What if everybody in the market recognizes it’s now the minute to front-run the crash?
We have a fine-sounding word for running with the herd: momentum. When the herd is running, those who purchase what the herd is buying and sell what the herd is selling are trading momentum, which sounds so much more professional and high-brow than the noisy, dirty picture of big mammals (and their trading machines) mindlessly running with the herd.
We also have a fine-sounding expression for anticipating where the herd is running: front-running. So when the herd is running into stocks, those who buy stocks simply ahead of the herd are front-running the market.
When the Federal Reserve announces that’s it’s going to make billionaires even wealthier with some brand-new financial spew, those betting that stocks will never decrease because the Fed has our back are front-running the Fed.
There are 2 remarkable assumptions at the heart of momentum and front-running: The momentum herd and those front-running the herd base their behavior on the assumption that there will always be other rich people who will offer all the shares they want to purchase today’s prices prior to the run-up to brand-new highs.
Considering that only rich individuals own stocks, we understand that those selling stocks are selling to other abundant people and those purchasing stocks are purchasing from other rich individuals. So the assumption of those front-running the market is that there is a large adequate sub-herd of rich individuals who for whatever factor aren’t clever enough to front-run the herd, and who will mistakenly sell their stocks just before they double in worth.
The second assumption is that there will likewise be a large adequate sub-herd of abundant people who will buy all the shares they want to cost the top, right before the bubble pops and the worth of the recently bought shares falls in half.
There are different ways to state this, however the bottom line is that momentum and front-running are only rewarding if you cost the top, just before the bubble bursts. You would be forgiven for preparing for that the exact same sub-herd front-running the herd and the Fed en route approximately the top of the bubble would be simply as prescient and active in front-running the inescapable bursting of the bubble, however this is not how running with the herd works.
Brief interest recently plumbed multi-year lows, showing that very few are front-running the market crash.
Those trading momentum and front-running the herd/Fed are making an impressive assumption, a presumption which shows up in a fantastic volume of financial-media content: the stock market, we’re informed, will continue to make new highs like clockwork up until some point in the 3rd or fourth quarter, at which point there may well be a spot of trouble, i.e., a crash.
The presumption is that all the abundant individuals who own stocks will be so splendidly stupid that they will hold their shares till the crash and after that offer them at prices far lower than they can fetch today. Put another way, the marketplace individuals who decide this is close enough to the leading to liquidate their positions today and not linger for the crash to clean them out assume that the herd of other rich people who will be thrilled to buy their insanely overvalued shares at today’s rates is big enough to absorb all their selling with no downward pressure on evaluations.
To put it simply, the presumption being made is: I can wait until right before the crash to offer, since there will be tons of splendidly dumb rich people who will purchase all the shares I want to sell at today’s lofty costs– or higher, and this liquidation will not press appraisals off a cliff.
As a general guideline, individuals do not all become rich by being splendidly foolish, i.e., failing to expect what other rich people will do, therefore this raises the concern: what if everybody in the market realizes it’s now the moment to front-run the crash?
Maybe Wile E. Coyote could provide some beneficial viewpoint on what takes place next.
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