By Eric Peters, CIO of One River Asset Management
“Hear that scream?” he whispered from one of those multi-manager monstrosities. “That’s the sound of someone’s face being ripped off,” he said, uneasy, flashing me a couple risk reports. “Another quarter, another million-year flood,” he said, exasperated, the cataclysms appearing ever more frequently.
“They’re grossing us down, they got to. No choice.” In the background, a cacophony of sickening howls, grown men begging for mercy, crying like babies, to each his own. “My book is airtight, got my head down,” he said, his factors lightly touched. The wrath of deleverage, passing mercifully by. “What a terrible way to earn a living.”
Temple of Doom
"We waited to hear what Powell thinks about asset bubbles,” said Indiana Jones, our industry’s leading archeologist, explorer. “He admitted markets may be ahead of themselves.” Echoes of irrational exuberance reverberated through the ages. “But he said interest rates aren’t the right weapon for whipping asset bubbles,” he explained. “This then frames the issue as a regulatory matter,” he said. “But they never really define matters of financial stability. Powell passed the problem to Yellen without a clear mechanism for the Treasury or the SEC to respond.”
“So what does Yellen think about financial stability?” asked Indiana. “She doesn’t,” he said, exploring her archives. “In her final Jackson Hole speech, she emphasized the Fed had been on a mission to make banks safe, and they were, so market risks were in the hands of private investors who understood what they were doing.” The Fed obviously changed their minds in March 2020, saving over-leveraged investors from themselves. “So Powell just punted issues of macro stability to Treasury, where Yellen will bury them. And we’re left right back where we started.”
“Monday, Short-Interest factor had a 3 standard deviation move higher. Hedge Fund factor fell -1.3 standard deviations,” said CO2, gasping for air. “Tuesday, Short Interest factor jumped 5.9 STD. HF ownership fell 2.4 STD,” he added. “Wednesday, Short Interest jumped 7.6 STD. HF ownership fell 4.5 STD.” Risk managers swung the scythe. “Thursday, Short Interest fell 2.5 STD. HF ownership was up 2.3 STD. That’s when Robinhood restricted trading,” said CO2. “Then Friday felt like any other day, despite the S&P 500 puking 1.9%.”
“Our biggest prime broker said this week was one of the largest gross downs they’ve ever seen,” continued CO2, his position tiddy. “No one stress tests their books for a 7.6 standard deviation move.” Last time things went wrong was when the momentum factor turned abruptly. This time some minuscule retail stock sparked the short squeeze. “Obviously there are too many funds running highly-leveraged factor-neutral books,” said CO2. “The breadth of the blowups is widening, the depth of pain deepening. But will anything change? Nope.”