This page has been archived and commenting is disabled.

"Your Alpha Is Burning" - Fighting Greek Fire with Fire: Volatility, Correlation, and Truth

Tyler Durden's picture




 

From the mind that brought you the Great Vega Short comes the next masterpiece on liquidity, volatility, contagion and everything else.

The world economy is fighting a fearsome wildfire as the European sovereign debt crisis burns its way closer toward the tinderbox of a second global recession. The insolvency inferno has no prejudice and will fuse to the flesh of any asset class fueling a blistering spiral of correlation and volatility. The third quarter of 2011 was characterized by explosive movements in equity markets as the S&P 500 index declined -14% in the worst performance since the crash of 2008. Global indices officially entered bear market territory with the MSCI All-Country World Index down more than -20% since peaking in May. The 10-year US Treasury yield reached the lowest level on record in September as credit markets braced for an economic slowdown. Over the quarter implied volatility increased +96% as the VIX index climbed to 42.96. If you heeded the omens of variance markets earlier this year you were richly rewarded by this increase in volatility.

 

A wildfire is blind and cruel in violently transforming the essence of any material to ash. In this sense the end-effect of fire is always correlation and volatility. The common method to extinguish a wildfire is by dousing it with water but what if this is not enough? Is it possible for fire to resist or spread through the addition of liquidity? Ironically in recorded history there is one such type of flame... Greek Fire. Greek Fire was the most feared weapon of the Byzantine Empire because water alone was powerless against its flames. The composition of the weapon is an ancient secret but modern scientists believe it was made with calcium phosphide (heating lime, bones, charcoal) which, upon contact with water, ignites spontaneously. Greek Fire was so difficult to extinguish that it was known to continue to burn even underneath bodies of water. The fire could fuse to any surface, including the sea, explode and spread uncontrollably. For this reason the ancient napalm was very effective in naval warfare and saved Constantinople from two Arab sieges. The guardians of the formula were so afraid it would fall into enemy hands that its secrets were eventually lost to time(1). For those who fought against Greek Fire a liquidity trap became a liquidity grave.

 

In the new era of global interconnectedness liquidity alone is not enough to extinguish Europe's Greek Fire. The smoldering flames of default are spreading impervious to fiat money creation. The unintended consequences of unprecedented intervention in markets are culminating in higher cross-asset correlations and violent price gyrations. All we left have to show for our three year liquidity orgy is the most correlated period in modern finance. The propensity for erratic movements in DJIA daily lagged returns is at the most extreme levels in over nine decades of recorded data. We are trapped in a binary market governed by the flip of a macroeconomic coin with deflation on one side and government bail-outs on the other. In this hyper-correlated market many alpha generating strategies resemble directional volatility trades.

 

The more global asset classes move in lockstep the more haphazardly the international response to the crisis has become. A currency war is raging as central banks alternate dousing sovereign insolvency flames with uncoordinated currency devaluation. Whether this is Brazil unexpectedly cutting rates by 50 basis points despite the highest inflation in six years or Switzerland pegging the Franc to the Euro to protect exports it is every man, woman, and central bank for itself. Every day we see new kinks in the armor of prior economic and political alliances that lay vulnerable to surrender in a vicious self-reinforcing cycle of devaluation. While public opposition grows to bail-out economics the Federal Reserve has very few credible stimulus options remaining to battle the inferno.

 

Greek Fire in Europe threatens to ignite a global recession and if you haven't already noticed, your alpha is burning. There are no safe havens and to survive the flames of the next decade we must embrace and harness their nature.

Full note:

 

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Fri, 10/07/2011 - 11:01 | 1749672 oogs66
oogs66's picture

keep the articles coming...the rally is fading!

Fri, 10/07/2011 - 11:36 | 1749777 scatterbrains
scatterbrains's picture

What's going on with derivatives trader MF Global ?  stock continues to swan dive despite the delusional stock rally.

Fri, 10/07/2011 - 12:45 | 1750022 Harlequin001
Harlequin001's picture

This article is just complete and utter bollocks..

WTF is he on about, arson?

Fri, 03/16/2012 - 04:50 | 2261087 glenn17
glenn17's picture

Hi ,This one is great and is really a good post . I think it will help me a lot in the related stuff and is very much useful for me.Very well written I appreciate & must say good job.

tony fawaz

Fri, 10/07/2011 - 11:06 | 1749676 Spitzer
Spitzer's picture

 

Imagine there was a financial crisis that involved similar circumstances to the one we are dealing with right now and we knew how it ended. There would be no inflation vs deflation debate because we would have the answer right in front of us. .........Well guess what....There was one and we know how it ended. For some reason though, every econo-financial pundit, no matter what school of thought they are from, have forgotten about it. Wether it is Gonzalo Lira, Peter Schiff, Jim Rogers, FOFOA, Max Keiser, Tyler Derden at ZeroHedge or the vast misinformed crew of keynesians that spew their nonsense all over the  financial world, not one of them has ever mentioned the...........http://freegoldobserver.blogspot.com/

 

Fri, 10/07/2011 - 11:47 | 1749814 Caviar Emptor
Caviar Emptor's picture

It was only "forgotten" because the Fed eased and flooded like never before and brought on the mania of 1998-2000.

It is being mentioned by some. And in Asia it's not been forgotten at all. The fear is that China will go down the same road. We'll see

Fri, 10/07/2011 - 11:58 | 1749847 Spitzer
Spitzer's picture

Greenspan actually raised rates at the time which attracted the capital back to the US from Asia.

As the U.S. economy recovered from a recession in the early 1990s, the U.S. Federal Reserve Bank under Alan Greenspan began to raise U.S. interest rates to head off inflation. This made the U.S. a more attractive investment destination relative to Southeast Asia.

As for China...

The creditor Yuan is pegged to the debtor dollar.

It is still a DEBTOR pegged to a CREDITOR but the roles are reversed which makes it even worse for the debtor. The Yuan is pegged to the dollar but the Yuan is the creditor. The Yuan holds the upper hand. The Yuan can make a run out of the dollar which would cause a 40 60 or 80% fall in the dollar and an equivalent rise in the Yuan.

Fri, 10/07/2011 - 11:17 | 1749725 Roy Bush
Roy Bush's picture

It's designed to default.  But first the population will be impoverished and assets will be bought for pennies on the dollar.

Fri, 10/07/2011 - 11:19 | 1749735 Hansel
Hansel's picture

Are we winning yet?

Fri, 10/07/2011 - 11:21 | 1749736 buzzsaw99
buzzsaw99's picture

Hath not an alpha fund fees, managers??? ...fed with the same kosher spam, hurt with the same weapons, subject to the same diseases... If you prick us, do we not bleed negative alpha? If you tickle us with bonuses, do we not laugh? If you poison us with toxic assets, do we not divest? And if you wrong us, shall we not revenge??? [/merchant of venice]

Fri, 10/07/2011 - 11:39 | 1749788 Stumpy
Stumpy's picture

I've discovered a HUGE arbitrage between Barclay's XXV and the inverse of VXX. Compression ahead. Take a look. I'm no financial expert, but I am an engineer.

http://i.imgur.com/sQjPR.png

Fri, 10/07/2011 - 11:51 | 1749826 Stumpy
Stumpy's picture

Man, what type of fucked up data was I served by Yahoo Finance? VXX 11.21 @ 2010-11-08, VXX 45.39 @ 2010-11-09.

1: 4 Stock Split... Never mind, false alarm.

Fri, 10/07/2011 - 12:55 | 1750078 Putty
Putty's picture

Yahoo Finance.  ha.

Fri, 10/07/2011 - 11:41 | 1749794 Piranhanoia
Piranhanoia's picture

"A wildfire is blind and cruel"   I guess systematic looting and the destruction of your world by the folks that claim to own it could metaphor into a wildfire.  But it is not blind, and it is cruel by design.   I should read some more of Papa's work to get the bad taste of spoiled adjectives out of my craw.   

 

Fri, 10/07/2011 - 11:50 | 1749823 frenchie
frenchie's picture

it is also "vive LA volatilité" in french

Fri, 10/07/2011 - 11:53 | 1749828 The Big Ching-aso
The Big Ching-aso's picture

There are 'safer' havens than others.    All I know is that if you can't dilute something with the stroke of a keypad then that other something when it's readily tradeable between humans, and can be easily transported for other subsequent trades, becomes one of those havens.      Everything else is too much complex BS.

Keep it simple.   But don't be stupid.

Fri, 10/07/2011 - 11:53 | 1749831 Caviar Emptor
Caviar Emptor's picture

At this point, as a result of our failed finances, the looting of our wealth and our failed leadership, we've all responded by lowering our expectations. If we lower expectations enough, what's left of our economy will be sure to meet those expectations. Mission accomplished. That was easy. 

Fri, 10/07/2011 - 11:55 | 1749835 Loukanika the r...
Fri, 10/07/2011 - 12:42 | 1750026 Fozzy Slippers
Fozzy Slippers's picture

Jubilee or off with their heads?

Wed, 11/09/2011 - 12:28 | 1861121 karmete
karmete's picture

Well done! Thank you very much for professional templates and community edition sesli chat sesli sohbet

Do NOT follow this link or you will be banned from the site!