Short volatility is the new subprime. And as it was in 2007, complacency and risk-seeking are "perfectly" rampant...
FULL DISCLOSURE: I am always long brick shitting volatility. Gamble at your own risk...
Remember back in 2007 at the very top when they were giving jumbo mortgages to illegal aliens to buy McMansions? Good times. They called that period "The Big Short", because no one had figured out that it would all end badly. In reality, everyone knew it would end badly but they didn't know what day it would end, so they pretended it would go on forever. Ironically, those who made the bet against subprime got massacred for a long period of time before the collapse, due to the tsunami of dumb money flowing into high yielding subprime, which narrowed bond spreads giving the delusion of low risk.
Fast forward to today, and "financial stress" as measured by the Fed's Financial Stress index has never been lower. And if you believe that, there's a bridge for sale down the street...
The STLFSI measures the degree of financial stress in the markets and is constructed from 18 weekly data series: seven interest rate series, six yield spreads and five other indicators. Each of these variables captures some aspect of financial stress. Accordingly, as the level of financial stress in the economy changes, the data series are likely to move together.
There's something wrong with this index, I can't put my finger on it...
The subprime of this era is the bet that historically unprecedented Black Swan low volatility will continue forever. Everyone knows that it's a ticking time bomb, but no one knows how long the fuse is. And we all know that the best time to put on your seat belt is in the middle of a crash.
Which is why, instead of being considered a risk, it's considered this era's "greatest trade". Like giving subprime loans to people who are being deported.
"Bitcoin’s face-melting rally toward $10,000 (see our chart of the day below) is the talk of financial circles these days. But if the digital currency is, indeed, the dangerous bubble many believe it to be, its inevitable implosion will pale in comparison to the potential damage caused by the demise of one of the best trades the Wall Street has ever seen: Shorting the VIX."
“Shorting VIX, at these low levels, in the size they are doing, is not only dumb, but crazily dangerous, not only to the parties trading it, but also to the stability of the entire financial system,”
The day of reckoning may be a ways off. Those VIX shorts look to be doing just fine this morning, with stocks in the green early
The people who warned about subprime were ignored because Wall Street was too busy selling subprime to their clients and then using "The Big Short" weapon of choice, credit default swaps, to bet their own clients would be imploded by the toxic shit they just sold them. It worked of course. A morally corrupt collapse of fiduciary duty for which they got bailed out 100 cents on the dollar by Goldman Sachs Treasury secretary Hank Paulson.
What we've learned since 2008 is that Idiocracy's don't learn. Until they get buried so fucking deep it takes an archaeological dig to find them.
Like I said at the top, I'm betting this will do the trick.
Like I said at the top, I'm betting this will do the trick.
Unfortunately, to see the freight train coming, you have to have your eyes open...
Aside from crowding gamblers into a handful of massively overbought and overowned mega cap stocks, while the rest of the casino implodes, the market has "done nothing wrong"...
