“When asked their worst trades this year, they mostly cited buying volatility, credit protection, or equity puts.”
After all, “shouldn’t greater uncertainty about key economic policy issues lead to a larger dispersion of likely potential outcomes for companies?”
“There’s real danger but at the same time, the central figures are so laughable that it’s difficult to accept it as reality”…
“All this combines to suggest a volatile fourth quarter. Year-end themes remain elusive.”
“We would characterize existing political risks as of the run-of-the-mill variety that investors always face and a far cry from the high-stakes political events of the past several quarters (events that markets navigated with aplomb.”
“This is an environment that is bearish for volatility. It fosters further complacency and encourages continued vol selling.”
“If there’s one theme running through many of the conversations I’ve had this week, it’s that people are really unsettled about not having a clue where asset prices are going. Every move is portrayed as obvious, meaningful and sustainable–until it’s not.”
What could go wrong?
And yet true to form in a world where policymakers have turned everyone from macro managers to Target employees into vol. sellers and carry traders…
“To some extent the market’s resilience is justified; in other cases, however, it looks like a case of when rather than if potential shocks get priced in.”
Because then you’ll be actively contributing to the vol. spike (by selling assets or letting them roll off the balance sheet) and passively contributing to it as well by removing the “put” that incentivizes investors to buy dips and suppress volatility.
If you’re reading this, you’re probably in the investment industry, or at least have an interest in financial markets. If you’re in the investment industry or in the financial markets, you like to win. So you’re not going to like my answer.
We play. And we lose.
One of the defining characteristics of the ongoing risk rally over the past 14 months has been its remarkable resilience in the face of epochal political shifts and a world at war. Brexit, Trump, the near-miss in France with Marine Le Pen – all of those events had the potential to do lasting damage to…
Ok, so strap in, because this promises to be an interesting week. August has proven to be the month that risk assets finally took notice of the exceptionally precarious geopolitical backdrop. Risk assets have reacted unfavorably to the combination of rising tensions on the Korean peninsula and the seemingly terminal decline of the Trump administration. As…
“Deterrence counts on the rationality of the opponents. The build-up of mutual threats and the shows of force in the past weeks have unsettled markets, with risk assets and high-beta currencies underperforming, and it is likely to continue.”