Complexity Economics

Is a Huge Stock Market Crash Imminent?

Chain reaction

Blog written on January 12-th, 2015.

In a recent article “Why The Next Stock Market Crash Will Happen Any Day Now”  it is claimed that a massive stock market crash (down by 50%) will happen any day now. Based on past crash patterns it is said that we are on the verge of another huge collapse.

Crashes (of systems) are triggered by destabilizing events (natural disasters, conflicts, defaults of systemic corporations or banks, etc.). However, in order for a crash to actually happen a given system must be fragile. Evidently, a weak system will suffer attacks more than a resilient one. Like many other systems, global finance is a system. With one difference. It is huge – it engulfs our entire globe, the whole economy – and its dynamics are neither understood nor under control. The current state of the global economy provides eloquent proof.

The next big stock market crash needs, therefore, two conditions to materialize at the same time: a destabilizing event of sufficient intensity and a fragile global  financial system. While the triggering event may not happen, as for fragility, we’re very close to dangerously low levels. In fact, systems with resilience equal to or less than 50% are candidates for collapse. Again, low resilience (high fragility) is not a sufficient condition for collapse but it is a necessary one. The evolution of resilience of the Global Financial Resilience Index over the past 110 trading days is indicated below (the present blog written on January 12-th, 2015).

 

GFRI_10012015

 

The first drop in resilience, observed approximately 100 trading days ago was relatively mild. The one we witnessed 10 days ago is abrupt and there are no evident signs of recovery. The global financial system is, today, very fragile – 54%.  The longer it stays so low the greater the danger. The interdependency is also quite high – 43% – favoring fast propagation of shocks and contagion. The most likely contagion paths may be deduced from the Complexity Map of the Global Financial System (indicated below) with the help of particular software tools.

GFRI_10012015(click here to view above map in interactive mode).

However, the effects will in any event propagate at internet speed so that it doesn’t really matter what mode of failure the system selects. What is important is what the result will look like, i.e. where will the system settle after a potential collapse.

What is important in conditions of market collapse is to have as resilient asset portfolios as possible, so as to (potentially) minimize the consequences. This is accomplished by designing low-complexity portfolios using a newly developed technique. Click for details.

 

 

www.assetdyne.com

 

 

Established originally in 2005 in the USA, Ontonix is a technology company headquartered in Como, Italy. The unusual technology and solutions developed by Ontonix focus on countering what most threatens safety, advanced products, critical infrastructures, or IT network security - the rapid growth of complexity. In 2007 the company received recognition by being selected as Gartner's Cool Vendor. What makes Ontonix different from all those companies and research centers who claim to manage complexity is that we have a complexity metric. This means that we MEASURE complexity. We detect anomalies in complex defense systems without using Machine Learning for one very good reason: our clients don’t have the luxury of multiple examples of failures necessary to teach software to recognize them. We identify anomalies without having seen them before. Sometimes, you must get it right the first and only time!

1 comment on “Is a Huge Stock Market Crash Imminent?

  1. Gene Allen

    The Swiss bank decision to separate the value of the Swiss Franc from the Euro could be a precipitating event.

    Like

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