Kyle Bass: "Today's Market Resembles The 1987 Debacle On Steroids"

The US stock market celebrated the 30th anniversary of Black Monday with the 2017 version of a rocky trading day: Stocks sold off early, with S&P 500 futures recording their steepest post-midnight drop of the year. But the dip was reflexively and aggressively bought, and stocks even poked back into the green seconds before the close as algos mistook a repetitive Politico headline about Jay Powell’s chances of becoming the next Fed chair for news - leaving us with yet another record close.

Of course, the historical juxtaposition of the 1987 crash with today’s unnaturally placid markets practically forced even the most bullish of traders to question how much longer the present market paradigm - where markets listlessly drift through a seemingly interminable series of record highs while trading volume and volatility remain suppressed - can possibly last.

With that question in mind, Real Vision released a video early today containing interviews with some of the biggest names in the hedge fund universe. Though the interview was shot a few weeks ago, remarks from Hayman Capital’s Kyle Bass resonated with market's mood.

Bass discussed what he sees as the many short- and long-term risks to the US equity market, including the rise of algorithmic trading and passive investment, which have enabled investors to take risks without understanding what they’re doing, leaving the market vulnerable to an “air pocket."

And with  so many traders short vol, Bass said investors will know the correction has begun when a 4% or 5% drop in equities snowballs into a 10% to 15% decline at the drop of a hat.

“The shift from active to passive means that risk is in the hands of people who don’t know how to take risk. Therefore we’re likely to have a 1987 air pocket. This is like portfolio insurance on steroids, the way algorithmic trading is now running the market place.


Investors are moving from active to passive, meaning they’re taking the wheel themselves all at a time when CTAs are running their own algo strategies where they’re one and a half times long and half short and they all believe they can come out at the same time."


“If you see the equity market crack 4 or 5 points, buckle up, because I think we’re going to see a pretty interesting air-pocket, and I don’t think investors are ready for that,” Bass said.

When it comes to identifying potential catalysts, Bass said the US’s deteriorating relationships with both China and North Korea present significant long-term risks...

“Our trade relationship with China is worsening our relationship with north korea whatever it is continually worsens. We’ve got three people at the head of these countries that are trying ot maike their countries great again, I think that’s a real risk geopolitically."

...While the unwind of G-4 central bank stimulus could hammer equities and bonds in the short term.

"But when you think about it financially, which is actually easier to calculate, the financial reason is the G-4 central banks going from a period of accommodation to a period of tightening, and that’s net of bond issuance."

In summary, investors better snap up those out-of-the-money S&P 500 puts before it’s too late, because central banks - try as they might - can’t forestall the return of volatility forever.


auricle Fri, 10/20/2017 - 20:39 Permalink

Gating was designed and implemented to prevent such an 'air drop'. It didn't exist in prior crashes, we'll see how well it works this time around. 

Laowei Gweilo finametrics Fri, 10/20/2017 - 22:43 Permalink

because in truth, Hawk Hilary would have been more of a threat to China than TrumpTrump's a business man, his [previously] associated compnaies are heabily invested in or related to China, and he doesn't give two shits what China does as long as the U.S. gets a good deal out of it.but Hawk Hilary has a need to stick her nose in the liberal rights of other countries, and push forward the Western NWO.Hilary = more threat to China = better for China shortsTrump = TBH rather see a stable China because a stable China means it can be a stable (and not desperate) partner with the US, and at the very least, if both countries are stable and are doing well, they can equally mind their own business -- unstable countries like to create new enemies to destract the massesso yeah ... that's probably why

In reply to by finametrics

OldTrooper curbjob Fri, 10/20/2017 - 22:16 Permalink

An upvote for resetting a classic.  But, not to be too picky with an otherwise apt metaphor, it was the Black Knight that had the 'flesh wounds'.  The Knights Who Say 'Ni' first demanded a shubbery, then that Arthur cut down the mightiest tree with a herring.  Click the link, youngster, if you have no clue what we're talking about:

In reply to by curbjob

J. Peasemold G… zjxn06 Sat, 10/21/2017 - 01:27 Permalink

 No joke. Bring me a shrubbery (some useful investment advice) ! I can think of worse advice.But the fact that Jeb 'The Shrub' Bush was pruned in all probability saved the United States from sinking further into the mire.It still floats though. They all float down here.And the miracle of the now deflated and much aged purple juniper berry candidate hrc has in the same manner fallen far from the juniper 'Bush'.No longer what happened but "What Happened??", as Jeb 'The Shrub' chimes in "What? Me worry?" in forlon admiration.At this point what difference does it make. J. Peasemold Gruntfuttock

In reply to by zjxn06

jaxville grasha87 Sat, 10/21/2017 - 15:26 Permalink

  I've read Atlas Shrugged twice and many of the speeches several times.  I used to believe all that libertarian stuff.  Not anymore....  There is no way society will advance as long as there is a cohesive group working full time to undermine our values.  Taking gov't out of the equation will not help a great deal when that group still retains control of the media, education and the financial sector.   Libertarianism does not address the issue of fractional reserve banking and it's corollary, credit based currency.  Fractional reserve banking is the foundation upon which all power of the state rests.  Taking away the monopoly on force (which is the state) changes very little with the underlying foundation in place. Especially when that foundation is dominated by a minority who seek destruction or enslavement of the majority.  The JQ must be addressed before libertarian principles can ever advance individual rights and humanity in general.

In reply to by grasha87

auricle dirtyfiles Fri, 10/20/2017 - 21:33 Permalink

The economy represents the elevator, those inside the elevator are the investors. During normal operations, you can exit whenever you like. When the cable snaps, you are stuck. Past market crashes were like a locomotive, even when the crash was happening, you could still jump and survive. Not so much anymore. 

In reply to by dirtyfiles

ZIRPdiggler Fri, 10/20/2017 - 21:05 Permalink

So smart that he's stupid.....I listened to Kyle's interview on his China trade fail and I gotta say: if a Joe Q Public like myself knows that everything is fake, manipulated, and lacking in price discovery, then how come a guy that's this smart is still "trying to figure out a strategy"? It's fairly evident, what's going on.  It's painful listening to him trying to talk about the effect of geopolitics on the market, when it's clearly irrelevant to the number of equities that a central bank(s) can buy.  THERE IS NO STRATEGIZING ANYMORE!!!!!  I knew this two years ago, why doesn't this guy?

wdg ZIRPdiggler Sat, 10/21/2017 - 10:49 Permalink

Equity markets, bonds, commodity prices, fiat currencies and interest rates are all rigged. In fact, it is worse than that because our governments, courts and mass media are also rigged. 1984 has arrived although most people have been so zombified that they they are unaware that freedom, property rights and basic liberty exist in name only but not in reality. And the apex of rigging is a diabolical system of central and fractuional reserve banking. Of course this rotten system is not sustainable in the long run because it is in violation of morality, freedom, free markets and just common decency. The tragedy is that when it collapses into a heap of ashes, a lot of innocent people will be hurt badly and western civilization will be set back a generation of more while we try and recover during a new Dark Age. Let us hope that goodness triumphs over unspeakable evil as we rebuild our world. 

In reply to by ZIRPdiggler

clymer Fri, 10/20/2017 - 21:09 Permalink

I gotta admit his comment to the british cunt, "that's like hating the mirror because you're ugly" was one of his finer moments (too bad he sold out). I've never seen someone shutdown so gracefully

The Duke of Ne… Fri, 10/20/2017 - 21:16 Permalink

Grandma's gotto run the stock market thru the roof so she can reduce her balance sheet while the sheep hold the bag ... the sheep wont be keen on holding the bag during a weak market.  

Atomizer Fri, 10/20/2017 - 21:20 Permalink

Bring on the AI. We will knife and dice your exposure. You will look like complete retards running the central banking system. That includes you, City of London. Don't be surprised on the Brussels money laundering exposure. It's coming next. 

Atomizer DavidC Fri, 10/20/2017 - 21:59 Permalink

I can't post to often. I don't want YouTube channel's to get hit under Jewsusan CEO. I send emails to Tyler. I respect these people. If Tyler doesn't want to feature, his site and prerogative. We will take down the sand nigger IT developers in Silicon Valley. There is so much you don't even know. It's that serious.  

In reply to by DavidC

MaxThrust Fri, 10/20/2017 - 21:32 Permalink

Keep bleeting Kyle but I will never forget you favoured Hillary "The Anti-Christ" Clinton to win the Presidency because you knew she would make you even richer.

Paracelsus Sat, 10/21/2017 - 02:25 Permalink

  No, I can't stand his positions on issues,but he talks about RISK, like Reggie Middleton and Max Keiser.The reason his China and Japanese bets never took off is because no one thought they couldbe this unbelievably corrupt.  I liked the way he was the first to demand physical bullion for his U of T customers, instead of a serial number.And whatever he says I am sure he has a few guns on his ranch. (To defend his bags of nickels). 

Paracelsus Sat, 10/21/2017 - 02:25 Permalink

  No, I can't stand his positions on issues,but he talks about RISK, like Reggie Middleton and Max Keiser.The reason his China and Japanese bets never took off is because no one thought they couldbe this unbelievably corrupt.  I liked the way he was the first to demand physical bullion for his U of T customers, instead of a serial number.And whatever he says I am sure he has a few guns on his ranch. (To defend his bags of nickels).