— Holger Zschaepitz (@Schuldensuehner) October 15, 2017
The PROLIFERATION of COMPUTER-DRIVEN INVESTING has created an illusion that RISK can be measured and managed. But several anomalous episodes in recent years involving sudden, severe, and seemingly INEXPLICABLE PRICE SWINGS suggest the next MARKET SELLOFF could be exacerbated by the fact that the MACHINES are at the controls.”
In a market selloff, commodity-trading advisors similarly could exit their long positions quickly and look to short stocks, creating further selling pressure as they head for the exits. “Action leads to more action,” says Richard Bookstaber, chief risk officer at the University of California and author of The End of Theory, a book about financial crises caused by positive feedback loops.
PERHAPS THE BIG QUESTION is who might be left to buy. Warren Buffett once quipped that investors should be fearful when others are greedy and greedy when others are fearful, but the current market structure has turned that maxim on its head. Algorithms provide less liquidity in a downturn than a human market maker, who might be thinking about how to profit from a dislocation.
The rise of momentum and passive strategies has caused some $2 trillion to shift away from active money managers, who could be counted on to look for bargains as stocks sold off, says Kolanovic, the JPMorgan strategist. “We think the main attribute of the next crisis will be severe liquidity disruptions resulting from market developments since the last crisis,” he says.
But most strategists acknowledge that such an occurrence isn’t a high-probability event. Much will depend on the cause of any disruption, as well as seasonal factors—stocks are more thinly traded in summer, for example. Also, computers aren’t the only cause of selling cycles; bear markets, after all, long predate machine-driven trading.
Quantitative investors argue that they have learned from past mistakes and are less likely to be leveraged or crowded into the same trades. Moreover, regulators and exchanges have instituted rules that could help arrest a bout of unchecked selling, with trading halts imposed when the S&P 500 falls 7%, 13%, and 20%.
Maybe these precautions will work to stem a tidal wave of selling. One of these days—possibly soon, given stocks’ lofty valuation and the Fed’s plan to shrink its balance sheet—we’ll find out.
Very Bullish pic.twitter.com/8K2iBEhEjz
— Alastair Williamson (@StockBoardAsset) October 13, 2017
Global Market Cap As % of GDP At 2007 High
— Teddy Vallee (@TeddyVallee) October 15, 2017
First Yellen warning US stocks expensive, now this:
Carstens: Some Emerging-Market Assets May Be Priced Too Richly
— zerohedge (@zerohedge) October 15, 2017
Chart of the Overnight: 2s10s (monthly) death cross pic.twitter.com/d3r0jkftaj
— Alastair Williamson (@StockBoardAsset) October 15, 2017
More Americans Are Getting Their Electricity Cut Off
- In lingering effect of Great Recession, shut-offs stay high
- Trump wanted to scrap $3.4 billion in assistance to nonpayers
More than 900,000 homes went dark in Texas last summer because of unpaid bills, almost triple the number 10 years ago. In California last year, it was 714,000, the most on record. The tally across the country is in the millions, a sign of the economic stress that lingers after the Great Recession.
Utilities are disconnecting more households as President Donald Trump moved to end $3.4 billion in federal energy-bill help for the poorest Americans. Congress voted to reinstate the funding, but the administration has yet to release the money.
“It’s indicative of an economy that’s still recovering,” said Katrina Metzler, executive director of the National Energy and Utility Affordability Coalition in Washington. “Underemployment is still common, and many families live paycheck to paycheck.”
Deutsche Bank shares continue to drop in tandem w/ 10y Bund yields. pic.twitter.com/pHLFLHzCUz
— Holger Zschaepitz (@Schuldensuehner) October 13, 2017
Barron's w/ the 1987 theme pic.twitter.com/pjnKqJy8H3
— Alastair Williamson (@StockBoardAsset) October 14, 2017
Mkt madness continues. Global stocks gained another $800bn in mkt cap this wk. Now worth $88tn, highest ever, equals to 115% of global GDP! pic.twitter.com/bRuSPuKMtu
— Holger Zschaepitz (@Schuldensuehner) October 14, 2017