Whilst I was [in the US] everyone wanted to talk about trading liquidity and rates. In terms of liquidity some stressed more than others about it but all concluded that the last few weeks in rates were eye-opening . No-one really knew how to hedge or price for it in a world where you need to hit short-term performance targets. This supports my view that liquidity premiums will never be properly priced in this cycle and investors will stay in assets too long in order to maximise short-term performance. This is completely understandable though given the nature of the industry. But when this cycle does end there is likely to be savage moves in markets where either investors need to sell or where they are able to sell. The good news is that central bank liquidity should continue to push this problem out for a good while yet but we're likely to get regular reminders of the problems that will occur when the fundamentals change.
Don't worry about the selling: once it does begin, it will be so furious exchanges will simply
shut down for the day (or week, or month, or good) and nobody will be allowed to leave the biggest Hotel California ever created by central banks for market participants. The truth is that nobody is getting out of this alive, or at least with profits, when the central planners lose control. There is zero hedge to what is coming.
As for the bad news, while central bank liquidity is "pushing this problem out", it is also causing it as we showed in Why There Is No Treasury Liquidity In One Chart. So ironically the longer Central Banks delay the inevitable day of reckoning, the worse it will be. Incidentally, while we have been saying precisely that for almost 7 years, here is Bloomberg's Simon Ballard who sounds a tad tinfoil hattish and conspiracy bloggish.
Liquidity, or lack thereof, is increasingly seen as a potential central element to the next credit market correction
Sadly at the rate the mainstream media is agreeing with everything we have said from day 1, soon there will soon be no "conspiracy theories" left.