If you have not yet read Has “It” Finally Arrived?, available free to all readers, please click here to read it first.

What A “Market Crash” Really Means

The risk that comes from the bursting of a credit cycle is financial market disruption that causes prices to dislocate.  In 2008 that meant the utter inability to move certain credit and derivative products within the banking ecosystem which led to the downfall of Bear Stearns and Lehman Brothers. 

In turn those failures helped to nearly precipitate the systemic collapse of the banking system.  It got so bad that even high level bank CEOs were taking cash out of ATMs because they simply didn’t know if their won banks would be open in the morning.

Lots of changes were made to try and prevent such a thing from happening again, but many of these are counterproductive. 

In talking about Trump’s criticism of Powell, Chris Whalen of The Institutional Risk Analyst wrote several scathing critiques of the ways the Fed has indeed destroyed the markets, but it was his third point that really caught my attention:

Third is the real issuing bothering President Trump, even if he cannot find the precise words, namely liquidity.  We have the illusion of liquidity in the financial markets today.

Sell Side firms are prohibited by Dodd-Frank and the Volcker Rule from deploying capital in the cash equity and debt markets.  All bank portfolios are now passive.  No trading, no market making.  There is nobody to catch the falling knife.

The only credit being extended today in the short-term markets is with collateral.  There is no longer any unsecured lending between banks and, especially, non-banks.

As we noted in The Institutional Risk Analyst earlier this week, there are scores of nonbank lenders in mortgages, autos and consumer unsecured lending that are ready to go belly up.  Half of the non-bank mortgage lenders in the US are in default on their bank credit lines.  As in 2007, the model builders at the Fed in Washington have no idea nor do they care to hear outside opinions.

(Source)

There’s nobody to catch a falling knife.  Everybody has abdicated to the idea of an untested ecosystem of computer algorithms being first, last and only line of defense.  It’s kind of binary; it either works or it doesn’t.

It’s also untested. 

So the risk here, which is impossible to quantify, is that someday things go a bit haywire, something (or a whole lot of somethings) go out of parameter and the computers go dark.

What happens then?

First, we'll see………(Enroll to continue reading the full report)