Moral Hazard

Why Is Wealth/Income Inequality Soaring?

Why is wealth/income inequality soaring? The easy answer is of course the infinite greed of Wall Street fat-cats and the politicos they buy/own. If conventional labor and finance capital have lost their scarcity value, then the era in which financialization reaped big profits is ending.

Truth Is Being Suppressed By The Tools Of Money

Global Capitalism is trapped in its own Prisoner’s Dilemma; fourty four years after the end of the Bretton Woods System global central banks have manipulated the cost of risk in a competition of devaluation leading to a dangerous build up in debt and leverage, lower risk premiums, income disparity, and greater probability of tail events on both sides of the return distribution. Truth is being suppressed by the tools of money. Market behavior has now fully adapted to the expectation of pre-emptive central bank action to crisis creating a dangerous self-reflexivity and moral hazard. Volatility markets are warped in this new reality routinely exhibiting schizophrenic behavior. The tremendous growth of the short volatility complex across all assets, combined with self-reflexive investment strategies, are creating a dangerous ‘shadow convexity’ that will fuel the next hyper-crash.

Peak Debt, Peak Doubt, & Peak Double-Down

Investors are too complacent (the Minsky-Moment).  Too many are still trying to profit from the Fed subsidy of past stimulus. Investors remain loaded in risk assets, incentivized by the need to beat peers and benchmarks and comforted into complacency by the Fed ‘put’. The true level of risk is being ignored. The pervasive mentality of seeking maximum risk has become a terrible risk/reward trade for two main reasons...

"Shadow" Short Convexity: If You Short 'Fear', Be Prepared For 'Horror'

The 2007-2008 financial crash was not a black swan. That is a collective lie propagated by policy makers so they don’t cry themselves to sleep at night. Many different people predicted and profited from the 2008 crisis. It was about the fear of failing banks and crashing markets... but the true horror was the impending collapse of the entire fiat money system that never came to be. That was the true black swan. 

The Economic Doomsday Clock Is Closer To Midnight

Central banks are fearful and unwilling to normalize but artificially high valuations across asset classes cannot be sustained indefinitely absent fundamental global growth. Central banks are in a prison of their own design and we are trapped with them. The next great crash will occur when we collectively realize that the institutions that we trusted to remove risk are actually the source of it. The truth is that global central banks cannot remove extraordinary monetary accommodation without risking a complete collapse of the system, but the longer they wait the more they risk their own credibility, and the worse that inevitable collapse will be. In the Prisoner’s Dilemma, global central banks have set up the greatest volatility trade in history.

Moral Hazard, "Supernormal" VIX Swings, And Why August 2015 Was Just An Appetizer

The single most important “unknown unknown” today is any random event that may unexpectedly cause global central banks to withdraw their stated support of markets. Moral hazard has contributed to a significant build up in short and leveraged volatility creating a shadow ‘volatility gamma’ that reinforces the current trend in volatility direction. Rising volatility is followed by more rising volatility and vice versa. The pattern is creating a pro-cyclical monster of short volatility that, if left unchecked will contribute to a repeat of the May 2010 Flash Crash or 1987 Black Monday Crash. August 2015 was just an appetizer.

The Devil's Dictionary Of Post-Crisis Finance, Part 1

Austerity: Also known as “sado-fiscalism”. A forlorn attempt to stave off government bankruptcy.

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Keynesians: Economists “who hear voices in the air (and) are distilling their frenzy from some academic scribbler of a few years back” (John Maynard Keynes).

The Perilous Misperception That Central Bankers Have Mitigated Market Risk

Never have markets carried so much risk. And never have markets been as vulnerable to an abrupt change in perceptions with regard to central banker competence, effectiveness and capabilities. At the minimum, global markets will function poorly, but risk is now high for a disorderly – Party Crashing - "run" on financial markets, as faith in central banking begins to wane.

This Hedge Fund Made 15% Yesterday As The Market Tumbled

"Artemis Vega Fund LP and associated institutional managed accounts gained approximately +15.49% gross of fees on September 1, 2015 on a day the S&P 500 index lost -2.96%. Please note this performance was for the day....  Our models currently register a 30% probability the VIX will re-test highs above 40 in the next 21 days."

Leveraged Financial Speculation In The US At A Familiar Peak, Once Again

Like a dog returns to its vomit, the Fed's speculative bubble policy enables the one percent to once again feast on the carcass of the real economy. 'And no one could have ever seen it coming.' Once is an accident. Twice is no coincidence. Remind yourself what has changed since then. Banks have gotten bigger. Schemes and fraud continue. What will the third time be like? And the fourth?

"There Is No Other End Than A Bad One... It's A Mathematical Certainty"

When we see guys like Bernie Sanders get visibly angry at guys like Alan Greenspan it behooves all of us to go beyond the entertainment of it or some prima facie agreement and to truly understand why the anger is justified. If we were to all take the responsibility to understand the lifeblood of our American existence i.e. the economy, we will most certainly be moved to remove not only the policymakers but the system that together serve only those at the top of the economic food chain and at a cost to the rest of us. When we do we will be asking why in the hell is no one yelling at Janet Yellen??

"Greed Is King" - What We Learned Talking To Chinese Stock Investors

During a short stay in Shanghai a few weeks ago on unrelated business, we had an opportunity to witness the ground zero of the China market frenzy at its peak and its nascent plunge. Chinese retail investors make up 85% of the market, a far cry from the U.S. where retail investors own less than 30% of equities and make up less than 2% of NYSE trading volume for listed firms in 2009. Combined with the highest trading frequencies in the world and one of the lowest educational levels, describing China’s market as immature is an understatement.

The Greatest Collapse In The History Of The VIX Index

The ongoing decline in the VIX starting last week (and still going) is the largest supernormal volatility collapse in VIX history. Over the past 2 years, we have been experiencing a quantifiable ‘outlier’ or ‘black swan’ decline in the VIX every 6 months as evaluated against history. We can only point to government intervention as the core reason. We firmly believe that this moral hazard produces a hidden leverage and “shadow market gamma” that at some point will result in a sustained volatility outlier event in the opposite direction.

Bonds Are Back: "There Is Too Much Complacency"

Investors are too myopically focused on expectations of a steep rise in bond yields and on using central bank stimulus to pile back into riskier assets. There is too much complacency.  We believe the upside potential for Treasuries prices for the balance of the year is once again being greatly underestimated. The long end should continue to perform well under various scenarios. If the Fed hikes in September or earlier, the back end should perform well.  If the Fed breaks its implicit promise to hike rates in September, its credibility would be damaged:  unless of course, it was due to a significant deterioration in the economic or political landscape.  Either outcome would likely benefit long Treasury security prices.