One month ago, when investors were asked what they thought was the most crowded trade, respondents to BofA's monthly investor survey overwhelmingly replied: everyone is long the USD. Which, of course, is ironic because while everyone was lamenting the long USD "hotel" trade, at the same time these same investors admitted that a China recession and an EM debt crisis [5]were the biggest tail risks for the global economy: obviously, if China or the EMs implode, the USD would soar even higher so it was somewhat intuitive that the two would go hand in hand.
Fast forward one month, when the same question yields a peculiar response: yes, the long USD trade is still seen as the most crowded trade by 27% of investors, but in spots 2 through 4 we have some curious newcomers, namely:
- In 2nd spot, "Short Emerging Market equities" with 20%
- In 3rd spot, "Short Commodity Stocks" with 15%
- in 4th spot, "Short EM FX" with 8%
Visually:
[6]
What makes this chart even more ironic than last month's, is that while most investors admit the truth about wholesale positioning in a world in which one word out of place by the Fed can bring the whole house of cards crashing down, these are precisely the same trades that the respondents have put on themselves even though they are concerned that others have the same trades on, creating a positive feedback loop of fear that nobody is hedged enough against a potential EM-driven collapse.
Because as the chart below shows, while investors are lamenting others' positioning, fears about a China recession and an EM debt crisis are by and far the two biggest "tail risks" preoccupying investors' minds right now.
[7]
In other words, investors are now paranoid that other investors are even more paranoid.
Let's hope Dr. Yellen has the right medication this Thursday to cure the paranoid investing world of its latest Fed-induced psychosis.
