Odd Lots Richard Bookstaber on the Big Structural Risk in the Market Right Now
Dec 6, 2021
Richard Bookstaber, a risk management veteran and author of "A Demon of Our Own Design," dives into the current market's unsettling trends. He discusses the impacts of inflation and Fed policies, and questions if we're in an unsustainable bubble. The conversation covers significant risks like market leverage and liquidity issues, while drawing parallels to past crises. Bookstaber emphasizes the need for diversification in investment strategies amidst escalating structural vulnerabilities and the fallout from speculative behaviors.
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Hidden Market Risk
- Current market risk is greater than perceived, based on factors like leverage, concentration, and liquidity.
- These factors create vulnerability, similar to an overcrowded nightclub with limited exits.
Market Vulnerabilities
- High market concentration, leverage, and low liquidity increase vulnerability.
- The Federal Reserve's 2020 intervention was extraordinary, its future role is uncertain.
Volcker Rule's Impact on Liquidity
- Bookstaber recounts Solomon's emerging market crisis losses in the 1990s.
- Pre-Volcker Rule, proprietary trading incentivized market making, even during losses.
