FLASH CRASH on Steroids!

Most investors think that even if things go downhill fast that they will be smart enough to get out of the markets. After the debacle in 2008 where they saw the market do nasty and violent swings they learned a few things, this time they will make the right moves before it is to late. But what if it hits like the flash crash on steroids? We know that can't happen because circuit breakers have been put in place to arrest panic style moves.but imagine a market that falls, trade is halted, and the market simply does not reopen for days, or even weeks.

For a long time I have been trying to develop a scenario for a market crash and a reasonable map that would arrive at such a situation. To say I'm negative about this economy is a gross understatement. I saw the last housing bubble coming and predicted the crash in my book Advancing Time. We have never recovered from the Great Recession. By printing money, imploding interest rates, and exploding the Federal Governments deficit we have only delayed the "big one".

I recently came upon these two quotes on macroeconomic stabilization and crisis. First, from Macresilience;

"As Minsky has documented, the history of macroeconomic interventions post-WW2 has been the history of prevention of even the smallest snap-backs that are inherent to the process of creative destruction. The result is our current financial system which is as taut as it can be, in a state of fragility where any snap-back will be catastrophic."

And next from Nassim Taleb (author of The Black Swan);

"Complex systems that have artificially suppressed volatility tend to become extremely fragile, while at the same time exhibiting no visible risks. In fact, they tend to be too calm and exhibit minimal variability as silent risks accumulate beneath the surface. Although the stated intention of political leaders and economic policymakers is to stabilize the system by inhibiting fluctuations, the result tends to be the opposite."

These quotes suggest an analogy with ideas about forest management when natural fires are suppressed. If random fires do not periodically clear away forest underbrush, we see a build-up of flammable material sufficient to power a massive conflagration. I certainly think an equivalent truth applies to financial markets. The longer it has been since a painful collapse, the greater the willingness to pile on leverage and complexity, such that the next crisis becomes unmanageably awful. The "To Big To Fail" and other policies implemented since 2008 have laid the groundwork for "The Big One" 

By not taking steps to correct many of our ills in a way we have made things worse. We have not made the structural changes necessary for our economy to become sustainable. We have put band-aid upon band-aid, upon band-aid while what was necessary was the amputation of a diseased limb. After all the threats that this market has avoided, and sidestepped, it is possible that many now think of it as invincible. This market has overcome the death of the euro, the financial cliff, and the end of Greece as we knew it. My studies in micro-economics, and observations in the current real-estate market, both as a owner and hands on landlord allows me to predict, we ain't seen nothing yet!


Footnote; These low interest rates come at a price, a dark side exist, in the long run the benefits they bring may be out weighed by  the distortions they cause. For more on the subject please see the post below,

                       http://brucewilds.blogspot.com/2013/03/low-interest-rates-and-their-cost.html