Hedge Fund CIO: "If It Is Scenario B, Then It's Bombs Away For Stocks"

What better post-mortem on the events from last week when the long-awaited volocaust finally hit, than one from Eric Peters, CIO of One River Asset Management, who just one month ago we wrote is "Betting All On A Volatility Eruption" as "A Historic Reversal Is Coming." He was right.

As a reminder, back in October, we discussed a report  that several hedge funds have sprung up with just one strategy in mind: preparing for the arrival of the "fat tail", i.e., betting on a sharp spike in depressed, comatose volatility. One among them, was One River Asset Management, a manager of $700 million led by Eric Peters in Greenwich.

Just over three months later, Peters' thesis has borne out, following the biggest VIX eruption in history.

But was that it, and will vol revert back to more "conventional" level, or was last week's move just the beginning of something even bigger?

In his latest weekend letter to investors, Eric Peters explains what the two paths ahead are, and why one of them could result in Lehman-like devastation for markets and is "bombs away for risk prices."

Weekend Notes from One River's Eric Peters.

In Real Time

"We think this is very clearly the first leg of a paradigm shift to a higher volatility environment,” we wrote early Tuesday, our investment team reflecting on Monday’s remarkable events.

“The VIX ETF/ETN complex imploded yesterday/today. These products were the most exposed and thus the first to go because of their mechanics (it’s harder for VIX to double in a day from high levels than it was from low levels). Relative to the aggregate of all other forms of volatility selling, they’re not big, just really painful. They make for good headlines too. So the question now is whether the pain/spark of their blowup is enough to ignite bigger structural volatility shorts?”

“That’s a hard question to answer. There are two paths, A & B,” we continued.

  • (A) “This is the equivalent of the June 2007 Bear Sterns moment. In this scenario, market participants see the VIX ETF/ETN complex implosion as an isolated event sparked by poorly constructed products. Once investors really understand how they were constructed, they gain comfort in the ‘superiority’ of the strategies that they currently use to sell volatility (uncapped variance, risk parity, vol control, put selling, etc). They feel smart. And continue selling. Until a more widespread volatility unwind inevitably unfolds - probably tied a bit more closely to the economy and QE exits by the ECB/BOJ.”
  • (B) “This VIX ETF/ETN spark ignites other structural volatility shorts over the coming days/weeks, driven by a critical mass of risk managers across the financial industry not wanting to be the last to de-risk. Selling of risk assets increases volatility and this sparks more selling of risk assets in a reflexive way. In this scenario, visions of the ETF/ETN blowup makes value investors more patient in buying the dip. And with a new Fed governor, you don’t get a swift response. It’s bombs away for risk asset prices.”

We really don’t know which scenario it is (A or B). But we’re not adjusting our long volatility portfolio in a major way right now other than some modest position rotation. If it’s (A) then we will suffer giveback. But we don’t think we’ll revisit the lows in implied volatility now that this event has happened.

This move shows all the signs of being the beginning of something big and we won’t see the same cheap levels to get in again.

If it is (B) then risk assets have a long way to fall. Longer-dated volatility will move substantially higher. Volatilities across asset classes will catch up.

In terms of near-term market signals, the lack of major contagion into asset classes other than equities (volatility in both FX and gold is remarkably muted, rates volatility is moving higher but not by a lot), suggests that there is a very decent chance that it is scenario (A).

However, if markets don’t bounce in the next day or two, then it’s probably (B).

And if we do get a bounce in the S&P but then we get a couple daily closes below last night’s low in S&P 500 futures (2529 overnight low), then it really raises the risk that it’s also (B).



zorba THE GREEK lloll Sun, 02/11/2018 - 19:09 Permalink

If I take 1 from column A and 2 from column B, do I get a free egg roll? Actually, I am willing to wager that markets will neither  react like A or B, but more like C-Z, meaning we are in uncharted waters here and chances for unforeseen consequences are far more likely than not. We must remember, for the first time ever, the machines are doing 90% of the trading now. And after watching them deal with the last 6 trading days, machines trade faster than anyone can react to them, which means , they can do great damage to the market in a blink of an eye. Damage that could take days, if not weeks to unwind. 

In reply to by lloll

zorba THE GREEK zorba THE GREEK Sun, 02/11/2018 - 19:23 Permalink

It really is funny that One Rivers that oversees $700 million in chump change, has narrowed down the future possibilities of market reactions to recent extreme volatility to only two possibilities. There is no real precedent to what occurred in the last 6 days, but they have managed to rule out all other possibilities but 2. Good luck with that. I would think that the best thing one could do now is be neutral and wait to see how it plays out. 

In reply to by zorba THE GREEK

vladiki zorba THE GREEK Sun, 02/11/2018 - 19:54 Permalink

Excellent sense.

When I find myself thinking "I no longer have a clue what this instrument is worth; just today's price" that's my 100% sell signal. And that's now for 100% of my (just-sold) portfolio.  'Holding' now means flying into a dense thunderstorm with no credible weather report (the gurus' guesstimates are just tea-leaf readings and many are not even honest) and that's stupid. But I must thank last week's optimists.  Someone has to hold the bag, and they volunteered.

In reply to by zorba THE GREEK

All Risk No Reward vladiki Sun, 02/11/2018 - 20:22 Permalink

These aren't "uncharted waters."  This is the top of yet another thinly disguised debt-money exponential growth bubble fueled stock market bubble.

“The new law will create inflation whenever the trusts want inflation. From now on depressions will be scientifically created.
~Congressman Charles A. Lindbergh, after the passage of the Federal Reserve act 1913.

These ALL CRASH to a 100% certainty, NO EXCEPTIONS.

The key is debt-money based systems.  debt-free money can be inflated to the moon - and is often done.

Due note that when a country inflates its internal currency, the actual physical assets within said country DEFLATE IN PRICE RELATIVE TO EXTERNAL CURRENCIES.  Yes, Argentina inflated their currency, but the dollar could by a whole lot more Argentinian stuff after they had done so.


Got that?

BTW, the crash is a societal asset stripping event.  The Money Power Sith Lord Mega-Corporate fronts are now backed by government - THEY CAN'T GO UNDER, AND IF YOU WANT THEM TO, YOU CAN PUCKER UP AND KISS THEIR POT BELLIED REAR ENDS!

So, their Mega-Corps will asset strip the physical collateral from all the trillions in debts backed by collateral.

They will then basically control physical reality.


And I bet that not even 25% on Zerohedge will figure out what happened EVEN AFTER IT HAS HAPPENED!


Sheesh, this scam isn't even complicated, but so few can grasp it, even when told about it!

"The issue which has swept down the centuries and which will have to be fought sooner or later is the people versus the banks."
~Lord Acton

“When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes. Money has no motherland; financiers are without patriotism and without decency; their sole object is gain.”
~Napoleon Bonaparte

"Let the American people go into their debt-funding schemes and banking systems, and from that hour their boasted independence will be a mere phantom."
~William Pitt, (referring to the inauguration of the first National Bank in the United States under Alexander Hamilton).

How To Be a Crook

Poverty - Debt Is Not a Choice

Renaissance 2.0 The Rise of [Debt-Money Monopolist] Financial Empire

Debunking Money

Krugman (and each MIT economist professor - THEY KNOW AND THEY OCCULT!) is a Goebbelsian propagandist as he covers the crimes of wolves with his fake sheep suit and lisp.

Krugman to Lietaer: "Never touch the money system!"

And It's Gone

People with good intentions but limited understanding are more dangerous than people with total ill will.
~Martin Luther King, Jr.

“This Act establishes the most gigantic trust on earth.…When the President signs this Act, the invisible government by the Money Power, proven to exist by the Money Trust Investigation, will be legalized.…The money power overawes the legislative and executive forces of the Nation and of the States. I have seen these forces exerted during the different stages of this bill.…”
~Congressman Charles A. Lindbergh, referring to the act which established the Federal Reserve. Congressional Record, Vol. 51, p. 1446. December 22, 1913.       

"Although the so-called "moral issues" were raised, in view of the law of natural selection it was agreed that a nation or world of people who will not use their intelligence are no better than animals who do not have intelligence. Such people are beasts of burden and steaks on the table by choice and consent."
~Silent Weapons for Quiet Wars

In reply to by vladiki

zorba THE GREEK All Risk No Reward Sun, 02/11/2018 - 21:17 Permalink

My reference to uncharted waters was directed at that fact that the vast majority of trades executed in stocks today are done by robots and at the speed of light. We can not determine ahead of time how the algorithms will react toward each other during exceptionally high volume trading. During the last 6 trading days, I observed nearly 1% moves in major market averages in few seconds. I had never witnessed trade volume and price swings like that before. It was unprecedented. 

In reply to by All Risk No Reward

ThirteenthFloor All Risk No Reward Sun, 02/11/2018 - 21:22 Permalink

+100. For the Charles Lindbergh quotes.  

To those interested please read “Why your country is at war and what happens afterwards”.  Chapter 4, “Government, Farmer and Banker” applies do much today !


It no wonder his grandson was kidnapped and killed...most likely by Warburg.


In reply to by All Risk No Reward

Laowei Gweilo All Risk No Reward Sun, 02/11/2018 - 23:49 Permalink

they're not unwinding out of equity problems though, they're unwinding equity risk exposure. but ultimately they still need to rotate into some sort of equity position. these funds are equity based (is why they're short vol in the first place). funds rotating equity risk is not the same as 08 when it was the equities themselves unwinding debt or credit exposure. it's still a NET sell (since the unwound short vol position help them take far too large of positions) but even as they net sell equities, they need to rotate SOMEWHERE still in equities. again that's problem why the BofA analyst who called the crash expects funds to start going long value... small caps... long RUT (RTY).

they're going to rotate in search of value and book value, like the BofA analyst (who also called the 'Volmageddon' argues). problem with the funds positions rather than before it was problems with the banks that are part of the positions. ultimately these funds are MANDATED to still look for equity alpha of some sort. again, that's why the BofA 'volmaggedon' report expected a rotation into small caps, book value, RUSSEL 2000 instead of the SP500. big difference here with 08 is that it's not just an unwind but a rotation.

most short-vol positions INNATELY are based on equity positions of some sort. that's complete different than 08 when they're had to unwind BOOK VALUE (the bad debt) here the risk in in the positions themselves, not the equities that the positions are taking themselves in

In reply to by All Risk No Reward

AldousHuxley lloll Sun, 02/11/2018 - 19:11 Permalink

they are going to let this thing bleed for next 30 years when all of those who are accountable are dead.


See Japan....lost for 30 years and not a revolution in sight.


shorting = betting on majority of humans acting rationally

long = betting on ignorant humans acting based on emotions of fear/greed.

In reply to by lloll

CasualKat Sun, 02/11/2018 - 18:56 Permalink

Build on.... land. Yep. It's so old fashioned of me I know. Owning land is the firm foundation. You can diversify and hedge till you are blue in the face but in an actual crisis only land supports life. Something that is easy to forget when for a long time growing money was easy. Get out of debt and back to the basics. Get that right and nothing can touch you. 

Giant Meteor fezline Sun, 02/11/2018 - 19:24 Permalink

Thanks, I too noticed. Since I commented on the very same this morning, and then, poof, it was gone. Well done.

Ooops, the goog has now updated the content, to reflect the cleaned up page and commentary. The original must have made a few folks uptight .. or saving that, just another unfortunate glitch in the matrix ..

In reply to by fezline

Wild tree fezline Sun, 02/11/2018 - 22:21 Permalink

They redacted my comment, although hard to see what made their knickers go around their pencil neck. I was responding to GM, and here it is in in it's entirety.

Yes GM, Dave called it out correctly IMHO from a recent article. Here is what he wrote in three sentences that is the sum of the whole article, and why the seeds of our destruction as a country, and world have been fervently watered since 2008.

"No, the fundamentals do not provide reason for optimism. They provide reason for grave concern. As I’ve been writing all along, the greatest fundamental that is exerting pressure right now is the massive debt that the entire global economy is built on."

The steam train is on the track, clickety-clack, clickety-clack,

Picking up speed as it heads down the mountain that's a fact, clickety-clack, clickety-clack.

People are hanging on for dear life, clickety-clack, clickety-clack,

Won't matter none when the train runs out of track, clickety-clack, clickety-clack.


Does that make you happy you brain dead, narrow pencilneck, numbnut moron that saw fit to delete it?

In reply to by fezline

nuerocaster Sun, 02/11/2018 - 20:37 Permalink

It was the Honest Sam post about Roe v Wade. Yes Honest Sam when women start giving birth to ducks, ferns, zebras, then we can truly say that a fetus is a "potential" human being.

But Sam didn't mention the all mercenary military. A republic of mercenaries?

If you have a truly free, popular sovereignty society, a citizen soldiery is the essential and most legitimate collective action. Huge error it wasn't fully realized in the constitution.

But it doesn't matter now, that's the past.


ilovetexas Sun, 02/11/2018 - 20:59 Permalink

Goldman, Bridgewater, this one river guy, they all wish for a deeper correction. Or, it sounds like they cannot wait seeing a market crash! Then maybe the correction is temporarily over. They sound so nervous! Haha

ZeroLounger Sun, 02/11/2018 - 21:44 Permalink

I can tell you right now what will happen:

The market will melt up, 200-300-500 points at a time, until it gets CLOSE to back even (or maybe not really close, but just 'closer') then:

BAM! Down comes the hammer. Like Mike Maloney and many others have said, and just like in the charts of crashes from years past: waterfall decline.  And it continues on. A little bit back up, BAM!  Down, down, down. This thing isn't going to stop dropping for a couple of years.  People like Hussman have already told us how this ends.  S&P500 -70%.

If you can't see that this IS THE CRASH everyone has been talking about, then you've got blinders on.  Get your money OUT!

ZeroLounger ZeroLounger Sun, 02/11/2018 - 21:52 Permalink

Look: I made a similar comment about Bitcoin back in January, JUST BEFORE it took its nosedive.  Call me insane, but I go to the Church of Reality.

Vote up!


Vote down!




ZeroLounger Tue, 12/12/2017 - 00:14 Permalink

Bitcoin traders are going to have an epic meltdown soon:https://www.youtube.com/watch?v=yFGX8e0IsPQ

I had gotten about 500 oz of silver back in Sept. 2010.  I saw the parabola, knew what was coming, and sold my silver, last sale around $44.00. I WAS OUT, literally DAYS before it topped out May 2011.  I saw it coming. I don't know, maybe I'm a genius, maybe I just got lucky, but I know this crash is for real.

People you have to see through the fog and make some moves.

In reply to by ZeroLounger

ZeroLounger ZeroLounger Sun, 02/11/2018 - 21:57 Permalink

I bought a house on 8 acres in 2006 and was immediately underwater (after the housing bust) of $50,000. I rode it out 10 years, and SOLD Jan 2015. Yes, I was early, but, I'm OUT of that state and in a cheap home waiting to ride out the coming events (in a different state). I put my money where my mouth is.

It is really hard when you have kids going to school and jobs and your 401k looks like you're a millionaire, to take the steps necessary to protect yourself, like getting our of stocks and taking your real estate profits. But if you don't, you'll just be a statistic.

Better 3 years early than 3 minutes late.

In reply to by ZeroLounger

fezline Oldwood Mon, 02/12/2018 - 01:38 Permalink

That isn't his point. Are you selling or are you allowing your greed and blind faith in the market convince you to hang on tight?? this will all work out right??... This is just a glitch... I mean the DOW going up several thousand points when no material change in industry, technology, or the economy has manifested makes total sense right? I mean why worry when there is no foundation to back such a surge in the stock market?

Greed is like a religion... you can't speak logic to these fools... This is why most of them take the coward's way out when reality strikes.

In reply to by Oldwood