Are We Ignoring Liquidity?
The following is an excerpt from our weekly report published to clients on March 18, 2026…
“You need to know when to hold back and when to be aggressive.”
- Bruce Kovner
I don’t have much to add from last week as the situation in Iran is firmly in the driver’s seat. In all honesty, there’s not much use in predicting how things will play out, it really is just a ‘wait and see’ moment. While it seemed like President Trump was coming around to putting an end to the Iran war – contributing to the recent bounce in risk assets – the escalation overnight has put investors back into defensive mode.
Make no mistake, the longer the Strait of Hormuz stays closed and, now that the US and Israel have targeted Iran’s energy infrastructure, there’s a very real possibility that things are ratcheted up to a whole new level. Iran has already warned that various energy sites across the Middle East are now ‘legitimate targets’ as they seek retaliation for last night’s attacks.
I’ll be honest – I have no idea what the Trump administration is thinking, what the Israelis are thinking, or even what the Iranians are thinking for that matter. But what seems clear to me is that there doesn’t seem to be any firm playbook in hand as to what the objectives are for ending this war.
The one thing I will say is that we are starting to see some concerning signs of deteriorating liquidity. We can see it in the relative performance of corporate credit (LQD vs IEF or JNK vs IEI), we can see via the US Dollar rally, we can see it in the rise in rates across the curve. And, yes, there are the anecdotal concerns over private credit (Blackstone, Blue Owl, KKR gating redemptions and increasing questions over private marks). But perhaps most concerning is the action we’re seeing in metals this morning. Gold, Silver, Palladium, Copper – the most popular trades over the past several months – have come under significant pressure this morning.
The reason all of these are so relevant is that they’re fitting with the idea of a liquidity crunch. Remember – we highlighted this weeks ago where gross exposures were extremely high, while net exposures were relatively tame. I think that’s part of the reason the recent pullback has been so controlled – the Iran war was relatively well telegraphed. You had to be sleeping under a rock to not notice the largest buildup in US military assets across the Middle East since the Iraq war. And, as a result, vol has been incredibly bid throughout this whole episode. In other words, investors are hedged.
The only issue is – what happens when those hedges no longer protect your portfolio? What happens if implied vol doesn’t continue to rise, allowing investors to monetize that protection? What happens if the ‘defensive’ long positions that investors had been hiding out in – gold, silver, bonds – start to experience losses while other ‘hedges’ don’t offset said losses? That’s when correlations start to rise – when investors are forced to de-risk across the board because there really is no true protection other than cold hard cash.
Whether this turns into a full-blown liquidity crunch remains to be seen but the conditions are certainly present for one. As I said before, this all hinges on the Iran war and there’s really no telling how that’ll play out by the minute, hour, days, or even weeks. To channel Bruce Kovner once again this week, as frustrating as it may seem, I still believe now is one of those times to hold back.