READY TO RUN AT SHORT NOTICE

 
 When risky stuff hits trouble, all other asset classes get involved

Before the crash, the average time taken for full liquidation of corporate bond portfolios by mutual funds and ETFs was around five days. It is now nearer five weeks.

Why is that? Largely because regulators have made it tough for banks to run trading desks, by making it expensive to hold risky assets such as corporate debt on their balance sheets. And as trading has dried up, so has liquidity.

The above quotes are from Tony Jackson's  "The Long View" in the Financial Times, are about behavior as much as about market data. Push the threshold high enough and smart people will alter their behavior.

That the banks are not dumb enough or they are prohibited from owning these risky asset without the possibility of reward shouldn't surprise. So what if it's true they got caught holding them in the previous market crash and had to sell off better assets owing to dried up liquidity, that's what you have now, dried up liquidity.

Jackson goes on. The name for this is contamination. When the risky stuff hits trouble, all other assets get involved, and everyone takes a hit.

Once again the simple truth here is about behavior. When the paddy wagon comes they take the good girls along with the bad ones downtown. The other inviolable truth is every action has within it a counter reaction, another thing regulators and bureaucrat never to seem to comprehend.

Jackson correctly notes: And the truth is investment professionals know all this. Like farmers on the slopes of Vesuvius, they are ready to run at short notice.