JP Morgan’s head of derivatives and quantitative strategy Marko Kolanovic believes that the United States is heading for a period of social unrest not seen in a half of century.
Kolanovic, who has a Ph.D. in theoretical physics, believes that we are heading towards the “Great Liquidity Crisis.” He believes at the foundation of his prediction is the growing network of computer trading algorithms which he believes will force dramatic drops in stock prices.
Kolanovic sent a 168-page report to his JP Morgan clients that included near 50 financial analysts and economists perspectives.
Kolanovic is, in layman’s terms, talking about computer algorithms that now dominate trading sectors. The algorithms can short stocks and sell-off in short order based on a series of learned triggers. These computer-driven trading models have already impacted the bottom lines of traditional traders (you know, humans).
“Flash crashes,” as Kolanovic terms them, are becoming more and more a part of our trading dynamic.
“They are very rapid, sharp declines in asset values with sharp increases in market volatility,” Kolanovic, the bank’s global head of macro quantitative and derivatives research, said in a recent interview. But those flash crashes occurred during a backdrop of a U.S. economic expansion; the new market hasn’t been tested in the throes of a recession,” he said on a CNBC interview.
“If you have these liquidity-driven sharp sell-offs that come at the end of the cycle, or maybe even causes the end of the cycle, then I think you can have a much more significant asset price correction and even more significant increase in market volatility,” he continued.
Kolanovic believes that we’ve shifted from passive investors to active investors, which causes even greater stock market tumbles whenever we have “bad news.”
If you notice, stocks now tend to tumble in more dramatic fashion than ever whenever any sort of negative news breaks. The negative news often has little to do with a company’s financial prowess, yet, the shares dump. This is active investors and computer algorithms selling the shares off based on pre-programmed triggers. Once a stock starts to dive, the active investors start selling off in a panic as well. With so many more active investors than ever, it creates an environment with a deeper sell-off potential.
“Basically, right now, you have large groups of investors who are purely mechanical,” Kolanovic said. “They sell on certain signals and not necessarily on fundamental developments, such as increases in the VIX, or a change in the bond-equity correlation, or simple price action. Meaning if the market goes down 2%, then they need to sell.”
Kolanovic believes that this environment is going to lead us into the “great liquidity crisis.”
If the market were to dump off 40% of its value, the Federal Reserve might be forced to step in and make direct purchases of equities.
“Suddenly, every pension fund in the U.S. is severely underfunded, retail investors panic and sell, while individuals stop spending,” Kolanovic said. “If you have this type of severe crisis, how do you break the vicious cycle, the negative feedback loop? Maybe you stimulate the economy by cutting taxes further, perhaps even into negative territory. I think most likely is direct central bank intervention in asset prices, maybe bonds, maybe credit, and perhaps equities if that’s the eye of the storm.”
Please read my how to survive a stock market crash guide.
Kolanovic believes that the stock market should remain strong through the first half of 2019. He believes that the Federal Reserves timing on interest rate hikes could determine exactly when the economic crash occurs.
“The next crisis is also likely to result in social tensions similar to those witnessed 50 years ago in 1968.” he says.
In 1968, you had the Vietnam war. Today, you have Trumpian politics spreading globally. You have Brexit. You have Doug Ford as the new Premier in Ontario. You have the ongoing populist takeover of Italy.
In other words, we have a climate ripe for severe and dangerous social unrest. In 1968, Senator Robert F. Kennedy and Martin Luther King Jr. were both assassinated. Today’s hostility and divisions seem much more defined and tumultuous than they were in 1968.
A financial crisis could spell a complete global reset. Always have your preppers list in the works, it is better to be prepared and not need the supplies than it is to be unprepared and without anything.
A financial crisis could spawn a civil war like none we’ve ever seen.
Author: Jim Satney
PrepForThat’s Editor and lead writer for political, survival, and weather categories.
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