Month: February 2018

Yesterday we presented a must-read, if somewhat misleading, Q&A from Goldman’s head quant to the bank’s clients explaining the trading dynamics of ETPs in general, and whether clients have to be worried about another imminent volatility spike and selloff in particular (in response to which Goldman said no, which in light of today’s events may not have been the best advice).

And while we urge readers – especially those who are unfamiliar with the vol products and ETFs – to read the entire article, one particular section is critical, as it explains not only the bizarre marketwide meltups we have observed every day for years, but also why – on some days like Monday – the last minutes of trading are nothing short of total chaos.

Here is Goldman responding to “Why do issuers of VIX ETP have to trade near the 4:15 futures market close?“

The indices behind the VIX ETPs are based on one-day changes in VIX futures levels, measured by their 4:15 PM NY time prices. Every day, an ETP’s NAV change is a weighted average of the one-day returns of two VIX futures, but those weights change every day. It is only at the close of each trading day that the next day’s weights are fully known, because the total dollar amount of futures involved needs to be exactly the right leverage times the price of the product. This process becomes a feedback loop because each ETP’s closing NAV is an input to the size of its position the next trading day. As we approach the close every day, an ETP issuer shifts its portfolio to the next day’s position so it can correctly replicate the next day’s return.

While this is hardly rocket science, it should be clear that any time you see the words “a process becomes a feedback loop” mentioned in the same sentence as the “close of trading”, run.

via Zero Hedge http://ift.tt/2EtMCQQ Tyler Durden

Authored by Doug Kass via RealInvestmentAdvice.com,

* Friday was likely the day the short volatility trade died

* A massive regulatory overhaul is needed to counter the destabilizing influence of strategies and exchange traded products that have overwhelmed our markets

For years I have warned about the explosion in popularity (and listings) of ETFs (which now outnumber the number of publicly traded companies) and ETNs – in an oft repeated column entitled…”Kill The Quants Before They Kill Our Markets.”

In pointing out the risks of the “new” versions of strategies purporting to be able to control risk (on the fly) — mine was a voice in the wilderness, ignored by the majority of market participants who were enjoying the bullish fruits and impact of these newfangled strategies.

Indeed it took a bit over six years for XIV (an inverse VIX product, its VIX spelled backwards!) to rise from $10 to $144 but only one day for the product’s price to implode to $0. As blogger Quoth The Raven tweeted this morning: “Six years of picking up pennies in front of a bulldozer wiped away in one session.”

Nomura’s Charles McElligott (who I have quoted extensively over the last year) was another voice:

The “grey swan” we all have spoken about for years — that being the absurd “tail wagging the dog” potential of VIX ETN market structure (inverse and leveraged products) AND the massive growth in “negative convexity” / “vol target” / “vol rebalancing” strategies to either generate extra income or “systematically allocate risk” (looks good in the prospectus, right?!) — finally “broke” the volatility market, and has now bled-through to the “underlying” spot equities market…as the short vol trade went “lights out.”

The ETNs are the “patient zero” of this current market meltdown. It is estimated that there was anywhere from ~$125mm to $200mm of vega / VIX futs to BUY on the close from the two main “short VIX” ETNs that rebalance daily (XIV and SVXY). As S&P traded -50 handles AFTER the cash close from 4:00pm to 4:15pm into the market’s anticipation of the massive rebalancing of volatility (buy to cover) on the close, XIV then saw a delayed and terrifying ~-87 PERCENT move after the close, as some who owned XIV puts as crash protection sniffed this potential and speculated liquidation from the ETN, which is set per a rules-based system to buy back short vega after an 80% “crash trigger”(which again isn’t a certainty because they use a blend of 1st and 2nd month). The asset pool nonetheless was seemingly / largely wiped-out and the note is guaranteed to “pay out” to their shareholders as set per their prospectus. It is likely that this thing has indeed been “triggered” and will be forced to liquidate. SVXY doesn’t have the firm 80% “trigger” but too is seeing its NAV “wiped out” and is trading ~-80% post-close as well.

The issue NOW is the pile-on going-forward across assets, as the systematic “short vol” community’s models are now completely toast, and they too will be forced to cover remaining “short vol” positions that didn’t trade today-i.e. BE PREPARED FOR A MAJOR VIX FOLLOW-THROUGH TOMORROW.

VaR-based models need to be reset across all asset-class strategies, forcing further de-risking over the coming days and potentially weeks, as heads of funds and heads of risk try to figure out how much their models are forcing them to “gross-down.” Shorter-term vol target / vol allocation strategies (think CTAs) and longer-term models like risk-parity and too will reset and “rebalance” their risk (lower) as realized vols are re-priced. Structured products, annuities and other vehicles with built-in protection? Also purging exposure on the vol reset. Finally, it also shouldn’t be lost on the popularity of “short VIX” trades in the retail community, and the “butterfly flapping its wings” relationship to the recent melt-down in the crypto-currency space.

– Fade to Black

Until Friday, when we experienced a “come to Jesus” moment for structured products and relational quant strategies (e.g. risk parity and short vol ), few listened to our concerns of a possible Short Volatility Armageddon caused by a rapidly changing and dangerous market structure in which VIX products multiplied like weeds.

I believe the precipitous market drop in the last week has little to do with the projected course of interest rates or, for that matter, fundamentals.

It likely was a function of the distorted, dangerous world of new investment products and strategies.

As discussed below (and above), the proliferation of short vol, volatility trending and risk parity strategies when combined with an explosion of leveraged ETFs and ETNs — many of which were derivatives of derivatives and had no business existing except to please gamblers — had altered the market structure in as extreme a manner as Portfolio Insurance did 30 1/2 years ago (which led to the October, 1987, crash). Back then, Portfolio Insurance proved to be a bridge too far that added a dynamic component that would attempt to increase the hedge as the market was declining but which (1) served to actually increase the downward volatility of the market and (2) whose very ability to be executed depended on market liquidity being available but which their strategy of selling more at lower prices (as the market declined) would quickly exhaust and then destroy that liquidity very, very quickly.

The SEC was asleep then (in 1987) and the SEC is asleep today.

The kennel of VIX related products (that have become the tail that wags the market’s dog — should be closed down, post haste.

Market participants (and regulators) have little understanding of the technical nature of these products/strategies or the domino and ripple effect. Many of these ETF products and options should be suspended and outlawed and the issuers should be held to account. It’s bigger than bitcoin — and bitcoin is a dumb idea!

Unfortunately I can not see with clarity how the genie of quant strategies, ETFs and ETNs are taken out of the (market) bubble — particularly with the inertia of the regulatory authorities like the SEC.

Last night I sat next to the New York Times’ Jim Stewart at dinner — with my iPhone between us, spewing out the news that the market disequilibrium had been upset like nothing I had seen in decades. Jim and I chatted while watching (laser focused) the overnight market disorder — at its nadir, DJIA futures fall by -1200, S&P futures nearly -125 and Nasdaq futures collapsing by over -220 against fair market value.

I expanded further on some of continued concerns regarding the market’s structural problems in yesterday’s opening missive; and in my last post on Monday evening, “Revenge of the Machines”:

“Surprise #9: In 2018, the global volatility bubble bursts in a spectacular fashion, with stocks falling by 15% in one session.”

— Kass Diary, A Market That Continues to Underprice Risk

I spent the better part of 2017 and all of 2018 warning about the possibility of another flash crash — caused by a dangerous shift in the market structure which was led by leveraged actors who conducted short volatility and risk parity strategies — who are agnostic to balance sheets, income statements and intrinsic value. (Read my 15 Surprises for 2018 and this morning’s lengthy discussion in my opening missive.)

That shift in structure coupled with the popularity of passive strategies (ETFs) continued to have a pronounced impact on the markets, pushing volatility to (a hat size) of record lows and stocks to record highs — arguably, creating something of a “buyers panic” in January as late coming retail investors (suffering from “FOMO”) poured a record $50 billion into the coffers of domestic equity funds.

This buyers panic occurred in a backdrop of less liquidity and lower market volume — further exacerbating the late 2017/January gains. That buying forced RSIs towards unprecedented levels as investor sentiment surveys made multi-decade bullish highs.

As stocks climbed ever higher, skepticism and doubt were nearly abandoned and assessment of risk vs. reward took a back seat to bullishness.

The constant shorting of volatility, I warned, could resemble having the role of portfolio insurance which caused a rapid drop in stock prices in October, 1987. I even called short vol having the potential label of Portfolio Insurance (Part Deux).

The S&P Index (adjusted for the after hours S&P futures weakness of about another 30-40 handles) is now almost 285 handles below the level of only a few days ago.

This has served, according to my calculus, to move the downside risk relative to upside reward from 4:1 (negative) to less than 2:1 (negative) — using an expected trading range for the S&P Index in 2018 of between 2200 and 2800.

I am of the belief that today’s action was forced and, in a sense, a mechanically — inspired decline (remember the S&P Index was actually higher at one point in this session).

Oddly missing in the media discussion today has been the interest rate reaction — a flight to safety that took the ten year US note down by nearly fifteen basis points (to 2.70%)! This move may be interpreted as confirmation that the market’s precipitous drop today was structural and not necessarily rate related.

That is not to say that we will necessarily have a “V” type reaction.

I dont know … and anyone who expresses certainty (as many have) should be avoided and ignored.

We must wait and let the derisking of short vol and risk parity work itself out and run its course. The magnitude of the short-term market decline has likely contributed to margin calls and retail redemptions which will further complicate the timing of a recovery.

I aggressively traded a lot of Spyders (SPY) today and I am currently paying $260.20 in after hours — based on a view that this is a short term opportunity (but solely for a trade).

And I covered a number of shorts (at what I believe to be favorable prices) — particularly in financials — during the quick whoosh lower in the late afternoon. I took a number of shorts off of my Best Ideas List as the risk/reward ratios have abruptly changed — with many stocks down by 10% to 20% from a week ago.

Values will likely be created in the days and weeks ahead.

But in order to capitalize on those opportunities one has to be almost emotionless — not an easy task in a downturn like we have experienced in the last few days.

Let me end a hectic day with a column just written by JPMorgan’s global quant, Marko Kolanovic entitled “Flash Crash, Flows and Investment Opportunities”:

“In last week’s note, we noted that volatility, at the time, was not sufficient to trigger systematic strategy de-risking. On Friday, the market dropped ~2% on a day when bonds were down ~40bps. The move on Friday was helped by market makers’ hedging of option positions (as gamma positions turned from long to short midday). Friday’s move, on its own, was significant as it pushed realized volatility higher, which is a signal for many volatility targeting strategies to de-risk. Anecdotally, broad knowledge about the risk of systematic selling kept many investors fearful and waiting on the sidelines (both in equity and volatility markets). Midday today, short-term momentum turned negative (1M S&P 500 price return), resulting in selling from trend-following strategies. Further outflows resulted from index option gamma hedging, covering of short volatility trades, and volatility targeting strategies. These technical flows, in the absence of fundamental buyers, resulted in a flash crash at ~3:10pm today. At one point, the Dow was down more than 6%, and later partially recovered. After-hours, the VIX reached 38 and futures more than doubled-it is not clear at this point how this will reflect on various short volatility products (e.g., some volatility ETPs traded down over 50% after hours).

Today’s large increase of market volatility will clearly contribute to further outflows from systematic strategies in the days ahead (volatility targeting, risk parity, CTAs, short volatility). The total amount of these outflows may add to ~$100bn, as things stand. However, we want to point out the massive divergence between strong market fundamentals and equity price action over the past few days. The large market decline over the past few days will likely draw fundamental investors and even trigger pension fund rebalances (those that rebalance on weight thresholds). We also want to highlight a strong probability of policy makers stepping in to calm the market.

Rapid sell-offs, such as the one today, can also be followed by market bounce backs as liquidity gets exhausted by programmatic selling. With next year P/E on the S&P 500 now below 16, further positive impacts of tax reform and stabilization of bond yields (e.g., note the current record level of CFTC bond short positions), we think that the ongoing market sell-off ultimately presents a buying opportunity.”

via Zero Hedge http://ift.tt/2nPeG7K Tyler Durden

Forget the Trump tax cuts, the Senate budget deal, the Fed’s Quantitative Tightening and the collapse in foreign buying of US Treasuries: after years of dormancy, the biggest catalyst for a sharp inflationary spike has finally emerged, and it is none of the above. Behold: the velocity of money.

Over the past decade we have shown this chart on numerous occasions and usually in the context of failed Fed policy. After all, based on the fundamental MV = PQ equation, it is virtually impossible to generate inflation (P) as long as the velocity of money (V) is declining.

None other than the St. Louis Fed discussed this  in a report back in 2014:

Based on this equation, holding the money velocity constant, if the money supply (M) increases at a faster rate than real economic output (Q), the price level (P) must increase to make up the difference. According to this view, inflation in the U.S. should have been about 31 percent per year between 2008 and 2013, when the money supply grew at an average pace of 33 percent per year and output grew at an average pace just below 2 percent. Why, then, has inflation remained persistently low (below 2 percent) during this period?

The issue has to do with the velocity of money, which has never been constant. If for some reason the money velocity declines rapidly during an expansionary monetary policy period, it can offset the increase in money supply and even lead to deflation instead of inflation.

The regional Fed went on to note that during the first and second quarters of 2014, the velocity of the monetary base was at 4.4, its slowest pace on record. “This means that every dollar in the monetary base was spent only 4.4 times in the economy during the past year, down from 17.2 just prior to the recession. This implies that the unprecedented monetary base increase driven by the Fed’s large money injections through its large-scale asset purchase programs has failed to cause at least a one-for-one proportional increase in nominal GDP. Thus, it is precisely the sharp decline in velocity that has offset the sharp increase in money supply, leading to the almost no change in nominal GDP (either P or Q).”

So why did the unprecedented monetary base increase created by years of QE not cause a proportionate increase in either the general price level or GDP? The answer, according to the Fed at least, was in the private sector’s “dramatic increase in their willingness to hoard money instead of spend it. Such an unprecedented increase in money demand has slowed down the velocity of money, as the figure below shows.”

In light of the recent collapse in the US savings rate to just shy of record lows, that explanation makes zero sense, and what the St. Louis Fed meant to say is that of spending (or saving) freshly created money was immediately invested into risk-assets, almost exclusively by members of the 1% who were “closest to the money” . This explains why there was almost a 1:1 correlation between the increase in the Fed’s balance sheet and the S&P for years.

* * *

In any case, for whatever reason, after declining for nearly a decade, the Fed’s greatest wish after all these years appears to have been granted, amd it now appears that the velocity of money has finally bottomed, and is, in fact rebounding. And, in couldn’t come at a worse time: with Trump dumping trillions into the economy to stimulate it further, the Fed is now painfully behind the curve, which means that chair Powell will find himself rushing to hike rates at virtually every opportunity to avoid getting Volckered.

It may be too late, however: since directional changes to the velocity of money take place at a glacial pace, the chart above from Deutsche Bank suggests that the Fed should have started its tightening cycle long ago.

Still, the jury is still out on just how badly inflation will overshoot once money “spills” out of capital markets and into the broader economy, and how many rate hikes the Fed is “behind”. One thing that is certain, however, is that as we find out the answers, for risk assets and active managers, all of whom recently listed rising rates and inflation as the biggest risk factor… 

… it’s only downhill from here. 

 

via Zero Hedge http://ift.tt/2nUajYi Tyler Durden

GOP Whip John Cornyn may have spoken too soon…

 

Nothing firm still on when the Senate will vote on budget deal. Majority Whip Cornyn: If history is any guide, we’ll be out of here this afternoon

— Chad Pergram (@ChadPergram) February 8, 2018

 

With less than ten hours left for both the Senate and House to pass a bill to extend financing for the federal government, Kentucky Sen. Rand Paul is – once again – forcing a delay by objecting to certain spending levels.

The Congressional Budget Office just ruled that the spending deal would increase the deficit by $24.3 billion by 2022.

Paul has played the role of antagonist in the past, memorably back in late November when the GOP voted to pass a $4.5 trillion budget as a precursor to unlocking the reconciliation rules allowing Republicans to pass the Trump tax cuts through the senate with a simple majority vote.

 

BREAKING: Senate vote on budget deal delayed by objection to spending levels by Republican Senator Rand Paul – Sen. Cornyn pic.twitter.com/J412gVaJxQ

— Reuters Politics (@ReutersPolitics) February 8, 2018

…Meanwhile, Senate leaders have yet to begin procedural votes that were expected to begin nearly an hour ago…

 

Nothing settled on proposal for Senate to take procedural vote and then separate vote to approve budget deal. Hope was to begin process at 1:45 pm et. But nothing is agreed to yet.

— Chad Pergram (@ChadPergram) February 8, 2018

…and they can’t say when that vote is expected to take place, because Paul – as Cornyn put it – “has concerns he wants to be able to voice.”

 

Colleague Jason Donner rpts Cornyn says he’s not sure when Senate will move on budget deal. Says GOP KY Sen Paul holding things up. “Senator Paul has concerns he wants to be able to voice.”

— Chad Pergram (@ChadPergram) February 8, 2018

 

Once again, it appears the bipartisan deal struck between Chuck Schumer and Mitch McConnell was too much, too soon. As part of the deal, the two agreed to extend funding through March 23 while lifting spending caps that were imposed as part of the Budget Control Act of 2011 (the famous sequestration bill) while tentatively working out a two-year budget deal that would increase both domestic and military spending, provide money for disaster relief, combating the opiate crisis and – oh yeah – raising the debt ceiling. The Treasury’s emergency measures are expected to be tapped out early next month.

As we noted earlier, House Democratic leader Nancy Pelosi is refusing to support the deal struck by her fellow Congressional leader because she wants to force a vote on an immigration bill to preserve DACA protections – the subject of a historic 8-hour-long speech on the House floor yesterday.

In a letter to her Democratic colleagues today, Pelosi accused Speaker Paul Ryan – who says he won’t call for a vote on DACA without Trump’s approval – of “demeaning the dignity of the House” and defying the will of the American people.

 

Pelosi letter to Dem colleagues: Speaker Ryan’s refusal to allow a bipartisan process for a DACA proposal demeans the dignity of the House of Representatives. It is also an insult to the American people, who overwhelmingly support the Dreamers.

— Chad Pergram (@ChadPergram) February 8, 2018

 

In the Senate, Democrat Elizabeth Warren is also balking at passing the spending bill without voting on an immigration deal. And the House Freedom Caucus

Without another extension – what would be the fifth since September – funding for the Federal government will run out at 12:01 Friday morning.

Meanwhile, the House Freedom Caucus is still trying to kill the deal struck by the Senate leaders.

Keep in mind, the Senate hasn’t started their procedural votes yet. Once the bill passes the Senate, the bill will need to pass through the House Rules Committee before it can be brought to the floor for a vote…

 

House now in recess subject to the call of the chair, waiting on Senate to approve budget deal & send it across to the House. Bill will have to go the Rules Cmte in the House. Will take a few hrs before the Hse gets it on the flr once the Senate finishes it.

— Chad Pergram (@ChadPergram) February 8, 2018

With markets spiraling lower again Thursday, the budget process is rapidly transforming into a “damned-if-they-do-damned-if-they-don’t” situation, because if it passes and widens the deficit…

 

Senate deal’s 2 outcomes:
1. Govt shutdown and potential technical default
2. Spiking yields, sliding markets and more volmageddon

— zerohedge (@zerohedge) February 8, 2018

 

via Zero Hedge http://ift.tt/2EdL52k Tyler Durden

Via LPL Research,

As Janet Yellen hands over the reins to Jerome Powell at the Federal Reserve (Fed), a look back at history shows that markets have a funny way of testing new Fed chairs.

We’ll get into all of that in a second, but first things first – how did Yellen do?

Over her four year tenure as Fed chair, the Dow gained a solid 63%. As the chart below shows, this ranks 6^th out of the previous 15 Fed chairs:

Here are several other interesting stats on Fed chairs and markets:

• On an annualized basis, the Dow gained 12.9% under Yellen, which ranks as the 4^th best performance.
• The best total return under a Fed chair is the 312% Dow gain under Alan Greenspan.
• Greenspan was also the longest tenured Fed chair at 18.5 years, so his annualized return is only 8.0%.
• Greenspan became the Fed chair about two months before the stock market crash of 1987.
• The shortest tenured Fed chair was William Miller at 1.4 years.
• Arthur Burns is the only Fed chair to take office on a weekend day (Sunday, February 2, 1970).
• Eugene Meyer oversaw the largest decline during his less than two-year term; which occurred during the Great Depression when the Dow lost 65%, marking the worst annualized return at -32.6%.
• There were two consecutive Fed chairs named Eugene (Meyer and Black) during the Great Depression. What are the odds of that?

“I didn’t have a computer on my first day at LPL, and I thought that was bad,” remarked Ryan Detrick, Senior Market Strategist. “Well, Jerome Powell saw the single worst first day ever for a Fed chair when the Dow dropped 4.6% on Monday—I’d say that’s a bad first day on the job!”

“Weakness after a new Fed chair is quite normal. In fact, the Dow tends to slide more than 15% on average within the first six months of new Fed leadership,” said Detrick.

But the good news is that the Dow has rebounded more than 20% on average a year after those six-month lows are made.

There are many reasons why global markets tumbled over the past week; but it’s important to be aware that a new Fed chair (and the uncertainty he or she might bring) adds yet another worry for markets as Powell becomes acquainted with his new job, and markets become acquainted with him.

via Zero Hedge http://ift.tt/2FW5Lby Tyler Durden

Earlier this week, JPM’s head quant Marko Kolanovic did a “sort of” mea culpa  when he admitted that his note from last week, in which he projected that there would be no systematic  selling, was not exactly “correct” in light of what would end up being the “biggest VIX buy order in history” as VIX ETPs were crushed in a terminal short squeeze, that sent the VIX soaring by the most on record. However, in what has become a bizarre transformation, Kolanovic who until recently endorsed a prudent and cautious approach to investing, urged investors to once again “BTFD”, going so far as suggesting that central banks would step in to halt any potential rout. Judging by Bill Dudley’s just concluded comments amid today’s plunge in stocks, that does not appear to be the case, at least not for a while.

Fast forward to today, when Kolanovic has released an unprecedented third note in one week. In today’s edition he takes a step back, to more objectively examine the sources of the rising VIX wave, saying that the current crisis has played out exactly the same as the August 2015 crisis.

But first, now that the “current crisis” is panning out much more seriously than Kolanovic first expected, here is how the JPM quant frames the current situation:

In our note on Monday we argued that the current selloff is entirely technical in nature, that fundamentals did not change, and as such that we believe that it is an opportunity for human investors with some tolerance for market volatility to step in (the market is up ~1% since).  In our previous research we highlighted how liquidity shocks may develop and argued that the collision of selling from various systematic strategies and diminished equity liquidity provided by electronic market making in times of stress will produce liquidity crises. In particular, strategies that are selling are those that use realized volatility, correlations, VIX and price momentum as signals to adjust exposure, and AUM in these strategies increased greatly over the past decade. On the other side, electronic market making depth becomes severely diminished at the same time these signals are triggered. In our previous research, we also mapped out how some popular exchange traded volatility trading products will collapse. Finally, we outlined in our 2018 outlook that low VIX levels are not a new normal, and that volatility and tail risks will rise in 2018.

With that said, Kolanovic repeats what we said last week, namely that those who were around 2 and a half years ago should be filled with a sense of deja vu, because what is going on this week in equity markets is a carbon copy of the ETFlash Smash of August 2015, where first the ETNs, then CTAs then Risk Parities all blew up sequentially, crushing market liquidity, only because it took place in the premarket everyone blew up at exactly the same time, and the sequence of events was drastically truncated. Here is Kolanovic:

From the aspect of systematic flow and electronic liquidity, the current crisis has played exactly the same as the Aug 2015 crisis. It started with the de-risking of trend followers, short volatility positions, and strategies sensitive to bond-equity correlation. Similar to Aug 24th, by far the largest and quickest punch came from hedging flows for the trillion dollar+ S&P 500 index put option complex (gamma hedging) on Monday, and was compounded this time with liquidations in the VIX complex. As this was unfolding, electronic liquidity, in the once most liquid product, S&P 500 e-mini futures, evaporated.

As measured by market depth in futures, liquidity on 2/6 dropped by ~90% (compared to the first few weeks of the year). Once volatility was out of the bottle (~5% move on Monday), various forms of volatility targeting strategies (with AUM in excess of $300bn) were set in motion and added outflows that will keep investors on edge for several days.

In an amusing aside, Kolanovic says that “we think some of these systematic strategies may end up selling at the lows (and later on buying it back at the highs).” Not to mention retail investors, of course, all of whom XIV at the highs, relatively speaking, and were wiped out overnight on Monday.

And yet, just as we noted this morning, there is one notable difference from 2015: so far the vol crisis has been contained exclusively to equities, or as the JPM analysts says:

“while for equities this looks like a 2015 type of crisis, other asset classes disagree. This is because there is a big macro/fundamental difference between now and the Aug 2015 market crisis. In 2015, we dealt with an EM crisis (e.g. China), crisis of credit spreads, collapse in commodity prices, and weak global growth. There were legitimate fears of a global recession. Now, the situation is exactly the opposite: global growth is very strong, US corporate earnings are at record highs (and continue to be revised higher), commodities have stabilized, and the USD is weak.”

Ah yes, but the “common narrative” is one in which inflation – not deflation – can unleash the next economic crisis, by way of the market as the signal carrier, with risk assets crashing and unleashing the next economic contraction. Frankly, it is surprising that Kolanovic won’t even acknowledge this. After all, one look at the market, and it is beyond obvious that stocks selloff every time the 10Y approaches 2.85%, a level that has become a true ‘red line’ for equities. In fact, one can argue that in 2015, the risk of a global economic crisis was positive for stocks, as it meant more NIRP, and more QE if things got out of control: the only two catalyst that have moved stocks higher for the past decade. This time around, everything is flipped, with inflation the latent bogeyman.

Touching on none of this, Kolanovic instead makes an emotional appeal to fundamental investors, again: please BTFD:

We also want to add that the new Fed chair, vetted by the current administration that uses the stock market as a score card, is highly unlikely to do anything to derail markets and the economic cycle. All of these factors make a big difference, and should give confidence to fundamental investors to step in and short-circuit the feedback loop of programmatic selling and depleted equity liquidity. In an odd way, the market correction that happened early in the year (still low rates, strong global growth, tax reform earnings boost) may further extend this bull market cycle. Valuations have normalized (and are now close to historical averages), pockets of extreme leverage are defused (e.g. selling volatility, large speculative longs, etc.), and central banks will likely be a lot more cautious going forward given the market fragility lesson of this week (e.g. see Kuroda’s recent statements).

Here, Kolanovic makes a modest concession, and touches on the recent spike in yields, saying that it should be far less of an issue than it was when the 10Y was “well above 3%”: “Regarding the concerns of rising interest rates, we note that in the 2010-2013 time period we often had 10 year yields well above 3% in an environment of weaker growth.“

Ah yes, but global debt has also risen by about $60 trillion since 2010, which obviously means that interest rate breakevens are far lower especially in a world in which the neutral rate or so-called r-star is around 0%.

Kolanovic concludes by making a point that propagated across the financial media on Tuesday, namely that aside from equities, vol in other assets has barely budged.

This stark difference from 2015 is obvious when looking at volatility across asset classes. Through the lens of the VIX, this may look as bad as or even worse than 2015, but through the lens of interest rate volatility, credit spreads and FX volatility, current events look like the smallest of 5 crises since 2015. We do note that equity volatility will not go down back to the lows near-term (e.g. VIX of 10), but we expect it to decline from current levels, and for the term structure to normalize relatively quickly.

Well, that may have been the case, a few days ago, but as we wrote this morning in “Will The Market Shock Escalate Further: It Depends On Just This One Thing“, and the reason why equities are tumbling again for the second time this week, is that slowly but surely vol everywhere else, and especially in rates, is starting to catch up quickly with stocks.

Finally, for all those wondering if they should follow the advice of Kolanovic, who incidentally failed to anticipate this latest VIX eruption, recall our post from yesterday, in which we quoted an analyst  who did predict Volmageddon: his words: “Don’t even think about buying the dip.“

via Zero Hedge http://ift.tt/2Bi7hW5 Tyler Durden

Via TheAntiMedia.org,

A pair of New York politicians has introduced legislation that would force consumer goods corporation Procter & Gamble to make their Tide Pod product less appetizing to human beings.

State Senator Brad Hoylman and Assemblywoman Aravella Simotas, both Democrats, revealed their proposal at a joint press conference in New York’s capital city of Albany on Tuesday.

If passed, Senate bill S100A would require liquid detergent packets sold in the state of New York to be “designed in an opaque, uniform color that is not attractive to children and is not easily permeated by a child’s bite.”

The bill further states that each Tide Pod packet should be “enclosed in a separate, individual, non-permeable, child-resistant wrapper” and that the package they come in should have a warning label saying the product is “harmful if swallowed.”

And while S100A is being presented within a broader effort to protect kids, it’s clear the move was prompted by the “Tide Pod Challenge,” a recent social media trend that has young adults filming themselves deliberately ingesting the product.

In a letter the politicians sent to Procter & Gamble CEO David Taylor, Hoylman and Simotas refer to the “alarming social media stunt” as a “renewed opportunity” to tackle the “continuing problem” of people ingesting Tide Pods, accidental or otherwise.

On January 22, Taylor addressed the Tide Pod Challenge in a press release, stating:

“The possible life altering consequences of this act, seeking internet fame, can derail young people’s hopes and dreams and ultimately their health.”

Continuing, Taylor stated the obvious — that “even the most stringent standards and protocols, labels and warnings can’t prevent intentional abuse fueled by poor judgment and the desire for popularity.”

New York Assemblyman Joseph Errigo appeared to agree with Taylor, telling the NY Daily News that it’s not the job of manufacturers to protect people from themselves:

“There’s no easy way to spin it other than to say the people who are participating in this trend are old enough to know laundry detergent is not safe for consumption, and the people behind this legislation should know that it’s not the manufacturers who are to blame when people make stupid decisions with their products.”

*  *  *
Independent media is under attack — and we need your help to save it! Click here to become an Anti-Media patron.

via Zero Hedge http://ift.tt/2FZKSw7 Tyler Durden