Fears of a serious nuclear catastrophe pushed Japanese stocks far lower in Tuesday trading.
But there is another problem building, and some fear it could lead to a much more widespread crisis in financial assets.
The problem is that banks, Wall Street firms and hedge funds have built up exposures to riskier assets over the past two years. Much of the 'smart money' has been chasing bargains—bottom fishing in sovereign debt, muni debt and financial sector securities.
If sentiment turns suddenly away from risky assets, some of these investors could find that there was no market for the risk they hold. Although there is no direct connection between, say, the situation in Japan and Illinois revenue bonds, a sharp pullback in risk tolerance could see these very different asset classes decline together.
In a crisis, assets that seem uncorrelated on a fundamental or technical basis can suddenly trade together. As the saying goes, in a crisis, all correlations go to one.