Thursday, October 27, 2016

Globalized Liquidation In Progress

The world's largest hedge fund aka. "China" is selling U.S. T-bonds, risk parity funds then sell U.S. stocks...

September 15th, 2016

The ability of risk parity strategies — which typically rely on bonds moving in the opposite direction of stocks in order to appropriately diversify risk across the portfolio — to withstand the potential end of a multi-decade bull run in debt and simultaneous slump in equities has become a hot topic over the past year.

The debate has been revived in recent months as analysts and investors fret over the ability of such systematic strategies to exacerbate swings in the market and worsen losses.

Got correlation risk?

30 year ETF (TLT) with Low Volatility implosion fund (red). The date of the above article is circled...

"What's more, the strategist thinks that 'quantitative tightening' — or the sales of foreign, typically U.S. dollar denominated, holdings by central banks (notably China) in an attempt to support their domestic currencies, which were at the heart of the last shock to risk parity portfolios in the summer of 2015 — might be back."

PBOC intervention monkey hammers stocks:
The impact on stocks due to Yuan devaluation is delayed, because it's the PBOC intervention (t-bond selling) that monkey hammers stocks. The main impact to stocks is felt at the end of each decline as the PBOC attempts to stabilize the currency at the new lower level:

S&P downside gaps confirm:

All of which means that in this cycle, China's selling is just getting started...