FT's John Dizard Warns Of "Catastrophic Decline In Asset Values"

Tyler Durden's picture

Authored by John Dizard via The FT,

The mania for average returns has been suppressing short term losses, or corrections

A sound banker, alas! is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him.
— John Maynard Keynes

We have created a bubble in average. Waiters and childhood friends are no longer telling us about what miracle gold, oil, or tech stocks they bought at the right time. They are exchanging stories about low management fees on their index-tracking exchange traded funds.

This sounds like the warning bell at the top of a mania. Only now it is a mania in low transaction costs, average returns, and on-demand liquidity.

Most professional portfolio managers sneer at the “technical analysis” momentum traders, who buy if price charts point up and sell when the charts point down. These traders are seen as socially awkward eccentrics, picking magical price support and resistant lines up on home office trading screens.

True, the technical traders do not go to the same high level conferences as serious professional investors. Without really noticing it, though, much, if not most, of the investment establishment has turned into the class they most despise, which is to say back-office ’bot creators.

Index-based investment management, more sophisticated algorithmic trading, and even slow and steady buy-on-the-dips retail investing have all been suppressing short term losses, or corrections.

Short term asset price declines have been reversed by the wall of money coming out of active investment managers and into the accounts of low-cost index products. But this comes at the expense of making the eventual decline in a broad range of asset values not just painful, but catastrophic.

There is no greedy banker in a corner office on Broad Street who created this constellation of algorithmic death stars. Unfortunately for the political class, Wall Street listened to the denunciations of the risky strategies that led to the 2008 crash. So it concentrated on marketing “low-risk” investment strategies that promise all the liquidity that Grandma would ever need. In the event of another market crash, it will be harder to find convincing villains.

There was an interesting debate set up by Jim Grant of the Interest Rate Observer, a journal focused on financial markets, at his spring conference in New York last week. John Bogle, the founder of Vanguard, the fund house known for its low-cost ETFs, took the side of index investing.

On the other side, Steven Bregman of Horizon Kinetics, the New York-based investment advisory firm, made a serious case for stockpicking active management, including its social value of ensuring accurate price discovery.

Now, though, the ultra-low cost passive investing Mr Bogle pioneered is a few trillion dollars ahead. In the post-crisis world, his fundamental thesis that active management’s transaction costs eventually overcome any apparent performance edge has been reinforced by post-crisis monetary policy and slow growth.

As interest rates and returns are repressed, every basis point of extra transaction and portfolio management cost looms larger to the investor. And since every market dip is cushioned by central bank safety nets, the rise of index values has been looking ever more inexorable.

All those waiters and childhood friends will tell you they have liquidity, as in the right to cash in, whenever they want, at a low cost. The index fund managers get that liquidity by buying more of the most liquid securities, which then rise in price even faster. However, on the way down, this virtuous cycle tends to reverse.

And it is not clear how a society with population growth below 1 per cent, and productivity growth below 2 per cent, provides long term returns of 4 per cent to an ever larger group of retirees. Especially if it pulls back on international capital flows.

Serious-money portfolio managers will argue, correctly, that commodities and stock option buyers among the investing public usually lose their premium money. And yes, most amateur technical analysis investors eventually give up on charting their way to a fortune.

But professional portfolio managers have no day job to go back to. So they could be worse off than momentum traders working from home.

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knukles's picture

Please please please please please stop with the active managers make the world safer for the children.
Pretty please.
With whipped cream and unicorn sprinkles on it.

A dollar raised form an index fund exerts the same one dollar effect on the marketplace as does a dollar raised from an active manager


Kotzbomber747's picture

Oh dear, Black Swan Le Pen has just been defeated despite all the wishful thinking from all the 'experts,' and here comes the next "wolf" crying idiot looking for his 15 minutes of fame by predicting doom and gloom.

I guess he has some put options or gold coins to sell, while his 'sponsors' take the other side of the trade...

Giant Meteor's picture

Look, the beauty of the "black swan" is they do not pre-announce. Hell, for all anyone knows the guy with mommy issues is the black swan, or the fact that there was thug tactics to discourage the vote, or any number of any other unknown, unknowns ..

You forget the moral of the wolf story apparently. Eventually the wolves showed up.

Have some faith man!

Kotzbomber747's picture

But that's my whole point Meteor: Black Swans don't come advertised as relatively predictable elections, or some financial 'expert' throwing a dart by saying "everything will crash."

P.s. Trump has come into the fold of The Deep State within weeks of assuming office, and although the Brexit referendum is behind us, the actual Brexit has yet to happen. So the initial Black Swan event of their electoral surprise win has been either reversed (Trump) or the actual outcome (Brexit) has not even been completed.

P.p.s. For as far as "wolf" crying: I prefer a reliable fire warning system, instead of a system that will wake me up serveral times every night with false alarms, because when my house is really on fire I will most probably miss the opportunity to escape the flames since I'll be assuming it's another false alarm.

The only thing that ZH is doing with these "panic now" articles is reducing both vigilance and their credibility, instead of increasing it.

BeanusCountus's picture

You are right in that a Le Pen win would not have been a black swan event. The possibility was out there and discussed by many. Zero Hedge is not a "wolf crying" system for the most part. Only pointing out what might go wrong that many don't consider. I doubt many readers here "panic" from anything they read on the site. Btw, what are you reading it for? And there is no such thing as a reliable "black swan" fire warning system. The nature of a black swan is that it wasn't visible prior to revealing itself.

DownWithYogaPants's picture

Kotz is just being your average predictable pinhead.  They think simply and wonder why they never really get anything right and why they never win. No emotional intelligence displayed Kotz. Zero.  You want to panic like George Costanza when Eric the Clown puts the fire out with his big shoe be our guest.

Fact is what ZH is talking about from oh so many different angles is the inevitable that we all know is coming.  Know us not when it cometh.  But cometh it does.   It's not about market timing except for positioning for the grand scale event that has to come.

Now was that simple enough?

JRobby's picture

"When a Rothschild mouthpiece talks, people listen"

(Laugh Track Deafening !!!)

I guess the elite are all in PM's, Priceless Art and all the "strategic real estate" left?

Giant Meteor's picture

Jesus, who can argue with a reasonable man.

Fair enough ..

I agree there are many, (including me) who go with the sky is falling routine, and yes, some of it is perhaps conditioning, but also, looking at what is front of one's face. On the face of it, valuations of the "market" as example, are pure unadulterated bullshit, manufactured from whole cloth, an unnatural, but natural result of low to no digital currency interest rates, funny money, on top of the funny money, monopoly money shoveled to primary dealer and cohorts, to gamble with, as "there is no alternative" in preventing fatal triggering of every trip wired debt crisis, as far as the minds eye can see.

Now I understand the nature of WHY this insanity is occurring, and the fact that all the obvious financial fuckery, acts as a major delay of game, because they can, and certainly not in hopes of some miracle, which is never going to show up.

So the question is as always, how long can they keep the plates spinning thinly in the air, before some castastrophic, systemic failure, credit crisis, derivatives implosion, black swan, mother of all margin calls, what the fuck ever .. certainly I do not claim to have THAT answer ..

I would suggest to you however, in the scenario you just pointed out yourself, to wit;  "I prefer a reliable fire warning system, instead of a system that will wake me up server all times every night with false alarms, because when my house is really on fire I will most probably miss the opportunity to escape the flames because I'll be assuming it's another false alarm."

You nailed it. There IS no reliable warning system!

There CANNOT be any reliable warning system under the present conditions. If one can (rightly) say, that the entirety of the system is rigged, gamed in every way, by every metric ... how could there be a warning system? More to the point WHY would there be a warning system? Warning is not the name of this game. Information OVERLOAD is. The "warning system" was already triggered, Sept 11th , 2001, and of course the 2008 -09 global financial crisis, and the firemen thusly, went to the wrong address, poured gasoline on the wrong house, lit a match, threw it, and then drove away to start the next fire!

The warning system has already failed and is now, as you say, completely irrelevant ..

Perhaps THAT is our "black swan" right there  ..

ArthurDaley-OldieTimeTrader's picture


The black swan is coming. We just don't know when. Guns Gold and Grub will be what you need.

DownWithYogaPants's picture

The exit doors are even smaller on ETFs than they are on individual stocks.  The leverage is worse too.

This could go up faster than a night club in Outer Niggeria.  You know where they all arrive at a padlocked fire exit and pile up on top of one another.

yogibear's picture

The globalist will start WWIII before their assets are allowed to fall.

adanata's picture

Although there may be MidEast fireworks and more, WW3 is simply not on the agenda. Full on nuclear war is an extinction event for the northern hemisphere; all of it. Now if you see the Queen and Barons de Rothschild; along with the rest of the Bilderbergers ... those who ACTUALLY have control of 'the bomb' ... heading for South America, then you can worry.

TradingTroll's picture

Except in a decent correction.

Active manager look and assess market depth before dumping $10bn 'at market '.

Passive managers...ETFs...pass the buck, come what may. If a few index components have problems with price discovery then Rule 48 is imposed and pricing becomes erratic.

Passive managers will get wiped out.

Kotzbomber747's picture

I'm sure this Dizardguy can sell you some great put options, courtesy of Goldman Sex.

Batman11's picture

A bit like those tulip bulbs in 1600s Holland.

There was no new paradigm.


Offthebeach's picture

Thats why smart money went overseas, South Seas.

didthatreallyhappen's picture

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83_vf_1100_c's picture

"Catastrophic Decline In Asset Values"

They will get used to it. I did, still do as I chase my way to the bottom with AU/AG purchases.


ArthurDaley-OldieTimeTrader's picture



GDXJ the junior gold miner has been in a downward trend for 8 out of the last 10 months. The "JPMorgans" of the world of Silver and Gold have spooked the muppet money out of their positions. As painful as it is now is the time to hold one's precious metals and precious metal mining shares. These assets are real wealth. Everything else will soon show itselft to be just "Fiat"..

Houses Depreciate's picture

Current market conditions are;

-Falling rental rates
-Falling housing prices
-collapsing demand
-Inflation Adjusted Housing prices 300% higher than long term trend line
-Record housing inventory
-Rising delinquencies
-Foreclosure moratoriums
-Rampant subprime lending

Giant Meteor's picture

You forgot,

- buy the dip

pretty crazy right ?

Quinvarius's picture

How are asset prices supposed to fall when central banks are printing money and keeping them elevated out of fear of looking like the idiots they are?

Giant Meteor's picture

Only thing I can figure, someone pushes the wrong button, or some mega bag holder besides the FED says, fuck this shit ..

buzzsaw99's picture

i said god damn, god damn, the low management fee passive fund pusher man, lulz

Giant Meteor's picture

Try to think of it this way. Even with NO fee, they're still way overpaid ..

ThanksIwillHaveAnother's picture

What about the 401k's?  LOL!

Grandad Grumps's picture

Not sure at what point more money is coming out of 401ks and IRAs than is going in.

It won't matter as long as the banks keep being the buyer of last resort and maintain price through fraud.

Houses Depreciate's picture




Remember folks....


Nothing accelerates the economy and creates jobs like falling prices to dramatically lower and more affordable levels. Nothing.




ThanksIwillHaveAnother's picture

Soma Investing.   Didn't seem like USSR would collapse.   Just sleep.

Offthebeach's picture

Soviets had serious problems since Lenin....look squirrel!

Took 70 years.

Umh's picture

Help, someone define depression for me?

Houses Depreciate's picture

Sure..... A 'depression' is grossly inflated prices resulting in collapsing demand by definition. By the way, this is what we've been experiencing for a decade or more.

The only cure for a depression is falling prices to dramatically lower and more affordable levels.

Shpedly's picture

In addition to the very good technical definition below. Basically a "depression" is an antiquated word from when the Federal Reserve didnt know how to manipulate the market.

quasi_verbatim's picture

Pet rock barbarian relic: Day trade, lifetime hold.

yogibear's picture

Central banks won't allow that to happen. They will speed up printing of trillions.

Watch for asset purchases of $200 billion/month.

Maybe not QE5 but called something else.

rmopf2010's picture

That's right House Menu:

QE for breakfast

QE for brunch

QE for lunch

QE for dinner

QE for supper

Buy stocks they won't Dip evermore again

Troy Ounce's picture

$1 trillion in central bank liquidity YTD - or $250 billion per month -  is already there:


chubbar's picture

They may be doing it now and if not, who says they'll announce it in the future? How the fuck did the muni bond problem go away? Who knew that the Swiss Central bank was buying the shit out of equities the past few months? Who really knows what is on the CB balance sheets if they choose not to tell us?

The best way for them to keep this shit show going is to withhold information so that the analysts can't write articles telling us about it.

venturen's picture

The central banks are allowed to print money and buy stock and stuff....IT IS NEVER GOING DOWN....Everything in Zimbabwa is still a billion Z dollars

Deep Snorkeler's picture

The greatest fear Americans have

is the loss of leisure,

and the end of,

constant amusement.

Shpedly's picture

I love blowing stuff up with Tanerite, drinking beer and shooting just about any thing with a barrel. My leisure and constant amusement is secure.:)

Arthur's picture

And it is not clear how a society with population growth below 1 per cent, and productivity growth below 2 per cent, provides long term returns of 4 per cent to an ever larger group of retirees. Especially if it pulls back on international capital flows.


Well that's what global trade is all about, is allows business to be independent on the local economy and popoulation growth

wacky47's picture

Rome had its bread and circuses. The USA has SNAP, the NFL and the NBA....no difference really. Debt will cause the eventual collapse...the real question is when?

Muppet's picture

Asset declines are impossible now. Wake me and smell the liquidity!

Grandad Grumps's picture

How long have we been hearing this ... and it has not happened because every time it starts to show signs of happening money shows up out of the ether to prop things up.

Charvo's picture

Passive ETFs have 0% cash levels.  That's their thing.  They provide instant market exposure when you buy in.  Actively managed funds do have cash levels they maintain, but I wouldn't be surprised if these cash levels were at record lows.


The lynchpin in passive ETFs are these large megacap corporations like Apple, Alphabet, and Microsoft.  They represent large percentages of these mega ETFs like SPY and QQQ.  If these guys are maintaining their revenue and earnings performances, then it's tough for the passive ETF universe to cave in.