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Marc Faber & The Fed Warn of 1987 Style Crash


Marc Faber: Look out! A 1987-style crash is coming

 

Fed Warns Leveraged ETFs Could Trigger 1987-Style “Cascade” In Stocks

In a 43-page research report, the Federal Reserve has authored a rather concerning tome warning that the mechanical positive-feedback rebalancing of Leverage ETFs (LETFs) resembles the portfolio insurance strategies, which contributed to the stock market crash of October 19, 1987. The impact of LETFs on broad stock-market indexes become significant during periods of high volatility (shown empirically in 2008/9 and H2 2011) as they show that LETF rebalancing in response to a large market move could amplify the move and force them to further rebalance which may trigger a “cascade” reaction. Furthermore, executing orders within a short period of time, such as the last hour of trading, may cause disproportionate price changes (especially in financial stocks). The Fed warns that a significant price reduction at market close may also impair investor confidence with accelerating depressed prices at the close potentially driving large investor outflows overnight.

 

ETF-rebalancing implied price effects are most egregious at times of stress…

http://www.zerohedge.com/news/2013-08-12/fed-warns-leveraged-etfs-could-trigger-1987-style-cascade-stocks

 

October – market crash month !

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