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September 15 will be held 10 years after the collapse of the investment bank Lehman Brothers, a milestone event of the 2007-2008 financial crisis that turned a bear market into a panic in its own right. of sale. Marko Kolanovic, global head of macro-quantitative research and derivatives at America's largest bank, JPMorgan Chase & Co., led the way in describing the scenario of the next financial crisis, according to CNBC.
Meanwhile, the current bull market lasted nine and a half years starting on September 9, which resulted in dramatic gains in its last period. Investors with short memories will not be prepared for the next big stock market shock, increasing the chances that the next crisis will be particularly severe. Meanwhile, since the beginning of the year, a number of well-known market gurus have issued their own warnings that stocks are about to dive up to 60%. (For more, see also: Why the S & P 500 could fall more than 60%: Hussman.)
What will the next crisis look like
| Sales of sudden and severe securities |
| Liquidity crisis |
| Unprecedented Fed actions to strengthen stocks |
| The worst social unrest in the United States for 50 years |
Source: JPMorgan Chase, as reported by CNBC.
Computer Crisis
Kolanovic is particularly concerned about the growing importance of computerized trading and passive investing. As long as bullish sentiment weighed on investors, these two factors helped propel stock prices to new heights. However, once sentiment is down, the speed with which computerized trading algorithms operate can produce massive selling pressure that can overwhelm markets in a fraction of a second. In addition, these programs tend to play the role of leader, with waves of sales inducing even more waves of sales. (For more, see also: How Algo Trading Degrades.)
A booming stock market
Source: Yahoo Finance; Earnings calculated from the last trough of the bear market closed on March 9, 2009 until the close of September 5, 2018.
Time bomb
According to Kolanovic, in the last ten years, about $ 2 billion of investment has shifted from actively managed funds to passive funds, reducing the possibility that the managers of bargain hunting will stop a wave of sales. In addition, it estimates that up to 66% of all assets under management are now in index funds and quantitative funds, and that approximately 90% of the daily trading volume is derived from these strategies. other similar strategies.
Mark Mobius, emerging markets fund manager, expressed similar concerns about the explosive growth of passive ETFs and high-speed computerized transactions. He sees a growing danger of a "snowball effect" in which a small wave of sales quickly becomes an avalanche. (For more, see also: Contrarian Mark Mobius sees a plunge of 30%.)
The big liquidity crisis
A fall in stock prices is likely to result in what Kolanovic calls the big liquidity crisis, with buyers willing to buy more and more difficult to find, resulting in lower prices. If the sale reaches a 40% drop, he hopes the Federal Reserve will have to intervene to prevent the economy from slipping into a severe recession or even a depression. This is essentially what the Fed did in 2008-09, with its massive quantitative easing program to combat this crisis.
Rising social unrest
As financial resources deteriorate and pension funds are seriously underfunded, threatening to significantly reduce benefits, Kolanovic leaves the specter of the worst social unrest in the United States since 1968, following a new financial crisis. That year was marked by growing discontent with the Vietnam War, as well as the assassinations of the civil rights leader, Reverend Martin Luther King, and the presidential candidate, Senator Robert F. Kennedy.
Hedging His Bets
However, in an interview quoted by CNBC, Kolanovic said that if central banks such as the Fed were to intervene to support asset prices, the status quo should continue. Moreover, he believes that the risk of seeing a new financial crisis develop at least until the second half of 2019 is weak.
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