|
The "Tripwire" for the Next Black Monday? |
|
|
|
Dear Reader, |
Today I lower my head, belatedly… and pause in silent memory. |
For the black crepe went up on Wall Street 38 years ago this week — Oct. 19, 1987 — a date which witnessed the bloodiest one-day carnage in market history. |
The Dow Jones Industrial Average plummeted an impossible 22% that distant "Black Monday." |
A comparable blood-spilling today would plunge the index some 10,330 points. |
I compare that October day to the ancient Battle of Cannae. Invincible Rome lost as many as 70,000 legionnaires to Hannibal's armies — in one single day. |
Or, to the first day of the Battle of the Somme, July 1, 1916. On that date nearly 20,000 British soldiers fell flat under German guns… and never got up. |
It Literally Never Should Have Happened |
I wrote recently that Black Monday was a 17-standard deviation event. |
Probability theory suggests a 17-standard deviation event should never occur in the entire 4.6 billion year history of Earth. |
Not on one single occasion. Yet it did on that black October day in 1987. |
I wrote also that a complex statistical analysis of market history suggests that Black Mondays might occur with far more regularity. |
That complex statistical analysis indicated you can expect a similar cataclysm once every 104 years. |
Yet what sinister vortex could plunge today's market into a Black Monday sequel? |
Today we consider one harrowing possibility. |
| |
Only Days Left To Access The 11X Gold Strategy Before October 29th Deadline.
| The clock is ticking. A government meeting on October 29th will send gold prices soaring to $5,000. But if you're buying gold, you're leaving 11X profits on the table. There's a better way, but you must act now. Time is running out. | Click Here Immediately To Get The 11X Strategy Before It's Gone Forever |
| | |
|
The Potential Tripwire for the Next Black Monday |
Mr. Harley Bassman is a world-class expert in derivatives — what Warren Buffett has termed "weapons of mass destruction." |
This Bassman fellow lit out with one question in mind: |
The only question one cares about, identifying the tripwire that would tip our system into disequilibrium. |
|
|
That is, what specific tripwire could turn a blue day on Wall Street into another Black Monday? |
Mr. Bassman's researches indicate there is. But what is it? |
The potential villain of this black tale, a possible trigger for the next horror picture is: |
Passive investing. That is correct — passive investing. |
After the 2008 near-collapse, the emergency responders at the Federal Reserve inundated markets with oceans of liquidity. |
The biblical-level flooding washed away existing financial signposts… and "fundamentals" no longer appeared to matter. |
The tide rose, and all boats with it. |
The Demise of "Active" Investing and the Triumph of "Passive" Investing |
"Active" asset managers on the hunt for market inefficiencies could no longer separate winner from loser. |
The heaping majority of all actively managed stock funds have underperformed their index since 2008. |
Explains Larry Swedroe, former director of research at Buckingham Strategic Wealth: |
"While it is possible to win that game, the odds of doing so are so poor that it's simply not a prudent choice to play." |
"Passively" managed funds — contrarily — make no effort to pinpoint winners. |
They are "passive" because they sit back on their oars… and let the flowing tide lift their boat. |
They track an overall index or asset category — not the individual components. |
It is a strategy that has yielded handsome dividends in this era of rising waters. |
Passive investing has increased from perhaps 15% in 2007 to over half today's market. |
It is easy business so long as the tide continues to rise. Yet the risk is this: |
When the tide recedes… it recedes. |
Beware the Stampede |
As Freedom Financial News contributor Jim Rickards explains: |
In a bull market, the effect is to amplify the upside as indexers pile into hot stocks like [Nvidia], Google and Apple. But a small sell-off can turn into a stampede as passive investors head for the exits all at once without regard to the fundamentals of a particular stock. |
|
|
Meantime, today's hyperconnected markets are staggeringly complex — far more complex than in 1987. |
Mr. Rickards argues that this dizzying complexity leaves markets far more naked to "black swans" than odds alone suggest: |
One formal property of complex systems is that the size of the worst event that can happen is an exponential function of the system scale. This means that when a complex system's scale is doubled, the systemic risk does not double; it may increase by a factor of 10 or more… |
|
|
This kind of sudden, unexpected crash that seems to emerge from nowhere is entirely consistent with the predictions of complexity theory. Increasing market scale correlates with exponentially larger market collapses… |
|
|
No One Left to Catch the Falling Knife |
Next comes the central question: |
What happens when the critical threshold is passed… and passive investors rush the exit doors in the burning theater? |
Passive investors will be looking for active investors to "step up" and buy. The problem is there won't be any active investors left or at least not enough to make a difference. The market crash will be like a runaway train with no brakes. |
|
|
Consequently, warns Mr. Rickards: |
"This is one more reason why the next stock market crash will be the greatest in history." |
I do not know if the next stock market crash will be the greatest in history. |
There exist "circuit breakers" and other devices constructed to halt trading before the algorithms go amok… and before Chaos and Old Night can descend. |
Perhaps they may work the trick. |
Yet I would remind you that RMS Titanic was constructed with 16 watertight compartments designed to render her unsinkable. |
She sank. |
Regards, |
Brian Maher |
for Freedom Financial News |
P.S. Here at Freedom Financial News… we promise you nothing. |
That's right, we promise you nothing. No mega gains, no overnight riches. |
And we don't apologize for it. |
That's because we live in the real world. |
But that doesn't mean we lack… financial experts with rare insight who could potentially transform your finances in ways you may never have imagined. |
Here is information about a secret government meeting on October 29th — just over a week away — that could potentially enrich savvy investors 11X. |
It involves gold… and a highly unique situation that's unfolding now in the market. |
Click here now for all the urgent details. |
Post a Comment
Post a Comment