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Back To The Tinderbox
Headed into December, one key part of the year-end, melt-up thesis is that realized volatility will continue to grind lower, triggering mechanical re-leveraging from vol-sensitive investor cohorts.
"As our thesis for a post-election, post-vaccine implied vol compression continues unabated, the second-order impact on systematic 'vol control'—type strategies will continue providing supportive 'buy' flows in [the] coming days and weeks in the absence of another 'shock,'" Nomura's Charlie McEllig
Since the largest Wall Street dealers became banks at the onset of the global financial crisis the market structure has changed. Capital levels and cost of this capital is now partially dictated by bank regulatory requirements. As a bank now, the investment banks used allocating less capital to markets as a way of getting regulatory required capital higher. That caused the unintended consequence of this type of market structure with a lean amount of capital supporting markets. In essence risk has been shifted away from the banks and towards investors and other market players. And at the same time the size of the financial markets has grown significantly, which makes the problem bigger. Unless regulations change, we will have to live with this market structure.
This market is very scary for me, historically, a fundamentals based investor. I liked to find stocks that were beaten down, where I thought the future looked bright. Against the back drop of a stock market that functioned in a manner that was considered “normal”.
I learned a huge lesson earlier this year- I might have miraculously figured out when to get out-but did not know when to get back in.
As of now, with a much better understanding of the currency printing impact on the stock market, I am “almost all in”, but super paranoid. I am worrying the most about the effect of the January 5 run off election on the stock market.