I’ll Die Unhedged, Thank You.

It really is a question of faith in the power and credibility of the monetary policy put.

The Bank of Japan’s Kuroda would tell you “where there’s a will, there’s a way”. “All we need is positive attitude and conviction”, as he famously put it in 2015.

If actions speak louder than words when it comes to “conviction”, Kuroda leaves little room for doubt. On Tuesday, he said the BoJ owned nearly 80% of Japanese ETFs as of September 2018. That’s not “news”, but it is funny. Context is important, though. The BoJ only owns about 4% of Japan’s stock market.

In any case, market participants used to marvel at the extent to which political tumult never seemed to translate into sustainable spikes in market-based measures of volatility. Charts plotting various measures of policy uncertainty (“politicians’ implied vol.”, as it were) look like a polygraph from 2015 forward. But if you plot, for instance, rates vol. on the same axis, you get a sense of just how effective forward guidance has been in making sure geopolitics run amok didn’t spill over into asset prices.

Read more: The Central Bank Put Is Still There, But ‘Politicians’ Implied Vol.’ Has Exploded

But as crazy as things were in 2015 and 2016 (Russia formally entered the war in Syria, Europe was struggling to cope with an influx of migrants fleeing the war-torn Mideast, anti-immigrant sentiment was marshaled by political opportunists seeking to capitalize off xenophobia, etc.) the geopolitical backdrop is more fraught now.

The US is facing a full-fledged constitutional crisis. Don McGahn’s refusal to show for scheduled testimony to the House Judiciary Committee on Tuesday appears to have been the last straw for Democrats when it comes to suffering the White House’s belabored efforts to thwart subpoenas. Jerry Nader claimed the committee will hear from McGahn one way or another.


On Wednesday, House Democrats will hold a caucus meeting billed as “an update on oversight and investigations” into the Trump administration. Let’s not beat around the bush: They’re being baited into starting impeachment proceedings, something the White House thinks might play into the president’s hands in 2020.

Meanwhile, across the pond, Brexit has failed. Theresa May on Tuesday offered MPs a vote on a second referendum. Ostensibly, that’s a positive development, but it underscores just how misguided the original idea was and also how far afield we are in terms of allowing populist sentiment and noxious nationalism to lead us astray. The UK cannot get back the nearly three years wasted on Brexit, which will go down as one of the more ridiculous boondoggles in recorded history.

At the same time, the Trump administration is stumbling into an economic cold war with China and a possible shooting war with Iran. The consequences of either would be catastrophic. The former threatens to plunge the world into a recession. The latter would exact an unimaginable toll.

Read more: The US Is Stumbling Towards Two Worst-Case Scenarios

They say you can’t hedge a portfolio for the end of the world, and even if you could, what would be the point? That’s a tired, old adage that’s about as useful as any other tired old adage – not very.

The world isn’t going to end, but 2019 is different than 2015 and 2016 and 2017, all years when geopolitical tensions were running high enough to prompt any reasonable person to suggest that central banks were ill-equipped to tamp down volatility.

The trade war is stoking intense nationalism both in the US and China. That increases the chances of the conflict spilling over into things that have nothing to do with trade. Huawei is a slippery slope.

On Iran, Trump seems to be drawing a spurious parallel with North Korea – he clearly believes he can squeeze the theocracy until Tehran finally cracks, and then hold some kind of farcical summit that doubles as a photo op with Khamenei. John Bolton knows how absurd that is, but he’s no help, because if it were up to John, Trump would have already bombed the regime. Trump swears he doesn’t want to be in the regime change business. But you can’t tell the public that and then let Bolton advise you on matters of security. Trump initially snubbed Bolton because he was offended by John’s mustache – the president should have been offended by John’s foreign policy.

How many rate cuts is enough to offset all of this if it spirals? What percentage of their respective bond markets do the Big 3 central banks need to own to ensure that the incentive to chase yield and pile into carry trades is so strong – the cost of owning safe havens or, gasp, being long vol., so punitive – that financial assets stay supported?

Ironically, the answer to those questions is probably the same as it’s been for years. Central banks just need to create the conditions whereby markets surrender “to an ever shrinking menu of selections” which ultimately “converges on a binary option of either harvesting carry or running a risk of gradually going out of business”, as Deutsche Bank’s Aleksandar Kocic once put it. “Not much of a choice, really”, he added.

And therein lies the ultimate irony. In order to keep financial assets afloat in a world where the foundations of democracy are cracking and the risk of economic ruin and/or the actual loss of life seems to be increasing, monetary policy needs to be set such that not taking risks is a financial death sentence for anyone who’s concerned with underperformance.

Read more: Gray Rhino Or Black Swan? Characterizing Vol. Spikes In A ‘Smart Power’ Regime


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4 thoughts on “I’ll Die Unhedged, Thank You.

  1. “Photo of widow hearing about will and laughing. Caption. Smiling, Mrs.. X? We thought so. Where there’s a will there is a way.” – A House for Mr. Biswas, V S Naipaul

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