Since 2008, Global Central Banks have sponsored a dumb money mega bubble wherein the least hedged strategies got paid the most. In the process, they've inadvertently turned Globalization into a binary call option massively leveraged to imagined reality.
Why? Because nothing was learned from subprime...
mor·al haz·ard
lack of incentive to guard against risk where one is protected from its consequences
I've said many times recently that serial central bank bailouts are a disaster wanting to happen. Here we stand on the brink of yet another deflationary downturn and global gamblers have been led to believe that all they need to do is front-run central banks into risk assets. Which is why this iteration is going to be a lesson in how capital risk markets "work". Because what gamblers seem to not understand is that when "everyone" expects something to happen, it can't happen, at least from a speculative standpoint.
2018 should have been the most recent wake up call for people doing dumb things with leveraged money. Two major volatility spikes. Ignored. $13 trillion in global market losses which was half the value lost in 2008.
And yet a mere down payment on what is coming:
"Global equities lost about $13 trillion last year, and the erosion in value equals the combined market capitalisation of Asia’s three biggest economies – China, Japan, and India.
To be sure, the loss in absolute terms wasn’t as big as it was in the immediate aftermath of the 2008 meltdown, when equities had lost $27.8 trillion globally."
2018 was the worst year for hedge funds since 2008. Why? Because they are no longer hedged. Compliments of too many central bank bailouts, they are all "Imagined Reality" funds now:
The worst performing funds were concentrated in the binary "Black Swan" trades. By that I mean the subprime type markets where someone makes a ludicrously asinine bet which makes a lot of money until it explodes spectacularly. Then they say, "No one saw that coming".
In 2018, the Black Swan trade was shorting volatility. An idea that had worked great for several years straight and then lost five years of gains in one day on February 5th, 2018:
Inverse volatility ETF: -90%
By the time November rolled around, the lesson from February was long forgotten as yet more of these binary trades imploded later in 2018:
November, 2018:
With a well-documented history of statistical probability resulting in eventual catastrophic failure of the naked short-selling option strategy, the real question with Cordier’s loss is why don’t investors generally recognize the risk potential?"
“I promised you every day when I woke up and checked the markets, I was checking for rogue waves,” a tearful Tampa-based Cordier told investors...This rogue wave that I was unable to navigate has likely cost me my hedge fund”
One thing all hedge funds have in common is that they operate like a call option: Heads I win. Tails you lose. Their very incentive structure promotes systemic risk.
Fast forward less than two months from the worst year for hedge funds since 2008 and we learn that they've piled back into Tech stocks all over again. The riskiest part of the market:
There were four declines since the end of September, each one of larger magnitude than the previous. Each one bought with both hands, although on lower volume:
"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"
In the meantime, we've got a call option to manage
