Six years ago we first warned that unbridled central planning around the globe in the form of runaway debt monetization (which adds to stock market "liquidity" while soaking up trillions in high quality collateral i.e., government bonds) together with the uncontrolled proliferation of HFT which in turn soaks up all liquidity, can only mean one thing: crash across all assets classes. Years later, everyone is starting to finally get it.
Here is today's epiphany by Deutsche Bank's Jim Reid.
Everyone seems to have different theories with heavy corporate supply expectations a new one of late. What most traders have said though is that liquidity is awful. Big moves are possible on relatively low or average volumes. What has become increasingly clear over the last couple of years is that the combination of high money liquidity (ZIRP and QE) and low trading liquidity (regulation and bank capital constraints) creates air pockets. The former encourages investors to move in a similar (positive) direction until overheating occurs with the latter then creating problems when they want to collectively lighten up. Those of us in the credit market saw this close up with HY in H2 last year. However that this is increasingly spreading up the top of the capital structure is a worry. It’s also a worry that these events are occurring in relatively upbeat markets. I can't help thinking that when the next downturn hits the lack of liquidity in various markets is going to be chaotic. These increasingly regular liquidity issues we're seeing might be a mild dress rehearsal.
... a dress rehearsal for a main event that will be one for the ages.