Ben Inker (pictured), head of GMO’s Asset Allocation team argues that in addition to price -insensitive buyers, markets are now increasingly witnessing the phenomenon of price-insensitive sellers.
The last decade has seen an extraordinary rise in the importance of a unique class of investor. Generally referred to as “price-insensitive buyers,” these are asset owners for whom the expected returns of the assets they buy are not a primary consideration in their purchase decisions. Such buyers have been the explanation behind a whole series of market price movements that otherwise have not seemed to make sense in a historical context.
In today’s world, where prices of all sorts of assets are trading far above historical norms, it is worth recognizing that investors prepared to buy assets without regard to the price of those assets may also find themselves in a position to sell those assets without regard to price as well. This potential is compounded by the reduction in liquidity in markets around the world, which has been driven by tighter regulation of financial institutions, and, paradoxically, a greater desire for liquidity on the part of market participants. Making matters worse, in order to see massive changes in the price of a security, you don’t need the price-insensitive buyer to become a seller. You merely need him to cease being the marginal buyer. If price-insensitive buyers actually become price-insensitive sellers, it becomes possible that price falls could take asset prices significantly below historical norms. This is not to suggest that such an event is inevitable, still less is it an attempt to predict in which assets and when it will occur, but anyone conditioned to think that these investors provide a permanent support for the markets should be aware that the support may at some point be taken away