On Sunday, Bloomberg ran an “article” called “JPMorgan Plans Call With Clients to Address Market Volatility“. As of this writing, it features prominently on the front page of Bloomberg’s website.
“JPMorgan Chase & Co. plans to host a conference call on Tuesday to help clients make sense of markets after a week of wild swings for stocks and bonds”, the first line proclaims.
That’s according to what Bloomberg describes as an invitation they obtained. Here is that invitation:
Allow us to make a couple of quick points on this.
First, the bit about “poor liquidity and systematic flows in exacerbating market moves” is a reference to the “liquidity-volatility-flows feedback loop” the bank’s Marko Kolanovic has discussed on too many occasions to count over the years, and which he outlined again in January (see the first linked post below).
The relationship between volatility and liquidity “is very strong and nonlinear e.g., market depth declines exponentially with the VIX”, he wrote, in a note dedicated to the subject. “Given that an increase in volatility often results in systematic selling, this relationship is the key to understand market fragility and tail events”.
(JPMorgan)
That is in fact a crucial dynamic and, indeed, we have on several occasions over the past week discussed it in the context of this month’s various bouts of volatility (see the third linked post below).
That said, this is a fixture of modern market microstructure, and that is almost surely how it will be presented in this call. It isn’t unique to August, and Bloomberg’s use of the word “unusual” in their piece is somewhat misleading. Impaired market depth has been a problem for years and really, that is precisely the point. What we’ve seen in August is yet another manifestation of something Kolanovic has been pounding the table on for as long as anybody can remember.
The bit about convexity hedging in rates is something we’ve discussed at length in these pages too, and we would say the same thing about it that we just said about the loop between equity volatility, a lack of market depth and systematic strats – namely that while receiving flows have, in fact, exacerbated the rally in rates (i.e., accelerated the drop in long-end US yields), this is not something that is unique to August. Indeed, it’s played prominently in rates during several episodes in 2019 (see the second linked post below).
The point here is that these are all crucial dynamics, and you cannot understand recent manic moves in equities and rates without appreciating how these feedback loops work, but the way in which Bloomberg presented Tuesday’s conference call with Kolanovic is bound to leave some market participants with the impression that this is an “emergency” call, or an event the bank felt like they had to convene in order to avert some kind of panic.
That perception could well be amplified by the fact that Jamie Dimon himself chatted with Donald Trump on Wednesday, something Bloomberg (and CNBC) also reported.
Our message is simply this: Be smart, folks. There is nothing to panic about here, or if there is, it’s not that three JPMorgan analysts are holding a call with some clients.
In fact, given where the action has been concentrated this month (i.e., in rates) our guess would be that the call will focus more on the convexity hedging that on equities vol.
The ultimate irony to this non-story is that during the December rout and in its immediate aftermath, Kolanovic himself repeatedly warned about the “vicious” negative loop that can develop when sentiment is undermined by bombastic headlines which get circulated, exaggerated and amplified in the social media echo chamber.
He wasn’t so much talking about mainstream financial news outlets, but the point stands. As he put it, “if we add to this an increased number of algorithms that trade based on headlines, the impact on price action and investor psychology can be significant”.
Read more:
Marko Kolanovic Explains The ‘Liquidity-Volatility-Flows Feedback Loop’
The Gamma See-Saw: Deutsche’s Kocic Explains This Week’s Biggest Market Story
The VIX Did Something Monday It’s Only Done 5 Other Times – And That’s Not Even The Punchline
I think, If the market breaks by Tuesday, they’ll be bearish….if it rallies, they’ll be bullish…..if it holds steady, they’ll be undecided……just like the rest of us.
Good prognosis
Let’s face it…the bank’s wealth management arm makes money as long as their clients “stay invested”, especially in equities. They have a huge vested interest in “calming” their clients who understandably are getting nervous about their equity exposure to an extremely overvalued market – S&P 500 in particular- by most historical measures (CAPE, Buffett ratio, etc). Of course, it is going to be a “stay calm” message!
JPM’s wealth management revenues are based on assets under management, not on what those assets are invested in. A shift from equities to fixed income is largely revenue-neutral. A shift from equities to “cash equivalents” could be slightly revenue-dilutive if JPM charges lower fees on assets held in cash equivalents, but could be revenue-additive if those cash equivalents are JPM proprietary instruments or deposit accounts.
As a related example, if you look at the big brokers (SCHW etc), a huge part of their revenue is from sweeping clients’ cash balances. They earn around 1% on that (or did last time I looked at their financials).
Finally, he is almost certainly doing a call for JPM’s institutional clients, not for JPM’s wealth management clients.
Granted, the sellside as a whole tends to lean bullish for various structural and behavioral reasons. Its not evident to me if this particular analyst does that.
There’s an old market cliche which applies now more than ever:
“Don’t tell me up don’t tell me down, tell me the volume.”
The last time I checked they were charging much more for the equity portion vs bonds or cash. In any case a client could have completely liquidated their equity portion on Aug 14 2018 and independently invested it in T bills purchased directly from the US treasury. Fast forward to Aug 14, 2019. The client would have earned over 2% in T bills (while JPM would have lost 1% in fees) during a period when the S&P500 ended up exactly flat while experiencing stomach churning swings along the way. Btw, I believe more pain is yet to come….
Interesting. So JPM WM makes a higher fee as % of AUM in a 70% equity / 30% fixed portfolio than in a 50% / 50%? That seems like a potential conflict of interest?
The VIX/10 yr treasury yield hasn’t seen fear like this since around August 10, 2011. Thus, having a chat with clients about fear is obviously a nice idea, it might be wise to re-think risk!
Ever since Standard & Poor’s stripped the U.S. of its AAA credit rating on Friday, fears have been building that rating agencies may also downgrade AAA-rated nations in Europe, since they are also struggling with massive debt problems.
On Wednesday, shares of French bank Societe Generale tumbled 15% on the Paris stock exchange amid speculation that France, Europe’s second-largest economy after Germany, may be first to face a rating cut.
https://money.cnn.com/2011/08/10/markets/markets_newyork/index.htm