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On positive feedback

Share price falls sometimes feed on themselves, but only in the short term.

To what extent are stock markets automatically stabilising? This question gains force from the fact that the US yield curve has inverted again, with 10-year Treasury yields falling below three-month money rates.

This raises the danger of a positive feedback loop. The inverted yield curve might cause investors to fear recession, which could cause them to try to shift out of equities and into bonds with the result that the yield curve inverts even more which, could in turn, intensify fears of recession and so trigger even more selling of equities. We saw a glimpse of just this process last week.

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