A Nightmare On Wall Street – Updating The Feedback Doom Loop
Remember "Investigating The Market’s 'Nightmare Scenario'"?
Of course you don't. That post is from May and you've been drunk slept since then.
But it was an important piece. Essentially, it outlined the potential consequences of the feedback loop that's embedded in markets thanks to the proliferation of VIX ETPs and systematic strats that lever up in a low vol. regime.
Here, in a nutshell, is the potential problem:
One wonders, for instance, what would happen if rebalancing by VIX ETPs afte
Oh well, the whole thing could collapse. Look, a balloon. Nothing to see here. Almost 9:30. Time to BTFD and short vol. Nobody seems to be listening.
Sometimes when the fire drill is pulled, you find that some exits are blocked (few buyers).