Newsmax Finance Insider and former OMB director David Stockman fears there will be “a run on mutual funds and ETFs” amid the volatile economic climate.
He told Bloomberg TV
that banks and the global financial system remain vulnerable and there is likely to be another global financial crisis which will be worse than the last downturn.
“I do think that the banks have unloaded the worst of their stuff and today it is in mutual funds and ETFs, today it is in non-bank financial institutions, like all these companies that have come up overnight to make auto loans by selling junk bonds as a form of capital,” he said.
“The dangers of a run are far more serious now than it was with banks then. Back then, there never was a run on Main Street banks, it was only on a few hedge funds,” he said.
“This time you are going to have a run of $5 trillion or $6 trillion of mutual funds. This time you are going to have a run on the ETFs. There were only $1 trillion of ETFs in existence in 2008. There is over $3 trillion now and they are an accelerator mechanism,” he said.
“When everyone sells their ETFs, the managers have to go out and liquidate assets by selling the underlyings. The underlying assets are not nearly as liquid as the offer that anytime you want to sell your ETF there is a bid. Anytime you want to sell your mutual fund share, there is a bid … and I will tell you what … that is where the collision is going to come in the market.”
To be sure, it's scary to watch the stock market plummet, but long-term investors have always eventually been made whole.
Someone with terrible timing who bought an S&P 500 index fund on Oct. 9, 2007, when stocks peaked before the financial crisis, got back to even by August 2012, aided by dividends. That meant a wait of about five years.
Plus, much of stocks' long-term returns can come from just a handful of really big days, and it's impossible to predict when they'll occur. Miss them, and owning stocks gets much less lucrative. Two thirds of the S&P 500's gain over the last decade has come from just five days.
"This is the whole point of why equities generate the best returns of any major asset class over long periods of time," David Lefkowitz, senior equity strategist at UBS Wealth Management Americas, told the AP.
"They have higher volatility. If you can live with the higher volatility, you should be in a position to earn higher returns. I fully expect that stocks ultimately will reach new highs."
(Newsmax wire services contributed to this report).
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