The ABCs Of A Crash: No Alpha, All Beta, & Consensus Contagion

Tyler Durden's picture

The vicious circle of central-bank inspired low volatility begetting increasing fragility (instead of 2004-2007's virtuous circle) is nowhere more clear that in the collapse of alpha generation opportunities and the implicit capitulation of every hedge fund, retail investor, and Goldman muppet to be all-in on stocks. Removing collateral, gating bond funds, and constant warnings that they bonds (not stocks) may be frothy has done nothing but herd an ever more brainwashed investing public into an ever more concentrated ownership of stocks. This, as Citi's Matt King explains, has distorted markets to no longer follow fundamentals (no matter what you are pitched on TV or by your broker).


Risk 'not taken' emerges one way or another

If alpha is all but impossible...


Then funds will take beta instead...

Funds have not been this balls deep long beta in stocks since the top in 2007

Evan though markets are entirely disconnected from fundamentals...


And furthermore, while macro data has moderated, surprise have not - leaving (as we explained in great detail here) the fall in market vol outsripping the moderation in uncertainty dramatically...


But Consensus trades have started to crack...


The bottom line - there is no Alpha, everyone is all-in Beta, and consensus is now so one-sided that Contagion is inevitable if any event occurs to rattle market's faith in the omnipotent ones (like a gold spike).

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knukles's picture

Some have said it's about as disappointing as Tori Spelling without makeup
got pre-nups?

Cognitive Dissonance's picture

I think we can sqeeze a few more on that side of the ship.

I Write Code's picture

Exsqueeze me, but this seems to reverse the classic meanings of alpha and beta.  Alpha is market volatility and you don't generate it, it's just there.  I suppose I could google up the crazed variants you're using here, but if there isn't any then why should I?

The Most Interesting Frog in the World's picture

Alpha is what can be generated over and above the average, and after fees. I have been saying for a while that as we have moved deeper in to the pool of a centrally planned Soviet style economy, there becomes no need for a money manager (let alone a hedge fund manager charging 2 and 20). By removing risk and volatility any chance of creating alpha is eliminated.

Saw the same thing in 2000 and 2007. People with absolutely no background in managing money doing no research and achieving results better than those with the experience and proven talent. Ultimately for all the big money managers that have been full retard on board with the central planning, they better be careful what the wish for. It seems with all the government intervention, there is no need for them anymore.

Theosebes Goodfellow's picture

~"By removing risk and volatility any chance of creating alpha is eliminated."~

As ol' Grandpappy Goodfellow used to say, "You can't remove risk and volatility, only postpone it."

The only thing going on these days is extending the time the orchestra on the deck of the Titanic plays. But just like the game of musical chairs, the averge shmoe will not have enough time from when the music stops and the time when all the chairs are taken, (assuming there wiill be any for the average schmoe), to rescue his bacon if he has any in the fire.

Ol' Grandpappy Goodfellow said to never invest in anything you didn't understand. Right now, there's a whole lot that I don't understand, so I reserve myself to things that I do, (and have limited counterparty risk). Methinks the trick is to survive this current shell game with as much of one's assets as possible, (dry powder, so to speak), and wait to play another day in the future when the world makes sense again.

Turin Turambar's picture

I'm hoping they can continue to squeeze more time out of this failed strategy.  I need more time to accumulate and stack at great prices.


deflator's picture

 Michael Jackson was a hell of a frontman eh?

 How bout this one--big brother and the holding company...

OceanX's picture

Well, as long ya'll are posting videos...

"Straight To Hell"  -The Clash:

I think this is a little more emblamatic, with an ironic twist, of our situation

deflator's picture

Hold Gold and maybe, just maybe, dip a toe in the water and buy the VIX at 10.5-11?

jameswvu99's picture

What are the odds this market crashes:

1 year time frame 50%

2 year time frame 75%

3 year time frame 90%

I had the same odds in 2005 for the housing bubble.

AdvancingTime's picture

It might soon become apparent the economic efficiency of credit is beginning to collapse and the additional money poured into the system coupled with lower rates can no longer drive the economy forward. At some point the return on loaning money is simply not worth the risk!

 Why do you want to loan money if most likely you will never be repaid or repaid with something that is totally worthless? The collapse of credit can pose major problems such as what we saw when many sellers were forced to demand payment up front before shipping goods in 2008.

When this happens the only safe place to store wealth will be in "tangible assets" and the only lenders will be those who print the money that nobody wants. More on this subject below.

Mr. Ed's picture

Beta schmayta!  This is a new paradigm.  With the Fed screwin around on such a scale, I don't think old ideas apply anymore.

Can someone explain to me how the market can ever even begin the process of crashing... 

If the Fed is there to push up prices when they please and a chain reaction of margin calls, selling, price drops and more margin calls can never get started; then how can you have a crash?

I think it is more likely that the Fed will intentionally cause the market to crash when they and their friends decide.  Maybe they're waiting till they can cause a crash of a certain size for some purpose only they know...


PLEASE.  Someone.   Tell me why I'm wrong!