ROUBINI: A market ‘time bomb’ is raising the risk of a dramatic collapse

Monday, June 1, 2015
By Paul Martin

MIKE BIRD
BusinessInsider.com
JUN. 1, 2015

Nouriel Roubini, one of the few prominent economists credited with predicting the 2008 financial crisis, thinks more trouble could be just around the corner.

Roubini’s latest piece over at Project Syndicate is a warning particularly about the low levels of market liquidity:

A paradox has emerged in the financial markets of the advanced economies since the 2008 global financial crisis. Unconventional monetary policies have created a massive overhang of liquidity. But a series of recent shocks suggests that macro liquidity has become linked with severe market illiquidity.

That’s a slightly wonkish way of saying not enough money is moving in markets at any one time. That means small changes in positions can have much bigger changes on asset prices — small corrections become big corrections, and big corrections can become crashes.

Here’s Roubini again:

And yet investors have reason to be concerned. Their fears started with the “flash crash” of May 2010, when, in a matter of 30 minutes, major US stock indices fell by almost 10%, before recovering rapidly. Then came the “taper tantrum” in the spring of 2013, when US long-term interest rates shot up by 100 basis points after then-Fed chairman Ben Bernanke hinted at an end to the Fed’s monthly purchases of long-term securities.

The Rest…HERE

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