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Friday, March 29, 2024

What If The “Crash” Is As Rigged As Everything Else?

Courtesy of Charles Hugh-Smith, Of Two Minds

There is an almost touching faith that markets are rigged when they loft higher, but unrigged when they crash. Who's to say this crash isn't rigged? A few things about this "crash" (11% decline from all time highs now qualifies as a "crash") don't pass the sniff test.

Exhibit 1: VIX volatility Index soars to "the world is ending" levels when the S&P 500 drops a relatively modest 11%. The VIX above 50 is historically associated with declines of 20% or more–double the current drop.

[NOTE: Zero Hedge commented on the "trade of year" earlier today – VIX calls on the Friday before Monday's bloodbath opening. Read: Betting On "The End Of The World" Just Returned 2400% In One Day:

"On Friday afternoon, while the VIX was jumping as stocks were sliding, and well ahead of Monday's brief but systemic ETF failure which led to a VIX explosion, marketwide halts and a 1000 point Dow Jones collapse, we pointed out a disturbing event: someone was aggressively buying insurance against a market catastrophe by loading up on all the VIX September 50 calls they could get their hands on. In fact as of lunch time, some 625 calls had been purchased at a price of about a dime."

~ Ilene]

When the VIX spiked above 50 in 2008, the market ended up down 57%. Now that's a crash.

 

Exhibit 2: The VIX soared and the market cratered at the end of options expiration week (OEX), maximizing pain for the majority of punters. Generally speaking, OEX weeks are up. The exceptions are out of the blue lightning bolts such as the collapse of a major investment bank.

Was a modest devaluation in China's yuan really that unexpected, given the yuan's peg to the U.S. dollar which has risen 20% in the past year? Sorry, I don't buy it.

 

 

Exhibit 3: When the VIX spiked above 30 in October 2014, signaling panic, the Federal Reserve unleashed the Bullard Put, i.e. the Fed's willingness to unleash stimulus in the form of QE 4. Markets reversed sharply and the VIX collapsed.

Now the VIX tops 50 and the Federal Reserve issues an absurd statement that it doesn't respond to equity markets. Well then what was the Bullard Put in October, 2014? Mere coincidence? Sorry, that doesn't pass the sniff test.

Why would "somebody" engineer a mini-crash and send volatility to "the world is ending" levels? There are a couple of possibilities.

1. The Shock Doctrine. Naomi Klein's landmark study of how manufactured crises are used to justify further consolidation of power, The Shock Doctrine: The Rise of Disaster Capitalism, provides a blueprint for how financial crises set the stage for policies that extend the power of central and private banks and various state-private sector players.

A soaring VIX and sudden crash certainly softens up the system for the next policy squeeze.

2. A "crash" engineered to set up a buying opportunity for insiders. When easy gains get scarce, what better way to skim a quick 10% than engineer a "crash," scoop up shares dumped by panicked punters and momo-following HFT bots spooked by "the world is ending" VIX spike, and then reverse the "crash" with another round of happy talk?

Read Zero Hedge's Cutting Through The HFT Lies: What Really Happened During The Flash Crash Of August 24, 2015:

One of the fallacies being propagated about yesterday's flash crash, is that somehow HFTs came riding in as noble white knights and rescued the market from a collapse instead of actually causing it. This particular lie is worth a few quick observations and explanations of what really happened.

[HFT firms did NOT provide liquidity during the market drop. Doug Cifu, the CEO of HFT titan Virtu (the firm which has only lost money on 1 day in 6 yearstold CNBC it wasn't Virtu's fault the market did not work as a result of countless HFT glitches: "we don't cause volatility, as a market maker we're absorbing volatility and we think we soften it."]

[…]

Anyone who actually trades (and is not part of the Modern Market initiative) knows that this precisely what happens every time there is a spike in market vol: HFTs simply walk away leading to the dreaded "HFT STOP" moment, creating a feedback loop of even less liquidity, and even more volatility, until circuit breakers are finally hit or asset prices hit limits. Yesterday, for the first time in history, not only the S&P500, but the Nasdaq and the DJIA all hit their particular "limit down" triggers.

Credit Suisse also directly refutes what Doug Cifu said: HFTs, far from not causing volatility, merely step aside when volatility surges  thus leading to such stunners as VIX soaring above 50 overnight (with the CBOE too ashamed to even report what it would have been in the first 30 minutes of trading).

[…]

While Virtu may have fabricated its role in yesterday's events, there was one truth: it had an amazingly profitable day because as a result of the total chaos, HFTs were able to frontrun block orders from a mile away and as a result of soarking bid/ask spreads, Virtu raked in millions by simply capitalizing on the chaos it and its peers have created. As Cifu said then "Our firm is made for this kind of market." We quickly corrected him: "your firm made this kind of market."

[…]

~ Read the whole article, Ilene

3. Settling conflicts within the Deep State. I have covered the Deep State for years, in a variety of contexts. For example:

Is the Deep State Fracturing into Disunity? (March 14, 2014)

The Dollar and the Deep State (February 24, 2014)

Surplus Repression and the Self-Defeating Deep State (May 26, 2015)

Without going into details that deserve a separate essay, we can speculate that key power centers with the Deep State have profoundly different views about Imperial priorities.

One nexus of power engineers a trumped-up financial crisis (i.e. a convenient "crash") to force the hand of opposing power centers. As I have speculated here before, the rising U.S. dollar is anathema to Wall Street and its apparatchiks, while a rising USD is the cat's meow to those with a longer and more strategic view of dollar hegemony.

Take your pick–here's three good reasons to engineer a "crash" that benefits the few at the expense of the many.

 

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