Flash Crash Ahead
A cura di Walter Snyder, Swiss Financial Consulting
About 60% of stock market transactions are now coming from computers fed with algorithms based on great quantities of data. That may account for the extremely low volatility registered recently as competing algorithms buy and sell, trying to eke out profits from minimum movements in prices. Another factor is the policy of many companies implementing stock buyback programmes that benefit shareholders and reward executives by keeping the shares of the company at ever higher prices even though earnings do not justify the rise in the stock price.
The fact that computers work at very high speeds and very quickly, namely, in nanoseconds, means that if a large number of computers react to each other, price changes can take place very quickly. In fact there have been some flash crashes that seem to be unexplainable as the crash is not connected to any geopolitical event.
The low-interest environment prevailing since 2008 has brought about a difficult situation for pension funds and insurers. Many pension funds are underfunded while insurers find their margins unsatisfactory. Governments, on the other hand, benefit from ZIRP and low interest rates as that means that the cost of servicing their national debt is lower than it would be with a “normal” interest rate.
The recent record highs on the stock market with Apple in the lead seem to reinforce the bullish viewpoint that the rally is going to go on for a lot longer. Algorithms buy the dips and thus prevent any disastrous developments while the central banks stand by ready to buoy up the market like the PBoC when the Shanghai market was wavering.
In the US a lot of hard data that is not particularly promising hardly justifies the upward trend of the stock market. In fact analysts now base their views on projected future earnings and not the data of the most recent quarter. Even so there are numerous economists and commentators who assert that the market is overpriced and a correction or crash is looming.
Some even believe that the next crash is going to be worse than 2008 because of the high indebtedness of countries and companies. All this is taking place against a backdrop of increased tension between the US with both Russia and North Korea as the threat of a nuclear war is greater than it has been in many decades.
This Newsletter has predicted that September and October will be critical months. France will be lamed with strikes when the vacationers return to work and Mrs Merkel will be re-elected in Germany. We shall see what happens to stocks.