and is filed under Capital markets, People, Insight. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
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