Downward spiral in liquidity is leading to more market shocks

Sudden droughts exacerbate rising episodes of stress for investors

Rishabh Bhandari 

     © James Steidl/Dreamstime

Broad market liquidity — the ease with which investors can buy or sell a security without affecting its price — has been in a downward spiral for more than 10 years.

Look, for example, at what has happened to trading in futures contracts on the S&P 500 index — typically the world’s most liquid equity index futures. 

Over the past decade their liquidity, as measured by market depth, has collapsed by around 90 per cent. 

This pattern is repeated across asset classes and regions.

Depth is broadly a measure of the market’s ability to absorb flows without meaningful price impact in the underlying security. 

More specifically, it denotes the number of shares or contracts available on the bid or offer on a security at any point in time.

The decline in liquidity coincides with a huge increase in the number and magnitude of “volatility shocks” — defined as daily moves of more than 5 percentage points in the Vix Index which measures markets’ expectations of volatility. 

Between 1994 and 2007, there were nine. 

In the years since the 2008-09 financial crisis, there were 62.

More significantly, market liquidity has started to behave like sand — the tighter you try to grip it, the faster it slips through your fingers. 

Just when demand for liquidity is greatest, especially during periods of stress, it has tended to drain away. 

So not only is liquidity low, it has also become fragile and unreliable.

There are many reasons for these sudden droughts. 

The past decade has seen a proliferation of computer-driven, quantitative strategies driven by rules or market signals. 

The huge shift of assets into systematic and passive vehicles has reduced the scope for active managers to step in during periods of stress and provide liquidity. 

Instead, these systematic and passive strategies are constrained by their algorithms.

Tighter banking regulation has compounded the problem, radically reducing the capacity for large broker-dealers to assume risk. 

As a result, the investing world has lost access to some of the liquidity once provided by these banks.

Another key issue is that the market makers’ role has been largely taken over by bots running high-speed algorithms. 

Empirical observations suggest that these bots typically respond to any increase in the volatility of the underlying asset by progressively withdrawing liquidity.

There may well be additional reasons, but it is undeniable that we are now in a different and much less liquid market regime than the one in which many investors grew up.

Should they care? 

The short answer is yes and the reason is volatility — the flipside of the liquidity coin. 

Low liquidity means that the market now struggles to transfer risk efficiently from one participant to another. 

When an investor sells an asset, their sale can result in a price fall that triggers limits on trading positions known as ‘stop-losses’, forcing further sales. 

Lower liquidity, therefore, tends to amplify moves and exacerbate volatility.

But increased volatility resulting from lower liquidity is seen not only in asset prices. 

Price spreads that were once stable, for example between the Nasdaq 100 and Russell 2000 Indices for US shares, have become much more volatile in recent years. 

Relative moves between these two have increased materially over the past two years, highlighting the impact that low liquidity can have on current market trends.

What does this imply for markets? 

It means that more bubbles are likely, following those we have recently witnessed in cryptocurrencies, penny stocks, certain large caps and special purpose acquisition companies, as price moves are amplified by poor and fragile liquidity. 

Equally, it suggests that during periods of market stress, low liquidity is likely to create self-fulfilling panics that will exacerbate drawdowns.

To navigate this landscape successfully, investors must first recognise these liquidity risks. 

Second, they must understand that in this new environment, investor positioning — whether speculative, passive or systematic — and technical factors are more important in determining short-term moves in asset prices than market fundamentals.

Above all, given that liquidity and volatility are two sides of the same coin, it is more important than ever to understand and manage portfolio volatility.

For investors who want to play defence to avoid making tough or bad decisions during potentially brief periods of turbulence, hedging volatility with financial instruments is critical. 

For investors who want to play offence, more frequent bursts of volatility provide opportunities for returns during stress episodes.

The writer is senior portfolio manager at Capstone Investment Advisors

Downward spiral in liquidity is leading to more market shocks | Financial Times (


By Egon von Greyerz

When will the wax melt that holds up the global economy? 

Hubris is driving humans and markets ever higher and closer to the sun. 

The higher everything goes, the greater the risk that the wax melts and the wings that are supporting the global economy just fall off and everything crashes to the ground.

Investing successfully is primarily about managing risk rather than maximising profits. 

As we reach the end of the biggest bull market in history, investors feel so secure that risk has become an irrelevance.


The Hocus Pocus system of finance has offered total downside protection for investors for 1/2 a century. 

The last big crash that affected a whole generation was the 1929 crash. 

After a 90% fall in the Dow, it took 1/4 of a century to recover to the 1929 high.

But since Nixon caused the Hocus Pocus system to thrive from 1971, all major crashes have quickly retraced to new highs. 

The Dow has fallen 40-60% in 1973, 1987, 2000, 2008 and 2020. 

But instead of taking 25 years to recover like after the 1929 crash, no retracement since 1971 has taken more than 2 years.

This is the beauty of Hocus Pocus finance. 

Through printing and credit expansion you create unlimited access to liquidity for the big investors. 

Virtually no funds reach ordinary people who need it but instead the Hocus Focus system rewards the Croesus investors which means the haves get more and the have nots become relatively much poorer.

As the graphs below show, the bottom 50% hold 0.6% of corporate equities and Mutual Funds whilst the top 1% hold over 52%.

Income inequality is also expanding with the top 10% of earners getting just below 50% of income. 

As the graph shows, Europe is more egalitarian.


The inequality of wealth and income can correct itself in two distinct ways.

Either a revolution like in France in the late 1700s or Russia in the early 1900s. 

This would lead to a general fall in economic activity and redistribution of wealth in a new Marxist system. 

Asset markets would crash leading to everyone being worse off until Marxism is rejected by the people. 

In Russia that process took around 70 years last time.

The other way is a collapse of asset markets leading to a massive wipeout of the wealth of the rich. 

The poor would also be worse off due to the general deterioration in the economy.


So coming back to when the wax holding the world economy precariously together actually melts, let’s return to the Greek mythology.

Daedalus and his son Icarus were imprisoned by King Minos in the Labyrinth that Daedalus had built. 

The only way out was to fly and Daedalus came up with the idea to make bird wings that were attached to their bodies with wax. 

They managed to flee from the labyrinth using their wings. 

Icarus had been warned by his father not to fly too close to the sun as the wax would melt and he would crash. 

But carelessness and hubris couldn’t stop Icarus from reaching ever higher until the wax melted and he crashed to his death.

As the Everything Bubble is flying closer to the sun, the risk of the wax melting is growing exponentially.

The wax holding it all together needs a number of ingredients, to stick such as:

- Confidence – even if false,

- Hubris

- Propaganda

- Fake promises,

- Zero or negative interest rates

- Fake news

- Manipulation

- Corrupt financial system

- Debasement of money and purchasing power

- Fiscal deficits

- Ever increasing debt & credit

 - Unlimited money printing

Take away one or two of these ingredients and the wax will start melting and the whole global economy crash to the ground.

But who really cares about the wax that holds the world economy together. 

I and a few others have written about the problems we see and the risks we perceive. 

Also we discuss the consequences that will affect most people.

But whilst some of us believe that our message is of vital importance to everyone, we are sadly only reaching a minuscule minority of people.  

As the  income and wealth graphs show above, even in the Western world, most people have no assets to protect and an income that barely covers their daily outgoings.


As I often stress normal people without major savings can still buy gold and silver for wealth preservation. 

With 1 gram of gold costing $60 and an ounce of silver $30 virtually everyone can put some savings into precious metals. 

If the Venezuelans had done that 20 years ago with very small money, that would have saved them from total destitution.

I sometimes hear from people who are poor investors and even worse traders. 

These are people who are victims and never take responsibility for their own actions.

Even worse, they buy at the top and sell at the bottom. 

And then they are experts in the most exact of all sciences, namely HINDSIGHT!

“I should have bought Bitcoin at $10 or $100 instead of buying gold in 2011”.

Sadly these are people who will never make money consistently on anything since they can’t take responsibility for their own actions.

Also, they don’t comprehend that the primary purpose of holding gold or silver is to protect your wealth against the wax melting i.e. the massive risks of the everything bubble crashing to the ground

Precious metals principal role is wealth preservation or insurance against a rotten financial system and a constant debasement of currencies until they reach ZERO as the table below shows.


Technically, the precious metals are going through a minor correction which probably will not last much longer. 

The next move will be to $1,950 for gold on the way to $3,000 initially. 

Silver is likely to soon reach $30 on the way to $50 and beyond.

These prices are probable medium term targets on the way to much higher levels as the currency system collapses.

Holding gold and silver is imperative to protect against the next currency debasement which will be ruinous.

Long term, gold looks extremely strong technically as the chart in this article shows. 

But I must stress again that investors should not focus on price but on long term insurance and wealth protection.


Another factor which will drive the gold price is institutional gold investing for primarily inflation protection purposes. 

The latest pension fund to buy physical gold and store it in private vaults outside the banking system is CPEV for the canton of Vaud. 

They have switched out of hedge funds and into $600 million of physical gold.

Swiss institutions understand the importance of holding gold in physical form  outside the banking system rather than holding futures or gold ETFs.

I have explained the dangers of holding gold ETFs in this article from last year.

We are also advising clients not to hold gold in any bank, not even a Swiss Bank.


What institutions appreciate with physical gold is that it represents instant liquidity.

Over $180 billion of gold (mostly paper gold) is traded every day. 

Gold can be bought and sold around the clock at the quoted spot price plus a small margin for physical delivery.


Switzerland is the primary gold hub of the world. 

Over 70% of all the gold bars in the world are refined in Switzerland. 

Gold is 29% of Swiss exports and thus strategically important.

It is critical that investors have direct access to their own gold bars in the vault without passing through an intermediary as this would represent an undesirable counterparty risk.

Also, any intermediary organising the purchase and storage of the gold should be a Swiss company. 

Holding gold in Switzerland organised by for example a US or UK company adds a layer of jurisdictional risk.

All gold held in Swiss private vaults are subject to Swiss regulatory control and compliance. 

Gold which does not comply with the fiscal laws of the beneficial holder is not accepted by any vault.

Swiss private gold vaults have no reporting requirements to any country. 

This protects the confidentiality of the holder. 

They Relied on Chinese Vaccines. Now They’re Battling Outbreaks.

More than 90 countries are using Covid shots from China. Experts say recent infections in those places should serve as a cautionary tale in the global effort to fight the disease.

By Sui-Lee Wee 

A funeral in Kudus, Indonesia, in May. Many of the countries that are experiencing fresh coronavirus outbreaks despite high inoculation rates relied on Chinese-made vaccines.Credit...Antara Foto/via Reuters

Mongolia promised its people a “Covid-free summer.” 

Bahrain said there would be a “return to normal life.” 

The tiny island nation of the Seychelles aimed to jump-start its economy.

All three put their faith, at least in part, in easily accessible Chinese-made vaccines, which would allow them to roll out ambitious inoculation programs when much of the world was going without.

But instead of freedom from the coronavirus, all three countries are now battling a surge in infections.

China kicked off its vaccine diplomacy campaign last year by pledging to provide a shot that would be safe and effective at preventing severe cases of Covid-19. 

Less certain at the time was how successful it and other vaccines would be at curbing transmission.

Now, examples from several countries suggest that the Chinese vaccines may not be very effective at preventing the spread of the virus, particularly the new variants. 

The experiences of those countries lay bare a harsh reality facing a postpandemic world: The degree of recovery may depend on which vaccines governments give to their people.

In the Seychelles, Chile, Bahrain and Mongolia, 50 to 68 percent of the populations have been fully inoculated, outpacing the United States, according to Our World in Data, a data tracking project. 

All four ranked among the top 10 countries with the worst Covid outbreaks as recently as last week, according to data from The New York Times. 

And all four are mostly using shots made by two Chinese vaccine makers, Sinopharm and Sinovac Biotech.

“If the vaccines are sufficiently good, we should not see this pattern,” said Jin Dongyan, a virologist at the University of Hong Kong. 

“The Chinese have a responsibility to remedy this.”

A vaccination on Chiloé Island, Chile. In Chile, the Seychelles, Bahrain and Mongolia, 50 to 68 percent of the populations have been fully vaccinated.

A vaccination on Chiloé Island, Chile. 

In Chile, the Seychelles, Bahrain and Mongolia, 50 to 68 percent of the populations have been fully vaccinated.Credit...Alvaro Vidal/Agence France-Presse — Getty Images

Scientists don’t know for certain why some countries with relatively high inoculation rates are suffering new outbreaks. 

Variants, social controls that are eased too quickly and careless behavior after only the first of a two-shot regimen are possibilities. 

But the breakthrough infections could have lasting consequences.

In the United States, about 45 percent of the population is fully vaccinated, mostly with doses made by Pfizer-BioNTech and Moderna. 

Cases have dropped 94 percent over six months.

Israel provided shots from Pfizer and has the second-highest vaccination rate in the world, after the Seychelles. 

The number of new daily confirmed Covid-19 cases per million in Israel is now around 4.95.

In the Seychelles, which relied mostly on Sinopharm, that number is more than 716 cases per million.

Disparities such as these could create a world in which three types of countries emerge from the pandemic — the wealthy nations that used their resources to secure Pfizer-BioNTech and Moderna shots, the poorer countries that are far away from immunizing a majority of citizens, and then those that are fully inoculated but only partly protected.

China, as well as the more than 90 nations that have received the Chinese shots, may end up in the third group, contending with rolling lockdowns, testing and limits on day-to-day life for months or years to come. 

Economies could remain held back. 

And as more citizens question the efficacy of Chinese doses, persuading unvaccinated people to line up for shots may also become more difficult.

One month after receiving his second dose of Sinopharm, Otgonjargal Baatar fell ill and tested positive for Covid-19. 

Mr. Otgonjargal, a 31-year-old miner, spent nine days in a hospital in Ulaanbaatar, the capital of Mongolia. 

He said he was now questioning the usefulness of the shot.

“People were convinced that if we were vaccinated, the summer will be free of Covid,” he said. “Now it turns out that it’s not true.”

Xi Jinping, China’s leader, pledged to deliver a Chinese vaccine that could be easily stored and transported to millions of people around the world. He called it a “global public good.”Credit...Andrea Verdelli/Getty Images

Beijing saw its vaccine diplomacy as an opportunity to emerge from the pandemic as a more influential global power. 

China’s top leader, Xi Jinping, pledged to deliver a Chinese shot that could be easily stored and transported to millions of people around the world. 

He called it a “global public good.”

Mongolia was a beneficiary, jumping at the chance to score millions of Sinopharm shots. 

The small country quickly rolled out an inoculation program and eased restrictions. 

It has now vaccinated 52 percent of its population. 

But on Sunday, it recorded 2,400 new infections, a quadrupling from a month before.

In a statement, China’s Foreign Ministry said it did not see a link between the recent outbreaks and its vaccines. 

It cited the World Health Organization as saying that vaccination rates in certain countries had not reached sufficient levels to prevent outbreaks, and that countries needed to continue to maintain controls.

“Relevant reports and data also show that many countries that use Chinese-made vaccines have expressed that they are safe and reliable, and have played a good role in their epidemic prevention efforts,” the ministry said. 

China has also emphasized that its vaccines target severe disease rather than transmission.

No vaccine fully prevents transmission, and people can still fall ill after being inoculated, but the relatively low efficacy rates of Chinese shots have been identified as a possible cause of the recent outbreaks.

The Pfizer-BioNTech and Moderna vaccines have efficacy rates of more than 90 percent. 

A variety of other vaccines — including AstraZeneca and Johnson & Johnson — have efficacy rates of around 70 percent. 

The Sinopharm vaccine developed with the Beijing Institute of Biological Products has an efficacy rate of 78.1 percent; the Sinovac vaccine has an efficacy rate of 51 percent.

The Chinese companies have not released much clinical data to show how their vaccines work at preventing transmission. 

On Monday, Shao Yiming, an epidemiologist with the Chinese Center for Disease Control and Prevention, said China needed to fully vaccinate 80 to 85 percent of its population to achieve herd immunity, revising a previous official estimate of 70 percent.

Data on breakthrough infections has not been made available, either, though a Sinovac study out of Chile showed that the vaccine was less effective than those from Pfizer-BioNTech and Moderna at preventing infection among vaccinated individuals.

A representative from Sinopharm hung up the phone when reached for comment. Sinovac did not respond to a request for comment.

William Schaffner, medical director of the National Foundation for Infectious Diseases at Vanderbilt University, said the efficacy rates of Chinese shots could be low enough “to sustain some transmission, as well as create illness of a substantial amount in the highly vaccinated population, even though it keeps people largely out of the hospital.”

Mongolia now ranks among the top countries that have fully vaccinated its population, inoculating about 52 percent of its people. But on Sunday, it recorded 2,400 new infections, quadrupling from a month before.Credit...Khasar Sandag for The New York Times

Despite the spike in cases, officials in both the Seychelles and Mongolia have defended Sinopharm, saying it is effective in preventing severe cases of the disease.

Batbayar Ochirbat, head researcher of the Scientific Advisory Group for Emergencies at Mongolia’s Ministry of Health, said Mongolia had made the right decision to go with the Chinese-made shot, in part because it had helped keep the mortality rate low in the country. 

Data from Mongolia showed that the Sinopharm vaccine was actually more protective than the doses developed by AstraZeneca and Sputnik, a Russian vaccine, according to the Health Ministry.

The reason for the surge in Mongolia, Mr. Batbayar said, is that the country reopened too quickly, and many people believed they were protected after only one dose.

“I think you could say Mongolians celebrated too early,” he said. “My advice is the celebrations should start after the full vaccinations, so this is the lesson learned. There was too much confidence.”

Some health officials and scientists are less confident.

Nikolai Petrovsky, a professor at the College of Medicine and Public Health at Flinders University in Australia, said that with all of the evidence, it would be reasonable to assume the Sinopharm vaccine had minimal effect on curbing transmission. 

A major risk with the Chinese inoculation is that vaccinated people may have few or no symptoms and still spread the virus to others, he said.

“I think that this complexity has been lost on most decision makers around the world.”

In Indonesia, where a new variant is spreading, more than 350 doctors and health care workers recently came down with Covid-19 despite being fully vaccinated with Sinovac, according to the risk mitigation team of the Indonesian Medical Association. 

Across the country, 61 doctors died between February and June 7. Ten of them had taken the Chinese-made vaccine, the association said.

The numbers were enough to make Kenneth Mak, Singapore’s director of medical services, question the use of Sinovac. 

“It’s not a problem associated with Pfizer,” Mr. Mak said at a news conference on Friday. 

“This is actually a problem associated with the Sinovac vaccine.”

Bahrain and the United Arab Emirates were the first two countries to approve the Sinopharm shot, even before late-stage clinical trial data was released. 

Since then, there have been extensive reports of vaccinated people falling ill in both countries. 

In a statement, the Bahraini government’s media office said the kingdom’s vaccine rollout had been “efficient and successful to date.”

Still, last month officials from Bahrain and the United Arab Emirates announced that they would offer a third booster shot. 

The choices: Pfizer or more Sinopharm.

Reporting was contributed by Khaliun Bayartsogt, Andrea Kannapell, Ben Hubbard, Asmaa al-Omar and Muktita Suhartono. Elsie Chen and Claire Fu contributed research.