I don’t want to spend a ton of time on this because it should be self-evident, but I feel like it might be getting lost in the shuffle amid the myriad attempts to explain why everything seemed to come apart at the seams in October.
It’s a lot of fun to parse the various macro narratives for clues as to what’s driving asset prices and when it comes to the intersection of geopolitics and markets (my raison d’être), you’d be hard pressed to point to a period in history when understanding that nexus was more critical than it is right now.
In the same vein, the inherent perils of modern market structure are manifesting themselves in outsized drawdowns and wild swings as systematic flows and computerized market making collide with the dynamics engendered by the proliferation of passive products that allow anyone with an E*Trade account to access intraday liquidity (or, perhaps more aptly, the mirage of liquidity) in asset classes where retail investors have no business being, let alone day-trading.
Whenever we get manic trading and adverse conditions like those which played out last month, everybody attempts to incorporate all of the considerations listed above into a kind of unified theory of everything. I’m just as guilty (if not more so) of that than anyone.
But if you’re an Occam’s razor type and someone asked you to explain exactly what’s going on in a world where nearly every asset class seems to be struggling to perform, you’d probably be inclined to just note that USD “cash” is now an attractive alternative for the first time in as long as anybody can remember.
More simply: TINA is not only dead, but buried as well. Nowadays, there is an alternative. And that alternative is “cash.”
Here’s a chart:
As Citi’s Matt King put it back in August, “rising vol and meagre YTD returns are suddenly being complemented by renewed awareness of how single-name blow-ups can at a stroke wipe out months of carry”. That “sucking sound” you’re hearing “is the irresistible lure of 2.5% on $ cash – risk-free – pulling money from your asset class”, he continued. That “sucking sound” has only become louder since then.
Meanwhile, 10Y real yields in the U.S. back above 1% are a real challenge for risk. “Since mid-August, the rise in 10yr Treasury yields has mostly been due to an increase in real rates [and] this has been another form of tighter financial conditions for the market”, BofAML writes, in a note dated Thursday, adding that “historically, rising real rates seem to have been a fairly good harbinger of ‘risk-off’ episodes for the broader market.”
Again, there’s nothing particularly profound about any of the above, and that’s precisely the point – Occam’s razor.