What I Learned This Week

"Liquidity is the new leverage": Why the toxic combination of bank regulation, algorithmic investing, and QT has put equity and bond markets at increased risk of a systemic event.

The above quote comparing liquidity to leverage comes from Goldman Sachs’ head of Global Credit Strategy, Charles Himmelberg. Historically, leverage “is the tinder that turns a financial fire into an inferno,” as The Financial Times put it recently. However, since February’s flash crash, Himmelberg has again and again sounded the alarm that the algorithmic transformation of markets means liquidity, not leverage, should be the preeminent, catalytic concern as quantitative tightening progresses and volatility returns. “I routinely field questions from clients asking where the risks are building up, and this is the one I worry about,” he told The FT earlier this month. “Financial markets have c…

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