Marko Kolanovic, the global head of macro quantitative and derivatives research at the largest
U.S.-based bank, JPMorgan Chase & Co., has marked the occasion by issuing a dire scenario of
what the next financial crisis is likely to look like, CNBC reports.
Meanwhile, the current bull market will have lasted 9 1/2 years as of Sept. 9, delivering spectacular
gains during its run so far. Investors with short memories will be unprepared for the next big
shock to stock prices, increasing the odds that the next crisis will be particularly severe.
Meanwhile, since earlier this year, a number of well-known market gurus have been issuing
their own warnings that stocks are on the brink of plunging by up to 60%.
(For more, see also: Why the S&P 500 May Fall More Than 60%: Hussman.)
What The Next Crisis Will Look Like
|Sudden and severe stock selloffs|
|Unprecedented Fed actions to bolster stocks|
|Worst U.S. social unrest in 50 years|
Source: JPMorgan Chase, as reported by CNBC.
A particular source of concern for Kolanovic is the growing importance of computerized trading
and passive investing. As long as bullish sentiment held sway among investors, both these factors
helped propel stock prices to new heights. However, once sentiment pivots toward the bearish,
the lightning speed with which computerized trading algorithms operate can produce massive
selling pressure that may overwhelm the markets in fractions of a second. Moreover,
these programs tend to play follow-the-leader, with waves of selling inducing yet more waves
of selling. (For more, see also: How Algo Trading Is Worsening Stock Market Routs.)
A Soaring Stock Market
|Index||Gain Since 2009 Low|
|S&P 500 Index (SPX)||327%|
|Dow Jones Industrial Average (DJIA)||296%|
|Nasdaq Composite Index (IXIC)||531%|
Source: Yahoo Finance; gains computed from the last bear market low close on March 9, 2009
through the close on Sept. 5, 2018.
Ticking Time Bomb
According to Kolanovic, over the past decade about $2 trillion of investments have moved from actively-managed to passive funds, reducing the possibility that bargain-hunting managers
volume is driven by these and similar strategies.
danger of a "snowball effect" in which a small wave of selling rapidly becomes an avalanche.
(For more, see also: Contrarian Mark Mobius Sees a 30% Stock Plunge.)
The Great Liquidity Crisis
A plunge in stock prices is likely to cause what Kolanovic calls the Great Liquidity Crisis, with
willing buyers for stocks becoming increasingly harder to find, sending prices down yet further.
If the selloff reaches a 40% decline, he expects that the Federal Reserve will have to intervene,
to prevent the economy from slipping into a severe recession, if not a depression. This is essentially what the Fed did in 2008-09, with its massive program of quantitative easing to combat that crisis.
Rising Social Unrest
With personal wealth cratering, and pension funds becoming severely underfunded, thus threatening deep cuts to benefits, Kolanovic raises the specter of the worst social unrest in the
U.S. since 1968 as the result of a new financial crisis. That year was marked by rising discontent
over the Vietnam War, as well as the assassinations of civil rights leader the Rev. Martin Luther
King, Jr. and presidential candidate Senator Robert F. Kennedy.
Hedging His Bets
However, in an interview cited by CNBC, Kolanovic indicated that, should central banks such as
the Fed intervene successfully to prop up asset prices, the status quo is likely to be maintained.
Moreover, he sees low risk for a new financial crisis to develop until at least the second half of