If we’re going to scapegoat “the machines” for escalatory selloffs as we so often do (although selloffs being rare, “often” may be a misnomer), we might give them credit when they contribute to rallies.
Right? I mean, that’s the fair thing to do. Machines need positive affirmation too. And they appreciate it when it’s given. Or at least ChatGPT pretends to appreciate it.
If we aren’t thinking about robots’ “rights,” it’s probably time to start. They’re going to lord it over us sooner or later (sooner, by every appearance). Maybe if we’re nice to them for the remaining few years of human dominion, they’ll be inclined to benevolence once they supplant us.
I spent a fair amount of time over the summer carrying on about the steady grind lower in short-lookback realized vol and even more time on three-month trailing realized which, assuming no new shocks, was mathematically guaranteed to collapse beginning last month as the chaotic sessions around “Liberation Day” fell out of the sample.
There’s the chart. Realized vol’s inverted on the left axis. The white line’s three-month. Note the second shaded area: Three-month rVol collapsed from ~30 to ~14 in a matter of weeks as those “Liberation Day” sessions dropped out of the lookback. Prophecy fulfilled.
If you scale into (or out of) risk based on volatility, the collapse in three-month trailing vol dictated more exposure atop that already added back off the April panic lows. Or at least in theory, and for some models.
At the same time, a trending market’s conducive to… well, to trend-following strats, “who” likewise dialed up their exposure to equities into a summer melt-up which produced 17 new record highs for the S&P.
If you’re curious as to just how helpful that combined mechanical re-allocation bid was — i.e., if you’re wondering about the scope of it — Nomura’s Charlie McElligott tallied it up on Thursday.
The figure on the left shows you the inflection while the figure on the right gives you some context for $191.5 billion in added-back equity exposure across systematics.
So, thank a machine. Hug a robot. Model-based buying put a $200 billion bid under the market over the summer.
Now, though, the risk’s asymmetric, which is to say there’s more for systematics to sell on a vol expansion than to add on a continuation of benign conditions.
“[T]he general consensus view [is] that the risk / reward looks meaningfully dicier here in US stocks with both the downshift in US labor data and historically significant long positioning [particularly] vol-scaled exposure,” McElligott wrote, adding that “folks are increasingly uncomfortable being too long into potential sources of ‘mechanical supply’ skewing hard towards sell risk on even a small vol uptick following three months of substantial [systematic] buying.”
@JL – didn’t you send me another estimate indicating CTIs are already close to 99% long?
That would certainly support our Dear Leader’s analysis here.
Yes, I did. Vague impression of this fuzzy-minded meat investor is that systematics are tapped out for the nonce. Buybacks are not, but do enter a blackout period about now. We still have rate cuts to start this month and, if the WH gets its way, reach 200-300 bp over the coming year+. For which, I think, “bad news is good news” . . . until it gets too bad, I suppose.
I’m sure you are correct- but I also wonder if the migration of wealthy people out of UK and France and into UAE (very favorable tax regime) and Italy (flat tax) is also shifting investments from the EU to the USA.
I for one look forward to the day when our robot overlords finally seize control. Let’s see if they can manage things any better than we have. We had our chance. After all, it’s all just evolution, isn’t it?
Your comment reminds me of one of the short stories, “The Evitable Conflict,” in Isaac Asimov’s “I Robot.” (“I Robot” was a collection of 9 short stories. The Will Smith movie just verrrrry loosely adapts one of them.) Here’s the Wikipedia summary:
I still read Asimov. His nonfiction work is exceptional too.
I was a huge fan as a kid. I remember being blown away when I learned he published at least one book in every section of the Dewey decimal system. He had a series that was the “ABCs of…” on various subjects. I’m pretty sure I read them all.
Thanks for that. Now that I think of it, a robot that could run on a platform of managing Earth’s natural resources more efficiently might be the Democrat’s best chance to win the next Presidential election. Vote R. Daneel Olivaw!
It occurred to me when reading the comments for this piece that autocracy and the machine are manifested in similar ways. Both claim to solve a problem, simply, but create more trouble in the process. Both are voluntarily applied but almost impossible to get out of once implemented. Both are born out of human’s unwillingness to solve their own problems and thus it is poetic that we suffer for our laziness.
Systematic leverage now controls our financial destiny and there is nothing we can do about. Autocratic regimes are going to do everything they can to ensure they stay in power, there are no guardrails.