Young Research & Publishing Inc.

Investment Research Since 1978

Disclosure

  • About Us
    • Contributors
    • Archives
    • Dick Young’s Safe America
    • The Final Richard C. Young’s Intelligence Report
    • You’ve Read The Last Issue of Intelligence Report, Now What?
    • Dick Young’s Research Key: Anecdotal Evidence Gathering
    • Crisis at Vanguard
  • Investment Analysis
    • Bonds
    • Currencies and Gold
    • Dividend Investing
    • ETFs & Funds
    • Investment Strategy
    • Retirement Investing
    • Stocks
    • The Efficient Frontier
  • Investment Counsel
  • Dynamic Maximizers®
  • Retirement Compounders®
  • Free Email Signup

Post-Financial Crisis Regulation Could Worsen the Next Crisis

August 8, 2019 By Jeremy Jones, CFA

By Artem Oleshko @ Shutterstock.com

At the Financial Times, Amin Rajan explains that a lack of liquidity, which was strangled by post-2008 Financial Crisis regulation, could deepen any future financial crisis.

Put simply, traditional market makers for fixed-income products cannot now warehouse risk because of the effect of the regulation to enhance global financial resilience introduced after the 2008 crisis.

This is best shown by US investment grade credit. It grew by 43 per cent between 2007 and 2018, while dealer inventories were just 6 per cent of what they were in 2007, according to JPMorgan Asset Management. The new generation of intermediaries connects buyers and sellers only when two-way interest exists, and this can be sporadic.

At the same time, the quality of protection built into the riskier corner of the credit market has been falling, according to Moody’s Loan Covenant Quality Index. In this prolonged era of low rates, quantitative easing by the central banks has led investors to climb higher up the risk curve in search of yield. Today, it is hard to get returns in excess of 5 per cent without leverage or aggressive risk-taking across most asset classes.

Worse still, central banks’ quantitative easing has fostered the illusion that pump priming will guarantee liquidity by suppressing normal supply and demand. Convictionless trades now abound, as markets are moved by random psychological forces far removed from the fundamentals. For example, in 2017, 85 per cent of Italian high-yield bonds traded below the yield of the US treasuries.

In fixed income, market liquidity has diminished, as shown by average trade size and price impact. Of course, regulators can insist on stronger safety buffers but this will dilute returns by forcing funds to hold bigger cash reserves.

In the meantime, sudden outsized price moves have been evident in a range of asset classes, yet the bulls keep running and liquidity rears its head only sporadically.

Read more here.

Share this:

  • Email
  • Twitter
  • Facebook

You Might Also Like:

  • Red Alert! $164 Trillion in Global Borrowing Exceeds Pre-Financial Crisis
  • Didn’t This Happen Before the Last Crisis?
  • Euro Crisis Flares up Again
  • Author
  • Recent Posts
Jeremy Jones, CFA
Jeremy Jones, CFA, CFP® is the Director of Research at Young Research & Publishing Inc., and the Chief Investment Officer at Richard C. Young & Co., Ltd. Richard C. Young & Co., Ltd. was ranked #5 in CNBC's 2021 Financial Advisor Top 100. Jeremy is also a contributing editor of youngresearch.com.
Latest posts by Jeremy Jones, CFA (see all)
  • Despite Inflation, Best Year Ever for Vacation Demand - July 1, 2022
  • Purchases of Gaming Chips for Crypto Mining Tailing Off - June 30, 2022
  • Are Google, Amazon, and Microsoft About to Crash This Specialized Real Estate Market? - June 29, 2022

Search Young Research

Most Popular

  • Here’s Why You Need a 15-Year Retirement Investment Plan
  • Why Work When Taxes Take It All?
  • Are Google, Amazon, and Microsoft About to Crash This Specialized Real Estate Market?
  • What Happens to Your Passwords When You Die?
  • Regulators' Bungled Attempts to Cut Emissions Drove Oil Prices Higher
  • Is the Great Job Boom Over?
  • RURAL RENAISSANCE: America Finds the Country Again
  • The Power of a Compound Interest Table
  • Vanguard Wellesley (VWINX) vs. Wellington (VWELX): Which Fund is Best?
  • Your Survival Guy: Clearing the Decks, Buying a Boat, Seeing the World and More

Don’t Miss

Default Risk Among the Many Concerns with Annuities

Risk and Reward: An Efficient Frontier

How to be a Billionaire: Proven Strategies from the Titans of Wealth

Could this Be the Vanguard GNMA Winning Edge?

Cryptocosm and Life After Google

Warning: Avoid Mutual Fund Year End Distributions

Is Gold a Good Long-term Investment?

How to Invest in Gold

Vanguard Wellington (VWELX): The Original Balanced Fund

What is the Best Gold ETF for Investing and Trading?

Procter & Gamble (PG) Stock: The Only True Dividend King

The Dividend King of the North

You’ll Love This if You’re Dreaming of an Active Retirement Life

RSS The Latest at Richardcyoung.com

  • Happy Independence Day
  • For Investors Who Want to Stop Worrying About a Market Crash
  • Breaking News: House Election Update
  • WATCH: New York Governor Melts Down When Asked for Facts
  • Florida Is a Refresher Course in American Greatness
  • Should You Believe Ms. Hutchinson?
  • Biden’s Economy Even Weaker than Thought
  • A Cashless Society Is A Debacle for Americans
  • Time to Save, Troubles Dining Out, and Intelligence on Yellowstone
  • Democrats Running AWAY from Biden on the Campaign Trail

About Us

  • About Young Research
  • Archives
  • Contributors

Our Partners

  • Richard C. Young & Co.
  • Richardcyoung.com

Copyright © 2022 | Terms & Conditions

 

Loading Comments...
 

    loading Cancel
    Post was not sent - check your email addresses!
    Email check failed, please try again
    Sorry, your blog cannot share posts by email.