Monday, May 8, 2017

Conflict Of Idiocracy: Getting Paid To Ignore Risk

ZH: A Hedge Fund Manager Embraces Imagined Reality
"There are times when an investor has no choice but to behave as though he believes in things that don't necessarily exist. For us, that means being willing to be long risk assets in the full knowledge of two things: that those assets may have no qualitative support; and second, that this is all going to end painfully."

The reason why Wall Street isn't worried about risk, is because they don't manage systemic risk, they only create systemic risk. It's called moral hazard, and it's the lesson that was supposed to be learned in 2008, but an Idiocracy never learns. I suppose that's what makes it an Idiocracy...

mor·al haz·ard
lack of incentive to guard against risk where one is protected from its consequences

So here we are once again, neck deep in asinine levels of risk with a VIX at 24 year lows. Why is the VIX so low? Because 0% interest rates has turned volatility arbitrage into a yield seeking strategy - shorting volatility via the futures, is essentially going long the market, and hence puts a consistent bid beneath stocks. That is, until this strategy mean reverts, as described earlier, at which point vol shorts get their faces ripped off. But it's not their money anyways. 

"Earlier today, it was Goldman's cross-asset team which looked at the historic collapse in equity return correlations, and went on to caution that "the last time correlations were this low was in 2007, just preceding the financial crisis."

The warning came just as the VIX plunged under 9.90...and shortly before Citi released an ominous warning of its own, in which it looked at the bank's proprietary Macro Risk Index, and observed that "a sixth consecutive monthly decline in risk aversion has taken our Macro Risk Index to extreme lows. 

comparable low levels of risk aversion have historically been followed by higher volatility, stronger USD, higher bond prices and weak performance of global equities.

Then we get Professor Nouriel Roubini asking the obvious question - why are investors ignoring Black Swan risk i.e. the known unknowns. He comes up with several possible answers, none of which is correct. The answer is called "conflict of interest". But apparently they don't teach that concept in Ivy League echo chambers filled with like-minded morons always grasping for some sophisticated academic answer when the obvious is staring them in the face. After all, why would we need professors if we had common sense? And why would we learn any lessons from the last debacle that took place in broad daylight?

"I need to worry about my job, not the Ukraine..."