Thirty-Six Minutes of Chaos: Analyzing the Flash Crash

Fourteen years ago, the Dow Jones plummeted 9%, wiping out almost $1 trillion in market value almost instantly. This infamous event, known as the “Flash Crash,” jolted the financial world, prompting significant regulatory reforms.

This week, we’ll examine this recent chapter in financial history. Have these changes truly addressed the underlying issues in the market, or just masked them more effectively?

We also bring you a must-see moment from an interview with Biden’s economic advisor, whose response to a simple question about government finance left more questions than answers. Plus, an update on the latest inflation trends, like which U.S. city is facing the highest increase in grocery prices.

Let’s get started.

TD Securities: Election Dynamics Look Positive for Gold

TD Ameritrade predicts a Joe Biden victory could raise copper and silver prices due to increased green energy investments. A win for Republican Donald Trump could hurt green energy metals but could be a boost for oil and fossil fuels. Regardless of the outcome, TD Ameritrade expects gold to gain, as both candidates are likely to continue high deficit spending.

Biden Admin Cancels Additional $6.1 Billion in Student Debt

The Biden administration has forgiven $6.1 billion in student loans for 317,000 former students of “The Art Institutes,” a for-profit school chain that closed last fall after fraud allegations. Including this latest forgiveness, the administration has now canceled over $160 billion in debt for nearly 4.6 million borrowers.

Treasuries Mint Cash At $2 Million Per Minute

After decades of zero-rate policies, US Treasuries are once again providing a reliable source of income for investors. The Congressional Budget Office announced interest and dividends to individuals will reach $327 billion this year — more than double the mid-2010s. Moreover, these payments are expected to continue rising annually. In March alone, the Treasury Department paid out about $89 billion in interest — about $2 million per minute.

Spending Pullback Begins to Impact Major Restaurants

For several months, economists have predicted a downturn in consumer spending triggered by escalating prices and interest rates. Now, it appears these predictions are materializing. Popular chains like Starbucks, KFC, and McDonald’s experienced noticeable declines in sales in Q1, as consumers dined in to save on expenses.

Houston Has Fastest Rising Grocery Prices in the Nation

A recent USDA study shows Houston is experiencing the highest grocery price inflation in the nation — a whopping +7.8% rise in 2023. This rate surpasses other major cities (like Boston which came in second at +7%) and exceeds the national average grocery price rise of 5%.

In Case You Missed It: Biden Advisor Fumbles on Fundamentals

During a recent interview, a seemingly straightforward question left Biden’s economic advisor, Jared Bernstein, visibly flustered.

When asked why the government borrows money if they can just keep printing it, Bernstein’s response didn’t exactly inspire confidence:

Bernstein: “Well, so the, I mean again, some of this stuff gets some of the language that the mmm, some of the language and concepts are just confusing… The government definitely prints money and then it lends that money by, by selling bonds. Is that what they do? They, they, they, yeah, they, they, they sell bonds… So, yeah, I, I, I guess I’m just, I don’t, I can’t really talk. I don’t, I don’t get it. I don’t know what they’re talking about…”

If you found yourself nodding along in understanding, kudos to you.

However, if you’re scratching your head and would like some genuine insights, we recommend checking out Hidden Secrets of Money Episode 4, where Mike exposes the unfortunate truth behind our monetary system, that’s ultimately responsible for most of the inequality in our world today.

The 2010 Flash Crash: A Moment of Market Mayhem

At 2:45pm on the afternoon of Thursday, May 6, 2010, in what felt like a blink of an eye, the Dow plunged nearly 9%, erasing nearly $1 trillion in value. This event, known as the “Flash Crash,” was a wake-up call to the financial world. It had everyone asking… “What just happened?”

36 Minutes of Chaos – What Happened?

It turned out that the rapid sell-off was largely driven by automated trading algorithms that executed trades at speeds incomprehensible to humans. These ‘algo’ trades, reacting to data and each other’s actions, spiraled out of control, creating a feedback loop that drove prices down temporarily.

In response, regulators put their heads together to prevent events like this from happening in the future. One was the introduction of new safeguards known as “circuit breakers.” These mechanisms temporarily halt trading in a particular stock or the entire market if prices hit predefined thresholds too quickly. The idea is to provide a moment of pause for human traders to digest information and make considered decisions, something algorithms might not always do.

Beyond Breakers: Addressing Deeper Market Flaws

However, some critics argue that circuit breakers are merely band-aids on deeper issues within our financial systems — issues such as market manipulation and lack of transparency. They suggest that these safeguards, while necessary, also indicate how automated systems can be exploited in ways that destabilize the market, often to the detriment of the average investor.

Since the Flash Crash, there have been improvements not only in how trades are executed but also in how data is managed and monitored. The market today is more robust, with checks and balances designed to cushion against these kinds of shocks. However, it’s not foolproof — and for the average investor, the playing field is far from level.

The Uphill Battle for Retail Traders

Trying to compete with Wall Street’s trading desks as a retail investor is a little bit like entering a chess match where your opponent knows your moves in advance. Here are just a few disadvantages you face:

• Speed of Execution: Institutional traders have direct connections to exchanges, getting them faster execution times. While retail traders might experience delays of seconds to minutes, institutional trades can execute in milliseconds.
• Access to Information: Professional traders often have access to real-time data and analysis from multiple sources, which are costly or unavailable to retail traders. Many also benefit from “first call” analyses from research firms, giving them a head start on market-moving news.
• Capital and Leverage: Institutions can trade with enormous volumes and leverage, enhancing their ability to capitalize on small price movements.
• Algorithmic Trading: About 80% of the stock market trades are now made by algorithms. These systems dominate the trading landscape, analyzing massive volumes of data, executing trades at speeds, and in volumes, that no human trader could manage.
• Dark Pools: About 40% of all U.S. stock trades in 2019 were executed in dark pools or other off-exchange venues. These private exchanges enable institutions to trade large quantities of stocks without immediately affecting market prices — an advantage not available to the average investor.

When you see everything you’re up against — and add in commissions and fees — it’s not a shock that a high number of amateur traders struggle. Research shows that around 90% to 95% of day traders fail to achieve consistent profit.

Why A Long-Term Mindset Wins

Any time we see a large financial crash like the Flash Crash in 2010, we’re reminded of the fragility of our financial systems. For most investors, the steady approach of long-term investing in stable assets — like high-quality stocks, bonds, and precious metals — offers a more reliable path to financial security than trying to outmaneuver Wall Street at its own game.

A famous study by Brinson, Singer, and Beebower found that over 90% of the variability in a portfolio’s performance over time is due to asset allocation, rather than market timing or stock selection.

In the race between the hare and the tortoise, the tortoise wins by steadfast persistence, not by sprinting. While it might be tempting to join in on the latest trend or bet, this type of “FOMO investing” can be detrimental to your portfolio. We believe that putting your money in assets like gold and silver – and investing for the long term – is a steady, smart choice.