Last week, I covered one of the major causes of the 1987 crash and how its modern counterpart is in an even bigger positions to tear down markets.
The other major cause of the 1987 crash was something called index arbitrage.
Today, that once-obscure market corner is insanely large, thanks to almost $4 trillion worth of ETFs.
Index arbitrage is simple, and it’s happening every second of every trading day. Most people just don’t know it.
Even worse is that it doesn’t always work. Sometimes it does the exact opposite of what it was built to do, like gravity suddenly levitating everything you think is grounded.
Here’s how ETFs and index arbitrage are going to pull the rug out from under the markets…
The mechanical causes of the October 19, 1987 crash, which wiped 22% off the value of the Dow Jones Industrials Average in a day, are now a frighteningly large part of the fabric of equity markets in the U.S.
So is something else that didn’t exist in 1987.
Something that, at the exact worst moment in the trajectory of a crash, will rip the heart of liquidity out of the market without blinking an eye.
In fact, the very nature of the crash will target the people who think they are the safest.
Here’s how regulators fed the monster sleeping under passive investors’ beds…