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AGelbert

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    • Agelbert Truth AND Consequences
Re: Money
« Reply #300 on: February 05, 2018, 02:12:42 pm »
The Ghost 🌠 Of 1987

by Tyler Durden

Mon, 02/05/2018 - 13:54

SNIPPET:

The Fed and the algos: a toxic combination

What becomes to the options of the Fed to respond to a similar crash, the things are rather different now. In 1987, the Fed quickly dropped its fund rate to 7 percent from 7.5 and injected reserves to markets. Now, a 50 -basis point cut in the federal fund rate would take the rate back to the range 0.5 – 0.75, which would likely have a very limited effect of the short-term rates. The Fed has also been pumping massive amounts of liquidity in the markets through its QE program. While re-starting the program would surely provide some temporary relief, there is no certainty that it would be enough to stem the panic; moreover so, because the program trading has a much bigger role now than in 1987.


In the 1980s, the main innovation in the program trading was the portfolio insurance, where the computer models were used to optimize the stock-to-cash ratios at various market prices. Most of the portfolio insurers used the futures market, which was likely to increase the downward pressure of the stock prices during the fall. Currently, the automatic trading is much more widespread. It is estimated that around a half of all trading in the US stock markets is executed by algorithms.

Also, it is estimated that ETFs, the risk parity funds and the volatility target funds hold some $8 trillion of the so called passive private assets. They have contributed to the uninterrupted upward trend in the equity markets, but their behavior in a large market correction is untested. When a deep enough correction is reached, the algos are likely to start to sell and short the market and the ETFs and other funds will start to lose value en masse. This will turn their passive assets very active to the sell side. When this point is reached, selling in the markets is likely to morph into a rapid crash halted only by the circuit breakers.

To make things more alarming, the global economic situation resembles more the time before the Great Depression than before the crash of 1987. This makes it possible that, if a stock market crash occurs, it will start a path towards a global depression🌠. Thus, after nearly a decade of central bank induced market manipulation, we may finally be closing to the point where the Abyss starts to gaze back at us.

     


Full article:

https://www.zerohedge.com/news/2018-02-04/ghost-1987
Leges         Sine    Moribus     Vanae   
Faith,
if it has not works, is dead, being alone.

 

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