The actual productive economy has very little in common
with the erratic and substantial movement in equity pricing on the major exchanges. The conditions for conducting commerce
have not appreciably changed in the last days to warrant a numerical drop of historic proportions. For the working class and
the consumer market, the price of items did not see a major drop or rise in value in this latest turmoil. Lost in the confusion
is that the professional speculators won't be playing a game of chance, they will execute their financial triggers based upon
mathematical algorithms implemented at lightning speed by super computers. The days of the "specialists" making
a market has been dead for years.
is no such tangibility as an investment when the underlying security is based upon a third party financial instrument. This
is a primary reason why the real economy must be reflected upon the actual transactions of buying and selling.
Exchange-traded funds (ETF) have been the rage for
many years. The report, Will ETFs cause the next market crash?, hedges on their answer.
Claim 1: ETFs are blindly pushing up stock prices
US based fund manager FPA capital called ETFs “Weapons
of Mass Destruction” and stated “The flood of money into passive products is making stock prices move in lockstep
and creating markets increasingly divorced from underlying fundamentals”.
Claim 2: ETFs will sell on mass and compound
One of the known weaknesses of a managed fund structure is the ability for investors to fairly easily redeem their
funds, meaning at times of market falls, when a fund manager may find the best investment opportunities, the investors in
the fund are panicking and redeeming their investments, meaning the fund manager becomes a forced seller rather than a buyer.
Claim 3: ETFs
with low liquidity will be hard to sell if markets fall
In a free falling market it may be difficult for the market maker to price the
underlying investments forcing them to create a huge spread between the buy and sell price to protect their margins. This
was seen in the 2015 Dow Jones ‘Flash Crash’, where some ETFs dropped 30% when the market makers were unable to price the underlying securities.
Claim 4: ‘Exotic’ ETFs are
ETFs are generally referred to as ‘Synthetic’ or ‘Hedge fund’ in their title. Cunningham raised the
risk that the counterparty may default on their obligation, so an additional level of risk exists for the investor.
The risk to securities stability is profound from
such funds, especially when Carl Icahn calls BlackRock a 'dangerous' company, cites ETF concerns and the computers only accelerate and hasten artificial movements away from the genuine business activities in the bread
and butter economy. “They sell liquidity,” Icahn said in reference to BlackRock’s ETF business. “There
is no liquidity. That’s my point. And that’s what’s going to blow this up.”
Now even if this precarious system can deal with the volatility on a short term
basis, what happens when the overload cannot be tripped by circuit breakers? The machines have proven over the years that
many mini crashes are synthetic occurrences, and that the buyer of last resort becomes the Federal Reserve.
In a relatively new departure of its functions the Central Banks' Massive Incursion Into Buying Stocks is a sign of desperation.
"Their incursion into this bastion of the free markets signals we have entered the era where true price discovery
no longer exists. The central banks are often viewed as price-insensitive buyers, so this incestuous influx of money is in
some ways the ultimate distortion. This is especially true when the markets are not deep enough to accommodate the size of
these purchases. Over the years, global currency reserves have grown and this has increased pressure on central-bank managers
to diversify them, moving from being a liquidity manager to focusing on investment management but with this comes risk."