“Having over 40% of all the money in the market being managed by computers gives a huge boost to returns during a bull market. But when the selling starts, computers don’t think. Their algorithms will automatically sell and flash crashes will abound. Once fear replaces greed, the wave of computer selling will overwhelm those trying to actively manage their portfolios. Then the record level of margin debt will result in margin calls and a further wave of selling. The clueless 401k investor will see their retirement savings sliced by 40% in the blink of an eye.
It’s not a matter of if, but when the tsunami of selling will make the 2008 crisis look like a walk in the park. There are numerous other potential triggers which could cause or exacerbate the next financial crisis. Excess leverage always creates catastrophe. When you have $8 trillion of emerging market debt, a rising dollar, rising interest rates, and record low risk premiums, the fuse on the fireworks has already been lit.
We know the 2008 crisis was primarily driven by the implosion of subprime mortgage debt and derivatives of mass destruction tied to those mortgages. Talking heads on CNBC and spokes-models on Bloomberg are nonchalant about record high home prices because the amount of subprime mortgages is much lower than 2008. What they fail to acknowledge is the immense issuance of subprime auto, credit card, corporate, and student loan debt to borrowers incapable of repaying that debt.” – Jim Quinn, in his The Burning Platform blog