Eric Peters: "The Market Saw This Coming"

Some weekend observations on volatility and risk, excerpted from the latest batch of Weekend Notes by One River CIO Eric Peters.

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Things had been too easy for too long,” said Roadrunner, the equity market’s biggest volatility trader.

Yet vol has found a bid on each dip for weeks,” he said. “The market saw this coming.” The S&P 500 rallied +7.5% in the first 18 trading days of 2018. Yet implied volatility levels rose. Then stocks fell -3.9% in 5 days.

“When stocks dump on a Friday, closing at the lows, and you haven’t hedged, it makes for a long weekend,” said Roadrunner. “People are worried that higher interest rates kill this bull market. I’m more worried about lower interest rates,” he whispered, darting looks left, right, up.

Stocks should trade down hard Monday morning.” As hedgers sell. “Then we get to see where this thing really wants to go.”

Our Reality

“If we believe something, does that make it true?” he thought, unsure. When asked if the US government is concealing what they know about the 9/11 attacks, 49.6% of Americans agree or strongly agree. Is the government concealing what they know of JFK’s assassination? 49.6% agree or strongly agree. Alien encounters? 42.6%. Global warming? 42.1%. Plans for a One-World government? 32.9%. Obama’s birth certificate? 30.2%. Origin of the AIDS virus? 30.1%. Supreme court justice Scalia’s death? 27.8%. Apollo moon landing? 24.2%. Hmmm.


It raced across the night sky at 150,000 mph. No larger than a marble. The meteorite vanished in a trail of brilliant light, a faint green copper glow, come and gone. And his heart raced, recalling that first shooting star, decades ago, a child in a backseat, face pressed to the window, searching the heavens. His excitement late that night, replaced by profound sadness. The tragic fate of that distant star, its surrounding planets, its children too, all gone in a magnificent flash. The enormity of that tragedy consumed the little boy. But the more he thought about it, the less it made sense. So he found an encyclopedia.

And having set the record straight he returned to a world filled with Easter bunnies, Tooth Fairies and Santa Claus -- all such wonderful things, as real as the sky is blue, just so long as he never stopped to consider their impossibility.

In time, as he explored the history of humanity, he marveled at our ability to believe anything, everything. Religious and political leaders have us believe in things we fear. Business leaders have us believe in things we covet. Scientific pioneers challenge our beliefs. But left to our own devices, we simply believe in those things we most want to believe. Miracles and magic. Holy Grails. Buried treasure and Bitcoin. The lottery. Alchemy. We want to believe so badly that these things become real, for a time.

The history of markets is a tale of such things, our myths, manias. Illusions, delusions. As they unfold, they’re as real as Santa.

Today we’ve come to believe that volatility is the same thing as risk. When volatility declines, large risks become small. Which allows us to take more. And because volatility is mean-reverting, there are no risks provided we never exit a position. But the more he thought about it, the less sense it made.


Lumberjack Sun, 02/04/2018 - 10:04 Permalink

Hillary didn’t see this one coming...

(link has video).

But brazen clues of the crime are plain to see when we look back to the televised debate of Oct. 19, 2016.

Hindsight, thankfully comes gifted with 20-20 vision.

It was a well-plotted concept that was to go straight from Clinton’s lying lips to social and mainstream media as the most reliable smear designed to keep Trump out of the Oval Office, and that was to go on to make “the-Russians-stole-the-election” a household term.

20-20 vision also shows a most noteworthy timeline: The presidential debate where Clinton deftly dropped the Russian election interference bombshell happened just two days before the surveillance warrant was accepted by the Foreign Intelligence Surveillance Court (FISC).

In order to drop her bombshell at the perfect time, cunning Clinton went off topic during the debate in Las Vegas, where she took the debate off the subject of Open Borders to Russian presidential election interference.

The 25:16 minute mark from the final presidential debate bears witness:

NoWayJose Sun, 02/04/2018 - 10:10 Permalink

I see the drop due to one thing - and interest rates is not one of them.  The whole rally has been based on QE.  We now have a new Fed Head who is not so accommodating (and is perhaps less under the control of the Squid?).  The bulk of the 666 plunge happened after another Fed Guv came out hawkish during a Friday speech.  

No fundamentals, no earnings, no technicals, nothing - has affected the relentless rally.  Why should it now?  The only ‘corrections’ for 10 years has been when the Fed has stopped QE!

Fred box Sun, 02/04/2018 - 10:24 Permalink

Wow!The market shed 665pts andover 1000 for the week hardly anyone notices.If this market retraces say 38% which it could easily do,I'm sure Trump will be blamed!

















MuffDiver69 Sun, 02/04/2018 - 10:27 Permalink

Headline should read “ The market saw a market coming”. What’s occurring now is a market developing. In 2007 a ten year was at 4.5% and before all other crashes higher...The idea 3% ten years are gonna crash a “market” is ludicrous and an artificial stock “market” rebalancing has always  been coming and many of us plan bad this didn’t start four years ago, including the balance sheet ...

Captain Nemo d… Sun, 02/04/2018 - 10:39 Permalink

It doesn't matter what you see coming, unless you see what others think is coming. Markets can stay irrational longer than you can stay solvent: it does not help if your Johnny is the only one marching to the beat.

An Shrubbery Sun, 02/04/2018 - 10:52 Permalink



Of course the market saw it coming, the market is never wrong! 

Only "market analysts, economists, and journalists" are wrong. And they have an impeccable record!

Cassandra.Hermes Sun, 02/04/2018 - 11:19 Permalink

I think with Ellen gone we are approaching the end of FED omnipotence.

The FED is reducing a $4.4 trillion balance sheet by $10 billion a month, but $10 billion is just a start. The Fed’s goal is to eventually reach $50 billion a month, with the program ending in 2020 having hopefully shrunk the balance sheet to $3 trillion.

We're kind of back in a position where everyone is asking for predictions again only now, everyone wants to know how far markets will fall, whereas just a week ago, the question was how high markets will rise.