Wednesday, April 13, 2016

Marginal players are getting hit the first and the worst.

For many years I have written that when the end of the global debt Ponzi hits us that there will be noticeable signs heralding its arrival.  One of these signs was that markets which everyone thought to be robust and heavily traded will be exposed to be very thinly traded.  Volatility will increase and so will bid/ask spreads.  Why???  Because "liquidity" is an elitist code word for debt.  When the ability to take on cheap and easy debt to trade with is diminished, less players will be available for the markets.  The market maker will have no choice but to let spreads rise again to 1950s levels.  It used to be that you would have to go half, quarter or eight of a point in spread to buy or sell.  I can still remember reading the stock quote pages in the newspaper as a kid where everything was expressed in fractions.

Then as the debt Ponzi increased the liquidity, the spread on pretty much everything went down to 1-2 cents.  Market makers, who were normally the beneficiary of large spreads, made up the difference in volume.  But as the volume dies, people's piddling $10 will hardly be worth collecting on low volume.  Brokers/market makers will increase the cost of trading going forward and it will drive the day traders back into real jobs. The reduced liquidity will result in larger spreads.  Nobody and I mean nobody out there is predicting this because they really haven't been able to pull themselves out of time, step back, and look at the big picture including where we used to be and the factors that got us here.

Keep an eye out for increased cost of trading, reduced volume, loss of public interest in the stock market, the collapse and BK of outfits like CNBC and other financial specific media.  Not overnight, but coming in like the tide: slow but steady.  As these things occur, the markets will become more and more risky to play in. 

Today's story about this subject can be read here.  The details of the story are just noise.  The only thing worth taking away and thinking about is the direction of travel.

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