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Everyone Is A Passive Investor—Until The Selling Begins

Summary:
First, while my example above is extreme, the problem with even 20% of the market being “passive” is the liquidity issues surrounding the market as a whole. With more ETF’s than individual stocks, and the number of outstanding shares traded being reduced by share buybacks, the risk of a sharp and disorderly reversal remains due to compressed credit and liquidity risk premia. As a result, market participants need to be mindful of the risks of diminished market liquidity, asset price discontinuities and contagion across asset markets. http://davidstockmanscontracorner.com/?p=185758&preview_id=185758&preview_nonce=f7f60bfe52&preview=true

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First, while my example above is extreme, the problem with even 20% of the market being “passive” is the liquidity issues surrounding the market as a whole. With more ETF’s than individual stocks, and the number of outstanding shares traded being reduced by share buybacks, the risk of a sharp and disorderly reversal remains due to compressed credit and liquidity risk premia. As a result, market participants need to be mindful of the risks of diminished market liquidity, asset price discontinuities and contagion across asset markets.

http://davidstockmanscontracorner.com/?p=185758&preview_id=185758&preview_nonce=f7f60bfe52&preview=true

David Stockman
David Alan Stockman (born November 10, 1946) is a former businessman and U.S. politician who served as a Republican U.S. Representative from the state of Michigan (1977–1981) and as the Director of the Office of Management and Budget (1981–1985) under President Ronald Reagan.

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