THE STRAIGHT FLUSH CRASH

AN ILLUSION OF SIMPLICITY, AN ENTANGLEMENT OF COMPLEXITY

Lately, there has been talk of so-called “elevated” markets. Equity markets, real estate markets and bond markets are indeed reaching new highs regularly. But how long will this last? Can it last indefinitely? Or as is often said, “It’s different this time,”; is it really? We posit that it is not different this time. In fact, there are very real parallels that should concern every investor. What could catalyze the next global financial crisis (“GFC II”)? We suggest that it won’t be a “Flash Crash.” Instead it will be a flash flood that could be caused by very real systemic risk. In other words, the system will flush itself of the market detritus accumulated over the last 8-9 years. We are calling it The Straight Flush Crash. This paper will explain why.

For anyone that has studied the sequence of events leading up to the Global Financial Crisis (“GFC”) of 2008-09, it would not be hard to put together the shape of the new crisis. The first GFC began with the New Century Financial bankruptcy that caused the first market hiccup on February 27, 2007 (when the VIX indicator jumped a record 60% in one day) and escalated to Bear Stearns, to Lehman Brothers, then to the whole GFC debacle. In our opinion, the market blip on August 24, 2015 (affectionately known as the ETF Flash Crash) was the first indication of the shape of things to come. During each crisis, a flashpoint has ignited the existing structure, which then toppled and in turn caused enormous losses for investors. For example, in the GFC of 2008-09, subprime lending was a small fraction of lending which ignited the whole structured finance pyramid and caused the liquidity crisis that bankrupted multiple banks.

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