Obviously, nothing could go wrong here.
“But how ironic would it be, if the instrument that was the hands-down winner during the last crisis, ended up causing the next crisis because too many people were short it?”
“This mechanism of market functioning is a manifestation of systemic causation.”
It’s all about “loops” and “spirals” these days.
“Spiraling leverage cannot continue indefinitely. At some point, the bubble becomes too big and cannot be subsumed by a bigger bubble – the damage of its burst would become irreparable.”
Also ensuring a rapid reversion are everyone’s favorite market doomsday vehicles.
Suspension of disbelief, on the other hand, implies an active effort on the part of the person or persons in question to avoid common sense in favor of a more convenient explanation of reality.
“And although I am not changing my tune that the US stock market is overbought and ripe for a surprise correction, I am adding a trade to my arsenal.”
“In a way, continued prosperity and stability in itself is destabilizing leading to riskier lending as the asset prices of collateral decline. This is the essence of Minsky’s take on financial markets.”
“But what happens if there is an exogenous circuit breaker and we can no longer pretend?”
“We miss volatility. We are living in a strange world with lot of geopolitical volatility but it’s not in financial markets.”
When the proverbial shit hits the fan, don’t blame risk parity and the trend followers. Rather, point the finger at the Target manager next door.
“It has been over 50 years since realized vol was as low as this year’s 7%. 2006’s 10% was the lowest SPX volatility of the lull between the dot com selloff and the financial crisis. The lowest annual SPX realized vol years on record are 1964 and 1965 with 5.3% and 6.8%, respectively.”
“Vol shorts will get their comeuppance, even if it’s later rather than sooner.”
According to the latest read on this, the potential for an ETP rebalance to cause problems is still near record highs.