Sunny Days Will Return

Say what you want about the deposed junk bond peddler at Drexel Burnham Lambert, Michael Milken, you have to admit that he’s right on this one. He once noted, “Liquidity is an illusion. It is always there when you don’t need it and rarely there when you do.”

To elaborate, in volatile times, money moves toward rock-solid investments. Specifically the Federal Government  (Have you seen the short-term Treasuries recently?). In more stable times it moves toward investments that deliver a better return.

The last year or so can hardly be called stable. Predictably, money fled the markets, depressing the value of everything. When compounded by the housing collapse and the problems that rating agencies have had assessing bonds, long-term assets held to mark to market accounting rules got hammered.

But these are all temporary events that are impacting long-term investments in the short-term. Nonetheless these are the criteria mark to market uses to evaluate an investment. It’s a bit like valuing the convertible you bought yesterday at 10% of its purchase price because it’s raining today.

There will again be a sunny day. And as bizarre as it sounds, the FASB should take advice from Mr. Milken. Liquidity will return. When we need it least, of course, but it will return nevertheless. We need accounting rules that acknowledge this.