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Risk parity fund unwind tipping point

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I am looking for answers to:
1.What is the tipping point for the risk parity fund unwind?
2. Are the calculations on a day-to-day basis to start the cascade or would a several day drop trigger it?

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Here is my clipping file:

----------------------------------------======================
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Like many investing innovations, the risk-parity approach has its roots in the institutional world of pensions and endowments. The institutional pioneer was hedge-fund firm Bridgewater Associates, which launched its All Weather fund in 1996. Today, there are 14 risk-parity mutual funds.

Risk-parity mutual funds resemble balanced funds in some respects. A traditional balanced fund might allocate 60 % of its assets to stocks—to capture market appreciation—and 40% to bonds—to provide income and a cushion for market dips. The argument against traditional balanced funds is that, because stocks are more volatile than bonds, overall such funds are riskier than investors realize.

Risk parity funds, on the other hand, allocate their money based not on asset classes but on risk. Take Invesco's Balanced-Risk Allocation Fund, which has gathered nearly $14 billion of assets since its launch in 2009. The fund deploys its assets in order to equalize risk between stocks, bonds and commodities.

Risk-parity funds are complex. One way their managers equalize risk across asset classes is through the use of leverage and derivatives.

------
This is what Goldman, which last week downgraded the S&P 500 and Stoxx 600 to a “sell” citing the spike in risk of systematic leverage as one of the reasons for its bearishness, said about the sharp hit to risk-parity.

The bond sell-off since last week illustrates this: equity/bond correlations have increased sharply (Exhibit 4). This likely led to a day of very poor returns for traditional balanced funds and risk parity portfolios: the latter have likely suffered more, as the significant decline in equity volatility over the summer has likely led to increased equity allocations. Exhibit 4, which shows daily returns of a simple risk parity portfolio (using 3-month volatility to scale weights), suggests that they would have had a similarly bad day recently to during the ‘taper tantrum’, ‘Bund tantrum’ and the two China/commodities drawdowns (August 2015, December 2015). Performance pressures in the event of a pick-up in volatility and correlations could drive more de-risking from risk parity investors and vol target funds.

---------
BofA’s Shyam Rajan released on Friday, the credit strategist explains why from being long US real rates, the bank switched to a real rate short last week; the primary reason: concern about risk parity exposure. Here is what he said:

One of the most talked about themes recently has been the impending unwind of levered risk parity portfolios. Our equity analysts estimate that the recent moves (bond and equity sell-off) could trigger as much as $50bn in bond selling from risk-parity type investors. While data on holdings is minimal, the influence of risk parity deleveraging on real rates is clear from Chart 4 and Chart 5.
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Rajan then points out that as the correlation between equities and nominal bond yields turn negative, the risk parity community delevers, resulting in a sustained underperformance of real yields. While one can assume that this is because risk parity performance mirrors nominal bond yields, as BofA shows in the next chart, there is a compelling case that this is purely a real rate phenomenon.

the best indicator of just how [de]stressed risk-parity funds are, keep an eye on the performance of the world’s biggest hedge fund, Bridgewater, which suffered sharp losses during all previous instances when correlations across asset-classes soared, due to either VaR shocks or taper tantrums. Which brings us to the troubling question of the day: with nearly $200 billion in AUM, how soon until a sharp hit to Bridgewater’s risk-parity exposure “forces” Ray Dalio’s massive, and systematically important, fund to become the next “too big to fail” assured of a taxpayer bailout when "unthinkable" LTCM-type moment finally hits?
Is The Latest Risk-Parity Blow Up Just Starting | Zero Hedge

---------
BREAKING DOWN 'Risk Parity'

The risk parity approach to portfolio asset allocation focuses on the amount of risk in each component rather than the specific dollar amounts invested in each component. In other words, risk parity focuses not on the allocation of capital (like traditional allocation models), but on the allocation of risk. Risk parity considers four different components: equities, credit, interest rates and commodities, and attempts to spread risk evenly across the asset classes. The goal of risk parity investing is to earn the same level of return with less volatility and risk, or to realize better returns with an equal amount of risk and volatility (versus traditional asset allocation strategies).

A traditional 60/40 portfolio can attribute 80 to 90% of its risk allocation to equities. As a result, the portfolio's returns will be dependent upon the returns of the equity markets. Proponents of the risk parity strategy state that while the 60/40 approach performs well during bull markets and periods of economic growth, it tends to fail during bear markets and economic slumps. The risk parity approach attempts to balance the portfolio to perform well under a variety of economic and market conditions.
The first risk parity fund, the All Weather hedge fund, was introduced by Bridgewater Associates in 1996.
Risk Parity Definition | Investopedia

----------
For equity markets, the risk associated with risk parity funds is their programmatic nature and the sheer amount of levered capital allocated to the strategy which can result in substantial selling pressure when risk measures exceed pre-defined parameters. As BofA pointed out about a year ago, volatility swings in August 2015 likely resulted in $28 - $48 billion in equity selling pressure from risk parity funds alone resulting in a massive equity selloff that wiped out the YTD performance of a couple of prominent hedge funds.

Based on typical characteristics in many popular risk parity funds, we can assume vol control overlays with
target vols between 6% and 10% vol along with leverage caps from 1.5x to 3.0x. Under these assumptions, anywhere between 40% and 120% of unlevered assets under management could have been deleveraged last week.


A recently published report estimated the size of assets tracking risk parity at $400bn. Based on typical characteristics in many popular risk parity funds, we can assume vol control overlays with target vols between 6% and 10% vol along with leverage caps from 1.5x to 3.0x. Under these assumptions, anywhere between 40% and 120% of unlevered assets under management could have been deleveraged last week.

If we assume $200bn of the purported $400bn risk parity AUM uses vol control, then the above 40% to 120% range suggests that between $80bn and $240bn in levered risk parity notional could have been unwound over the prior week. With a 35/65 split between equities and fixed income, this would have translated to $28bn to $84bn of potential selling pressure in equities and $52bn to $156bn in fixed income.

Which brings us to last week's sharp sell-off in JGBs (chart 7), which in turn raised renewed concerns of forced selling by risk parity funds. Showing just how fragile these funds can be, BofA finds that a mere 2% daily decline in the S&P coupled with a 0.6% decline in the 10Y Treasury could trigger 25% deleveraging by risk parity funds. "Last Friday 10-Year US Treasury futures declined about 60bps. Had the S&P 500 declined 2.0%, we would have expected about 25% of the unlevered notional of a model 8% vol-targeted, 2.0x max leverage risk parity portfolio to deleverage. The S&P 500 was in fact up 86bps on a total return basis which according to the tool falls in the region of no deleveraging."

If BofA is correct, it would mean that a day which sees a -4% SPX drop and +1% bond rally (good diversification) would generate no selling pressure, "underscoring the critical role played by bond-equity correlation in governing the severity of risk parity unwinds." However, a troubling scenario is one where even a relatively benign 2% selloff of the S&P coupled with just a 1% selloff of the 10Y could result in up to 50% deleveraging, which in turn would accelerate further liquidations by other comparable funds, and lead to a self-fulfilling crash across asset classes.

Which incidentally sounds like precisely the scenario that could happen when the Fed tries to raise rates, and is also why asset classes continue to move without fear of any rate hike, as they now realize - very well - just how trapped the Fed truly is. That said, in 4 months we will see if the Fed, for once, has the intestinal fortitude to actually raise rates in the face of the extreme volatility awaiting equities in the event they do... we doubt it.

One Year Later, This Is What Would Prompt Another "Risk-Parity" Blow Up | Zero Hedge
------------

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.

"While the exact source of reserve sales is not clear, the [yuan's] cheapening post Brexit, its stickiness around the 6.70 level and the pickup in custody decline could be an indication Chinese sales of U.S. Treasuries have resumed," the strategist writes. "The continuing gradual unwind of reserve demand should be a headwind for real rates."

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.

"Our equity analysts estimate that the recent moves — bond and equity sell-off — could trigger as much as $50-billion in bond selling from risk-parity type investors," writes Head of U.S. Rates Strategy Shyam Rajan in a note published on Thursday. "While data on holdings is minimal, the influence of risk parity deleveraging on real rates is clear."

A positive correlation between stocks and bonds during the 2016 rally contributed to the outperformance of risk parity portfolios, which at their basic level employ a long, levered position in bonds with a long position in stocks. But that also means this strategy has taken it on the chin as stocks and bonds sold off in unison on Friday, extending their declines, in aggregate, through the first three sessions of this week.

In a separate report, BofAML equity strategists said that the price action on Friday represented a shock "likely larger than Brexit for quant funds," and suggested massive systematic selling would ensue over the coming sessions.

Head of Global Rates and Currencies Research David Woo, has been pounding on the table that the potential for fiscal stimulus following the U.S. election — particularly if Donald Trump is elected — poses a huge threat to risk parity portfolios.

Thus Sept 16,2016
https://www.bloomberg.com/news/articles/2016-09-15/forced-selling-from-risk-parity-funds-will-push-up-u-s-real-treasury-yields-says-bofa

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"However, a troubling scenario is one where even a relatively benign 2% selloff of the S&P coupled with just a 1% selloff of the 10Y could result in up to 50% deleveraging, which in turn would accelerate further liquidations by other comparable funds, and lead to a self-fulfilling crash across asset classes."

Are these one day amounts the 2% sell-off in the S&P and 1% in 10yr Notes?

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not quite sure of bond calculation


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The answer to these questions is always buried somewhere in the ZH comments.

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While the discussion of Risk Parity Funds, was both interesting and educational, aren't most of these articles 3 months old, and in that time equities have exploded, and not sold off?

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well no.

It is not academic and old news.

I included my research helps others who are not familiar with risk parity funds.
Things like what it is, how and why it came into being, how it has prospered are all important to understanding when it will not prosper and when it will be unwound.

If one reads it and understands it one will understand that the high leverage involved and the mandated selling required under certain circumstances make these funds just as potentially catastrophic as LDO - the "weapons of financial mass destruction" Warren Buffet cautioned against in the Great Crash of 2007.

As the bonds have recently fallen hard - post election the equities have been on a Trump tear.
If one reads the research, one will see that without the Trump tear we could have already had a major crash.

Recent events - last two days:
Chinese bonds are diving
and
the Fed has raised interest rates for the first time in (7+ years).

To speak of the potential calamitous sea change as old news means you were not a trader (or observant trader) in the great crash of 2007.
Many articles and financial writers were warning of the housing bubble and the enormous crash to follow. (they wrote several months before the event). Fed intervention was the only thing that stopped the meltdown and not until Lehman was gone and Aetna (?) fallen from 70 to $2 and bail-out by the Fed as it bankruptcy would have brought down the entire financial system.

ZH compares this potential to the LTCM fiasco. LTCM would have brought down the entire financial system except for emergency intervention by the FED

There were warning signs several months prior to the collapses of:
  • program trading collapse of Black Monday Oct 1987 -august with Oct Meltdown
  • dotcom bubble 2000 ("it's different this time") - many writers up to 1 year in advance
  • the leveraged MBS housing bubble of 2007 - august with Oct peak and Jan meltdown - 5 months
No doubt you would have declared the warning eruptions of Mount Vesuvius as "old news" and been buried in the ashes.
Small earthquakes started taking place on 20 August 79[36] becoming more frequent over the next four days, but the warnings were not recognized.[a]. On August 24, in the year AD 79, Vesuvius erupted in one of the most catastrophic and famous eruptions of all time.

(Mount Vesuvius as seen from the ruins of Pompeii, which was destroyed in the eruption of AD 79. https://en.wikipedia.org/wiki/Mount_Vesuvius )

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Thanks to Janet Yellen's rate-hike-hawkishness (but, but, but, we're still ultra-easy), global equity and debt markets lost over $1 trillion in value - the biggest weekly loss since early May (weak China data and huge surge in dollar).

Global bonds lost over $430 billion in market value this week (Yellen hawkishness and China bond carnage) but stocks lost even more ($525 billion) as China financial turmoil added to the world's woes (and "three rate hikes next year" and fiscal stimulus efficacy questions did not help).

h/t @Schuldensuehner

Having retraced back to pre-Trump levels before The Fed statement this week, the combination of China turmoil and Janet's un-dovishness sent global stocks and bonds down over $1 trillion on the week - the worst week globally since May 2016 (when the dollar surged amid China weakness and slowing EU growth forecasts)

In fact, while US bank stockholders are ebullient at The Trump presidency-to-be, the rest of the world has lost a combined $1.5 trillion in market value across its bonds and stocks (thanks in major part to Janet's help this week).

Global Debt, Equity Markets Lose $1 Trillion In Value As Hawkish Fed Spooks Traders | Zero Hedge

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and this January 2017 Earning`s period is going to be outright one of the worst we have seen since last January`s massive stock selloff. It is the difference between being able to use a selling algorithm program that gets a decent price for the closing of the position versus taking what the market gives you during selloff and gap down closing of positions where profits are annihilated in a very short timespan. Investors need to evaluate all of the parameters when making tax deferral decisions, and it isn`t as simple as they always mistakenly calculate when making these boneheaded simpleton calculations. No wonder they cannot outperform the market, you have to take profits into strength, not weakness when everybody and their brother is selling.

Why Investors continue to exhibit the same stupid patterns is beyond me, but the smart ones will be selling in the next two weeks to beat the carnage selling that occurs in January due to tax deferral selling, and reality setting in that no amount of Trump Magic can make these pig stocks earnings for the 4th quarter look good relative to the current stock prices. It is going to get ugly folks!
January 2017 Earnings Is Going To Be a Bloodbath | Zero Hedge

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We have bats here where I live.

I notice when I go out for my walk in the rice paddies in the evening, at the hour of "dog and wolf", that there are no bats out yet. I keep saying to myself that it's already dark enough, where the hell are they.

Then, suddenly, at some imperceptible shade of gray, they are suddenly all out darting about.

Some economic events are like this, too. They take forever to happen, then they happen all at once.

Two other cases in point:

-- JGB widowmaker trade
-- Chinese corporate bond short trade

I am sure it must be super painful to be paying the premium on either of these trades. And especially with your investors saying that it hasn't happened yet ergo it ain't gonna happen.

[SIDEBAR I used to be embarrassed to admit reading Zero Hedge, much less cite it in a discussion. But now that the MSM has lost all credibility, I say screw it, ZH it is. Why the f$ck not?]

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The article (see link at bottom), shows that shale gas companies are heavily cashflow negative and that the impact of there potential bankruptcy could be very large and hurt many pension funds hold their debt.

---------
Fracking shale gas in the Pennsylvania Marcellus generated $204 million in impact fees, but the road damage topped $3.5 billion. What a deal. From the information I have read, it takes an estimated 1,600 truck trips for a single fracked well.

As we can see from all the information and data provided in this article, the Great U.S. Shale Energy Industry has been a complete failure. Moreover, we are witnessing the U.S. Shale Gas Industry, COUNTDOWN to DISASTER. When the industry finally implodes, who will pay to properly cap the tens of thousands of fracked wells?? Who will fix the roads? What happens when the natural gas-electric generation supply drops considerably?

Yes, that is correct. The United States will be in serious trouble. However, Americans today have no clue that the U.S. Shale Energy Industry has made no real money, ripped off landowners of their royalty payments, polluted groundwater and destroyed countless roads across the country, all in the effort to make us "Energy Independent."
https://www.zerohedge.com/news/2016-12-1 ... to+zero%29

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roughly flat in the last month

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The $USD Strength Just Became a REAL Problem For China
by Phoenix Capital... - Dec 20, 2016 9:28 AM

The $USD is currently above 103. This is a MASSIVE problem for the financial system, particularly China, the second largest economy in the world.

If you don’t believe me, consider that China’s multi-TRILLION Dollar bond market broke last week.

Chinese bond yields soared and authorities halted trading in some futures contracts for the first time on Thursday, as a global bond-market selloff worsened a day after the Federal Reserve signaled a quicker pace of interest-rate increases next year.

This whole situation is beginning to feel a LOT like August 2015, right before China implemented a massive Yuan devaluation triggering a stock market meltdown. We believe another similar move is about to hit… catching 99% of investors off guard.
The $USD Strength Just Became a REAL Problem For China | Zero Hedge

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... an overextended syndrome this extreme has only emerged at the market peaks preceding the worst collapses in the past century. Prior to the advance of recent years, the list of these instances was: August 1929, the week of the bull market peak; August 1972, after which the S&P 500 would advance about 7% by year-end, and then drop by half; August 1987, the week of the bull market peak; July 1999, just before an abrupt 12% market correction, with a secondary signal in March 2000, the week of the final market peak; and July 2007, within a few points of the final peak in the S&P 500, with a secondary signal in October 2007, the week of that bull final market peak.

They also offer a consistent framework to understand market fluctuations. Recall for example, my April 2007 estimate of a 40% loss to fair-value, and then following that 40% loss, my late-October 2008 comment observing that stocks had become undervalued. Over the complete market cycle, valuation is quite a strong suit for us.

Similarly, as I wrote at the March 2000 bubble peak:“Investors have turned the market into a carnival, where everybody ‘knows’ that the new rides are the good rides, and the old rides just don’t work. Where the carnival barkers seem to hand out free money for just showing up. Unfortunately, this business is not that kind - it has always been true that in every pyramid, in every easy-money sure-thing, the first ones to get out are the only ones to get out..

Over time, price/revenue ratios come back into line. Currently, that would require an 83% plunge in tech stocks (recall the 1969-70 tech massacre). The plunge may be muted to about 65% given several years of revenue growth. If you understand values and market history, you know we’re not joking.”

As it happened, the S&P 500 lost half of its value by the October 2002 low, while the tech-heavy Nasdaq 100 Index lost an oddly precise 83% of its value.

After more than three decades as a professional investor, it’s become clear that when investors are euphoric, they are incapable of recognizing euphoria itself. Presently, we hear inexplicable assertions that somehow euphoria hasn’t taken hold. Yet in addition to the third greatest valuation extreme in history for the market, the single greatest valuation extreme for the median stock, and expectations for economic growth that are inconsistent with basic arithmetic, both the 4-week average of advisory bullishness and the bull-bear spread are higher today than at either the 2000 or 2007 market peaks.

Disciplined investing isn't easy (and whenever it seems like it is, you're about to learn a costly lesson). The market has been in a more than two-year top-formation with internals lagging the major indices, with investors chasing high-beta stocks (those with amplified sensitivity to market fluctuations)

If history is a guide, nobody will remember the patience, discipline, and tolerance for frustration that were required to avoid or to benefit from the 50-60% market loss that we estimate over the completion of this cycle.

source:
Hussman Funds - Weekly Market Comment: Red Flags Waving - December 19, 2016

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“When prices are unusually elevated relative to the norm, it’s almost always because trend-followers (and other price-insensitive buyers) are ‘all in.’ Those positions are - and in fact have to be - offset by equal and opposite underweights by value-conscious investors. A sudden increase in the desired holdings of trend-sensitive traders has to be satisfied by inducing a price increase large enough to give value-conscious investors an incentive to sell. Conversely, a sudden decrease in the desired holdings of trend-sensitive traders has to be satisfied by inducing a price decline large enough to give value-conscious investors an incentive to buy. Any tendency of investors to buy on greed and sell on fear obviously amplifies this process.

Source:
Hussman Funds - Weekly Market Comment: Red Flags Waving - December 19, 2016
-------

I think you can see from the above that the trend-followers will keep increasing prices until the point where a few start to sell. But then you need a large down-gap for value-buyers to start to return. They received above-valuation prices to get them to sell and to buy they will need below valuation prices.

AS in marginal utility the highest prices are the last of the buyers and when all buyers are in there are none left on the slide.

(expect perhaps the market manipulator the FED who buys will the taxpayers money stock its BB are desperately dumping)

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But despite President Trump’s best efforts, says Casey, he won’t be able to stop the bloodbath coming in the bond market, a preview of which has been available for all to view in China, where the government halted trading last week following a record bond market crash.

People forget that the last peak in interest was between 1980-1982 when T-Bills were yielding over 16%… since then interest rates have been in a 35 year bear market going to below zero, which i thought was metaphysically impossible… So, interest rates are going to go up… Low interest rates and negative interest rates are actually destructive of capital and civilization because it discourages people from savings.



It doesn’t matter what these stupid governments do… interest rates are headed up… and I think they’re headed way up for a long time at this point… so if you own bonds sell them… hit the bid.

Doug Casey is the founder of Casey Research and well known for his forecasting prowess, having accurately called the crash of 2008 and many other trends over the last four decades. In his latest interview with Future Money Trends Casey explains what a Donald Trump Presidency will mean for financial markets, economic stimulus, and geo-politics. As he’s noted previously, 2008 was just the first part of the storm and we are rapidly approaching the trailing edge of the hurricane. This time around it’s going to last much longer and be much worse than what we experienced before.

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Doug Casey Warns "We're Going To Have Financial Chaos... It's A Dangerous Situation" | Zero Hedge

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One never expects a market top right after a bottom - that just wouldn't have been a bottom would it?

In a msg from a friend
"We were casually talking about the economy and the future of real estate market etc. I said i think not far in the future there will be major market correction. My friend who knows me for many years said "yes but you have been saying that for 10 years." He is actually kind of right about that. "

Well let's pull this fellow's comment (i.e "yes but you have been saying that for 10 years.") apart

The low was March 2009 - that was a fall of 58.5% for the market and 80 to 90 percent for many stocks.
(spy 161.61 to 67.10)

Even at that the fall was only arrested with massive intervention by the Fed and money printing for their banking buddies that increased the fed debt from 11 to 17 trillion.

A correction is a 10%+ decline and bear market 20% or more.
Until the market had risen 61.8% of the fall from the low you could be in a retracement within the bear market.

So one would not start saying the market at a top and due for a crash until at least the old high was attained. (May 2013). We are 3 1/2 years later.


Many things have happened including:
The PIIGS debt (which no it still hasn't gone away - see Italy's 3 largest bank and the oldest in the world insolvent except for gov't money infusion)
Cyprus
Iceland
Bank of Scotland
Greece - several times
Spanish banks
now Italy

China once touted has the boon to drive the world markets is now seen as a hard landing candidate - with shadow banking, zombie companies and ghost cities.
  • Is China the USA friend? -no
  • If China surprise devalues it's Yuan will it do it when it is the most or least opportune for the USA? - least.
  • Can China buy puts just before a surprise devaluation attack and profit from the knowledge? - for sure.
  • If equity speculators (eg the banks) see a rapid fall in equities and understand that the landscape has changed and they will have to pay some interest on margin accounts will they dump stocks or buy? - perhaps buy until they see that it has exceeded 10% and then reverse.

Each time in the last 3 yrs there has been a flash crash the Fed has stepped in at exactly a 10% fall (to the tick!).

Will they on the next one? -Probably.

Will it stop the cascade? perhaps initially ( but eventually it won't. IMO)



A good time for the Chinese to launch a yuan devaluation attack? -Perhaps over the holidays or just after Trump steps in.

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Less than a month ago we warned that the Chinese commodity bubble 2.0 was bursting as speculative volume had exploded relative to open interest and exchanges had begun (after unreal surges in prices) to crackdown on the speculation. The carnage continued and over the last few days has bloodbath'd even more as China warns that it will miss its growth targets.

Spot The Odd One Out...
Zinc -22%
Iron Ore -20%
Steel Rebar -20%
China Coking Coal -25%
Copper -13%
Bitcoin +18%


It appears as China housing bubble pops, commodity bubble pops, and credit-fueled growth bubble pops... there is only one place left for Chinese trend-followers to flee to - Bitcoin.
source: Commodity Futures Plunge Following China Growth Downgrade | Zero Hedge

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The Chinese and Japanese economies are chained together at the neck.

And now the long-awaited inflation in Japan has finally showed up, on top of the trouble in China.

This is extremely worrisome, because although the Chinese economic system can be isolated to some extent, the Japanese cannot. It's much more integrated into the global economy.

"Wasn't Japan deep in a deflationary spiral that they needed to print mounds of currency and drop rates to below zero to fix? Not anymore they're not."

Early In Japan's Runaway Inflation: A Building Market Risk - SPDR S&P 500 Trust ETF (NYSEARCA:SPY) | Seeking Alpha

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suko View Post
The Chinese and Japanese economies are chained together at the neck.

And now the long-awaited inflation in Japan has finally showed up, on top of the trouble in China.

.....
Early In Japan's Runaway Inflation: A Building Market Risk - SPDR S&P 500 Trust ETF (NYSEARCA:SPY) | Seeking Alpha

Thank-you for the post Suko.

It is very interesting and I went and read the article. From it:
"Remember the BOJ has cornered the bond and ETF market. They own about one-third of many major classes of securities.

This was all in the name to get inflation up.

Now that inflation is clearly moving up Japan will have to make the decision at some point to raise rates and sell much of what they bought.

If they sell such huge quantities of assets it will surely help to crash markets. Any trader knows getting into an illiquid position is the easy part. Getting out is the nightmare. Japan will have to get out."

-----------------
Since the rise in the Japanese equity market would have been in a large part due to the Japanese govt buying up to 1/3 of the assets, many investors (both domestic and off-shore) would have gotten on board the gravy train.

If/when the Japanese govt starts to sell, there is not only their selling pressure but those who bought alongside them.

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My theory with regard to the BOJ's $12T hoard of JGBs is that they will have to burn them rather than sell.
Or, if you prefer, declare a jubilee.

Hard to guess what the effect of this would be.

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My theory with regard to the BOJ's $12T hoard of JGBs is that they will have to burn them rather than sell.
Or, if you prefer, declare a jubilee.

Hard to guess what the effect of this would be.

Do you feel Japanese retail equity investors will sell if the Japanese stock market starts to fall?

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Do you feel Japanese retail equity investors will sell if the Japanese stock market starts to fall?

Japanese retail investors are infinitesimal.

The market is moved by US hedge funds.

And they tend to move very fast, which is why the Japanese market is so volatile.

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While we eagerly await the next installment of the McKinsey study on global releveraging, we noticed that in the latest report from the Institute for International Finance released on Wednesday, total debt as of Q3 2016 once again rose sharply, increasing by $11 trillion in the first 9 months of the year, hitting a new all time high of $217 trillion. As a result, late in 2016, global debt levels are now roughly 325% of the world's gross domestic product.

In terms of composition, emerging market debt rose substantially, as government bond and syndicated loan issuance in 2016 grew to almost three times its 2015 level. And, as has traditionally been the case, China accounted for the lion's share of the new debt, providing $710 million of the total $855 billion in new issuance during the year, the IIF reported.

Joining other prominent warnings, the IIF warned that higher borrowing costs in the wake of the U.S. presidential election and other stresses, including "an environment of subdued growth and still-weak corporate profitability, a stronger (U.S. dollar), rising sovereign bond yields, higher hedging costs, and deterioration in corporate creditworthiness" presented challenges for borrowers.

Additionally, "a shift toward more protectionist policies could also weigh on global financial flows, adding to these vulnerabilities," the IIF warned.

"Moreover, given the importance of the City of London in debt issuance and derivatives (particularly for European and EM firms), ongoing uncertainties surrounding the timing and nature of the Brexit process could pose additional risks including a higher cost of borrowing and higher hedging costs."

For now, however, record debt despite rising interest rates, remain staunchly bullish and the equity market's only concern is just when will the Dow Jones finally crack 20,000.

Sadly, since we don't have access to the underlying data in the IIF report, we leave readers with a snapshot of just the global bond market courtesy of the latest JPM quarterly guide to markets. It provides a concise snapshot of the indebted state of the world.
Global Debt Hits 325% Of World GDP, Rises To Record $217 Trillion | Zero Hedge

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The squeeze will have a temporary impact,” Luke Spajic, head of emerging Asia portfolio management at Pacific Investment Management Co., said in Hong Kong. “But I don’t think it necessarily changes the challenge, and the challenge is they still have to worry about the $50 billion to $60 billion a month of outflows and what they’re going to do about the value of their currency. And they have to face the fact that the U.S. is probably going to keep hiking rates.”

Benjamin Fuchs, chief investment officer at the $2 billion hedge fund BFAM Partners (Hong Kong), said China’s moves to repeatedly tighten capital controls risk eroding confidence in its currency. The dollar’s advance against the yen and other currencies has also increased competitive pressure on China to let the yuan depreciate, he said.

“We’re starting to see more and more of a negative cycle being created,” Fuchs said. China’s attempts to curb outflows are “just making people want to take money out quicker, and make companies change their behavior.”

source:
Chinese Volatility Explodes: Yuan Tumbles Most In One Year After Biggest 2-Day Rally Ever | Zero Hedge

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Federal Debt in FY 2016 Jumped $1.4 Trillion, or $12,036 Per Household

(CNSNews.com) – In fiscal 2016, which ended on Friday, the federal debt increased $1,422,827,047,452.46, according to data released today by the U.S. Treasury.

At the close of business on Sept. 30, 2015, the last day of fiscal 2015, the federal debt was $18,150,617,666,484.33, according to the Treasury. By the close of business on Sept. 30, 2016, the last day of fiscal 2016, it had climbed to $19,573,444,713,936.79.


According to the Census Bureau’s latest estimate, there were 118,215,000 households in the United States as of June. That means that the one-year increase in the federal debt of $1,422,827,047,452.46 in fiscal 2016 equaled about $12,036 per household.

The total federal debt of $19,573,444,713,936.79 now equals about $165,575 per household.

————
Corporates Lead Surge To Record $6.6 Trillion Debt Issuance

(The News PK) – Global debt sales reached a record this year, led by companies gorging on cheap borrowing costs.


The bond rally that dominated the first half of the year helped entice borrowers that issued debt via banks to take on just over $6.6tn, according to data provider Dealogic, breaking the previous annual record set in 2006.


Companies accounted for more than half of the $6.62tn of debt issued, underlining the extent to which negative interest rate policies adopted by the European Central Bank and the Bank of Japan, as well as a cautious Federal Reserve, encouraged the corporate world to increase its leverage.


Corporate bond sales climbed 8 per cent year on year to $3.6tn, led by blockbuster $10bn-plus deals to finance large mergers and acquisitions.


The remaining debt included sovereign bonds sold through bank syndication, US and international agencies, mortgage-backed securities and covered bonds. The figures exclude sovereign debt sold at regular auction.


“The low cost of financing with record-low interest rates simply made building up leverage tempting,” said Scott Mather, chief investment officer for core fixed income at Pimco.

=====
It's The Debt, Stupid - Massive Borrowing Binge Producing Fake Recovery | Zero Hedge

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TrimTabs also pointed out that last year’s fund flows reveal an overwhelming preference for passive U.S. equity products. U.S. equity mutual funds, most of which are actively managed, lost $233 billion in 2016, their third consecutive annual outflow. U.S. equity ETFs, almost all of which are passively managed, issued $169 billion, their seventh consecutive annual inflow.

source:
TrimTabs Says "Insatiable" ETF Buying Is Unlike It Has Anything Ever Seen, Issues A Warning | Zero Hedge

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Investors are bracing for a massive stock-market selloff - MarketWatch

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To summarize, redemptions in 2016 were the industry’s largest since 2009, and the third year on record where investors removed more than they allocated.

source:
Over $100 Billion Redeemed From Hedge Funds In 2016 As Only 32% Outperform Their Benchmark | Zero Hedge

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I cannot find words appropriate to describe how this academic, who has zero experience in the real world, is incapable of comprehending that his Marxist style intervention is creating the next crisis.

Yes, negative interest rates lower deficits. But who will buy the negative debt besides central banks? Why borrow money at all and compete against the private sector? Interest rates are negative to punish savers for saving.
.........

Economists such as Rogoff are still basking in the ideas of Karl Marx that government can and should manipulate society to achieve the public policy dreams of those in power. Rogoff is not willing to even think about what he has done to the pension system and how we are looking at states like Illinois becoming broke.

In California, less than four years have passed since it fought to achieve a balanced budget by raising taxes to the highest level in the nation. Politicians cannot manage the economy and negative interest rates are destroying pensions. There is no long-term gain, for Rogoff cannot imagine the next step. The central banks are trapped and can never resell what they have bought under Quantitative Easing. We are rapidly approaching the point of no return or no bid. That is when government tries to sell its debt to pay off the last chunk and there is no bid.

Martin Armstrong Rages: Ken Rogoff Is "An Elitist Who Has No Respect For The People" | Zero Hedge

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aquarian1 View Post
ears later.
China once touted has the boon to drive the world markets is now seen as a hard landing candidate - with shadow banking, zombie companies and ghost cities.
  • Is China the USA friend? -no
  • If China surprise devalues it's Yuan will it do it when it is the most or least opportune for the USA? - least.
  • Can China buy puts just before a surprise devaluation attack and profit from the knowledge? - for sure.
  • If equity speculators (eg the banks) see a rapid fall in equities and understand that the landscape has changed and they will have to pay some interest on margin accounts will they dump stocks or buy? - perhaps buy until they see that it has exceeded 10% and then reverse.

Each time in the last 3 yrs there has been a flash crash the Fed has stepped in at exactly a 10% fall (to the tick!).

Will they on the next one? -Probably.

Will it stop the cascade? perhaps initially ( but eventually it won't. IMO)


A good time for the Chinese to launch a yuan devaluation attack? -Perhaps over the holidays or just after Trump steps in.

Trump is coming in tomorrow.
That is Friday
and then the weekend

Prior Yuan devaluations were over the weekends with the shock hitting on Monday.

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The gloves come off, in other words.

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Trump is coming in tomorrow.
That is Friday
and then the weekend

Prior Yuan devaluations were over the weekends with the shock hitting on Monday.

Doesn't make sense that China or whoever is buying tons of puts. The VVIX is declining, suggesting options on the vix are cheap, with a low expected move in the vix, translating to a low expected move in the indices . At least, that's my very rudimentary understanding of it.

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Doesn't make sense that China or whoever is buying tons of puts. The VVIX is declining, suggesting options on the vix are cheap, with a low expected move in the vix, translating to a low expected move in the indices . At least, that's my very rudimentary understanding of it.

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Yes, well I don't follow and haven't tracked VVIX.
Do you know what the reading was prior to the last surprise devaluation?
(It took the markets down 10% in one day - prior to the US govt buying)

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Yuan Devalued to Combat China Slowdown

China devalued the yuan in a move that rippled through global markets, as policy makers stepped up efforts to support exporters and boost the role of market pricing in Asia’s largest economy.

The central bank cut its daily reference rate by 1.9 percent, triggering the yuan’s biggest one-day drop since China ended a dual-currency system in January 1994. The People’s Bank of China called the change a one-time adjustment and said its fixing will become more aligned with supply and demand.

source:
https://www.bloomberg.com/news/articles/2015-08-11/china-weakens-yuan-reference-rate-by-record-1-9-amid-slowdown
------
Yuan Sinks to Five-Year Low as PBOC Surprises With Weaker Fixing
Bloomberg News
Tuesday, January 05, 2016 7:46:25 PM Wednesday, January 06, 2016 10:27:43 AM

Offshore rate slides to record discount to Shanghai level
China sending out confusing policy signals, Macquarie says
source;
https://www.bloomberg.com/news/articles/2016-01-06/offshore-yuan-sinks-to-5-year-low-as-pboc-fixing-cut-for-7th-day



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In this thread I posted many different possible reasons and often by referencing others.

I don't know when a surprise fall will/would come.
I don't know what will be touted after the fact as the "reason"

When and avalanche comes down a hill people don't argue about which snowflake or sound caused it.
The avalanche people don't predict the day - only that there are dangerous avalanche conditions.

I'm a day-trader and my interest in the fall is an increase of down days.
The more often there are 20pt down moves the better.

I don't want to trade long side because of "flash crashes".
18 months after "fat-finger" Tuesday (complete with ridiculous rumours -- he typed a "Y" instead of a "T") they found the algo was programmed to sell without pause..

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supposedly brilliant people programming these algos.

Never saw a story of anyone being jailed though.

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It's hard to figure out the exact timeline based on the articles. But here's what I found:

Looks like the first Yuan devaluation happened Tuesday, August 11, 2015 (well, Monday August 10 overnight in the US). VVix was around 81 on August 10, which is very low. Started rising, and was at 85 on Tuesday, 88 on Wednesday. The SPX crash didn't occur until the next week, August 20, 2015, and VVix had risen to over 100 by that time. VIX was close to 20. There was plenty of warning that people were buying puts on the market and options on the VIX.

If that information is correct, that article from ZH seems like a big conspiracy theory which does not align with the available data.

The above scenario is not what's happening today.

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There was plenty of VIX warning in August 2015, as there usually is.

The term structure flattens out. Not always but 97% of the time.

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Thanks Jack and Suko for your insights into the VIX and Vix structure.

Yesterday I worked on:
when/if a dramatic fall happens would the incidence of down days be greater?

It was but not as much as I thought.

The tricky thing about day-trading is that you need to be more precise and longer-term structures are not as important to the pay-off.

There are several ways of measuring if a day is a "down" day versus an "up" day.
  1. close to close
  2. open to close
  3. Yhigh to High and Ylow to Low
  4. First end (FE) to Second end (SE) - which I abbreviate "dir"
and so on.

For day trading it seems the last is the more important metric.
So if the HOD was before the LOD then the FE to SE = down ( and vv) - see Note1.

here is the second of the two dramatic falls in the post above - Jan 2016.




Note1. If there is an exact double in either HOD or exact double in LOD then I record the first swing as the "dir"
so that is a V day would be recorded "down" and a Caret day would be "up".

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In the above we have 3 up and 10 down for +104 and -356 totals respectively (summing to -251.75) in a total fall of 270pts from peak to trough.

(eg. 30 Dec 2015 the dir = -15)

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The US has not paid enough respect to China's military. Senior US officials of the Asia-Pacific command frequently show their intention to flex their muscles with arrogance. The Trump team also took a flippant attitude toward China's core interests after Trump's election win. Enhancing communication and mutual understanding is not enough. China must procure a level of strategic military strength that will force the US to respect it.



A China with or without the Dongfeng-41 is different to the outside world. That is the significance of the Dongfeng-41. We hope this strategic edge will be revealed officially soon. It will not bring the China Threat theory, but will only add authority to the People's Liberation Army.

While Trump has had a busy morning, dismantling Obama's (and Warren Buffett's) anti- Keystone pipeline legacy, and has hardly caught up with the latest news out of China, we are curious how the US president will react - either on Twitter or otherwise - to the knowledge that what until now was a diplomatic "war of words", has not so quietly spilled over into what appears to be another nuclear build up arms race.
China Deploys ICBM System "In Response To Trump's Provocative Remarks" | Zero Hedge

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Here are InvesTech's stats:

The current P/E ratio of the S&P 500 at 25.5 is well above the long-term average of 17.1. In fact, the only times that this ratio has been significantly higher than today were during the Technology Bubble of the late 1990s, together with the distorted period in the subsequent recession, and the 2008-09 Financial Crisis (see graph below). Part of the stimulus for the latest rise in valuations is a market expectation for higher earnings power in the years ahead. However, much of that future growth is already priced into the market and current high valuations must be considered a longer-term risk at these lofty levels.

That said, in a world in which 80% of central banks said they plan on buying more stocks this year, why bother with such trivialities as "valuation" or analysis, when cost-indescriminate central banks who literally print money to buy equities, are perfectly happy to take your stocks off your hands at any price.

source:
How Much Longer Can The Market Go Without A Correction | Zero Hedge

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Regular readers remember how, when we first reported around the time of our launch eight years ago that central banks buy stocks, intervene and prop up markets, and generally manipulate equities in order to maintain confidence in a collapsing system, and avoid a liquidation panic and bank runs, it was branded "fake news" by the established financial "kommentariat." What a difference eight years makes, because today none other than the WSJ writes that "by keeping interest rates low and in some cases negative, central banks have prompted some of the most conservative investors to join the hunt for higher returns: Other central banks."

To be sure, nothing that the WSJ reports is news to our readers, who have known for years how central banks overtly, in the case of the BOJ, PBOC and SNB most prominently, and covertly, as the infamous "leave no trace behind" symbiosis between the NY Fed and Citadel, however we find it particularly enjoyable every time the financial paper of record reports what until only a few years ago was considered "conspiracy theory", and wonder what other current "fake news" will be gospel in 2020.
source:
80% Of Central Banks Plan To Buy More Stocks | Zero Hedge

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“When yields started to get really low and closer to zero in 2014, we decided to start equity investments,” said Jarno Ilves, head of investments at the Bank of Finland, who said he plans to increase his allocation to stocks.

But if you think the farce is bad now, wait until next year. According to a recent study by Invesco on central- bank investment which polled 18 reserve managers, some 80% and 43% of respondents to questions on asset allocation said they planned to invest more in stocks and corporate debt, respectively. Low government-bond returns were behind the moves to diversify, said 12 out of 15 respondents, while three declined to answer.

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DB
And with global macro surprises close to their all-time high - much of which has been predicated on the relentless debt-creation by China which just got instruction to slow down dramatically in the current quarter - the DB strategist says they are likely to roll over from current elevated levels, resulting in a slowdown in global growth in the coming months.

source:
Deutsche Warns Global Economy About To Roll Over, Says "Sell" | Zero Hedge

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Here are InvesTech's stats:

The current P/E ratio of the S&P 500 at 25.5 is well above the long-term average of 17.1. In fact, the only times that this ratio has been significantly higher than today were during the Technology Bubble of the late 1990s, together with the distorted period in the subsequent recession, and the 2008-09 Financial Crisis (see graph below). Part of the stimulus for the latest rise in valuations is a market expectation for higher earnings power in the years ahead. However, much of that future growth is already priced into the market and current high valuations must be considered a longer-term risk at these lofty levels.

That said, in a world in which 80% of central banks said they plan on buying more stocks this year, why bother with such trivialities as "valuation" or analysis, when cost-indescriminate central banks who literally print money to buy equities, are perfectly happy to take your stocks off your hands at any price.

source:
How Much Longer Can The Market Go Without A Correction | Zero Hedge


But PE ratio was also about this level right before the tech bubble....see graph from ZH. Not sure why one data point is chosen to interpret vs. another. Makes interpretation irrelevant.


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But PE ratio was also about this level right before the tech bubble....see graph from ZH. Not sure why one data point is chosen to interpret vs. another. Makes interpretation irrelevant.


That is exactly what makes the interpretation relevant and the point of the article.

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That is exactly what makes the interpretation relevant and the point of the article.

Well- there was 5-10 years of bull market after the high PE in the early 90s....so, ZH is predicting a crash in 10 years from now? It doesn't make sense to point out a PE of 25 and say market is overvalued and might crash, but might happen in 10-20 years from now. It's all just propaganda. The way I would interpret that graph would be, well a high PE of 25 might get us another 5-10 years before a downturn.

Or maybe the real way to interpret that graph is PEs are irrelevant to market fluctuations and don't help forecast upturns or downturns.

EDIT: also, just wanted to point out that at no point has the article treated the data in a rigorous statistical manner. It just pointed to a chart and said see this, it could be bad. You seem to highly regard stats and precision when it comes to numbers; I'm surprised you give any of those ZH articles any credence.

I enjoy your stats on the ES thread by the way.

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jackbravo View Post
Well- there was 5-10 years of bull market after the high PE in the early 90s....so, ZH is predicting a crash in 10 years from now? It doesn't make sense to point out a PE of 25 and say market is overvalued and might crash, but might happen in 10-20 years from now. It's all just propaganda. The way I would interpret that graph would be, well a high PE of 25 might get us another 5-10 years before a downturn.

Or maybe the real way to interpret that graph is PEs are irrelevant to market fluctuations and don't help forecast upturns or downturns.

Well Jack you don't know your stock crashes.
You don't read carefully.

1. one measures a peak at the peak not the beginning of the rise. The tech bubble peak was 2000 and it crashed
to 77 in 2002. This is what the chart of PE shows. (Where you circled is not the tech bubble peak.)
155.75-77.07 a 50.5% bear.
2. The end of 1999-2000 is the PE peak as shown .
3. The article source and PE peak correlation by Investech - not ZH
"we turned to a recent report by InvesTech"

You seem to have an argumentative approach, arguing for the sake of arguing and calling ZH conspiracy theory.

They quote the sources this one is Investech another is DB in (Deutsche Warns Global Economy About To Roll Over, Says "Sell"). I don't get access to Intestech reports, or Deutsche reports or Doug Casey, and so on. So these articles are about what they said. ZH does research others don't do.

Here's the key:
This thread was started with a question. It was looking for someone to
COMPUTE
the level that bonds would need to drop to start an unwind and if the drop has to be in a day or would over time count?

IF you Know the answer to that question - why not answer it?
I still haven't received an answer from anyone.

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People seem to like to emotively argue about crashes.
I, personally, really don't care.
I am a day trader and I have posted here that the swing to more down days is relevant.

I don't care to argue, especially about crashes. I don't have a need to stuff money in other peoples jeans, I don't write a newsletter nor do I care to.

I have watch the masses argue violently before ever crash that it can't happen.
The masses and investors have a notoriously short memory.

I have been trading in them all and called them all. I have
ABSOLUTELY no interest in arguing.

Everyone who wants to argue go ahead. Buy more, buy more, take tips from the shoeshine boy.

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I am a day trader and I have posted here that the swing to more down days is what is relevant to me.

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Well Jack you don't know your stock crashes.
You don't read carefully.

1. one measures a peak at the peak not the beginning of the rise. The tech bubble peak was 2000 and it crashed
to 77 in 2002. This is what the chart of PE shows. (Where you circled is not the tech bubble peak.)
155.75-77.07 a 50.5% bear.
2. The end of 1999-2000 is the PE peak as shown .
3. The article source and PE peak correlation by Investech - not ZH
"we turned to a recent report by InvesTech"

You seem to have an argumentative approach, arguing for the sake of arguing and calling ZH conspiracy theory.

They quote the sources this one is Investech another is DB in (Deutsche Warns Global Economy About To Roll Over, Says "Sell"). I don't get access to Intestech reports, or Deutsche reports or Doug Casey, and so on. So these articles are about what they said. ZH does research others don't do.

Here's the key:
This thread was started with a question. It was looking for someone to
COMPUTE
the level that bonds would need to drop to start an unwind and if the drop has to be in a day or would over time count?

IF you Know the answer to that question - why not answer it?
I still haven't received an answer from anyone.

Dude...if you don't want discussions other than the OP question, then why post other stuff? You posted this article, and I expressed my opinion regarding the article. No need to take it as a personal attack, especially since you've misunderstood my point. Feel free to block me from this thread if you don't want my participation. Until then, I will call BS when I read it. Those articles are pure fear-mongering without any rigorous evidence as back-up.

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Looove the bear porn!


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So, will a 3 point higher VIX help your daytrading?


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Here's another thread


I did not take it as a personal attack, Jack.
(Yes you are correct I missed your point on the PE article)
I didn't write it, or any of the other clippings.

No has answered the question in the thread.
The first responder went off on a tangent about "oh isn't this old stuff?, academic and useless?" (not exact quotes but the tone of the reply), so yes I cut and paste clippings from ZH.

It is fast and it may be over service to others.

I am neutral to them.
I don't call them: "bullshit" "conspiracy theory" or any "let's brawl" lingo.
nor do I call them
"great" "wonderful" etc

I am neutral to them.

To argue the points on the market cycle with others - and that does not mean you in particular - it means anyone - is simply a waste of time, which I can't afford. I know from experience it is futile.

Assuming they trade at all they were "all-in" at least three years ago.
They come to argue that's it.

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So, will a 3 point higher VIX help your daytrading?


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I should do some original thinking about tipping points. Perhaps on the weekend.

I am so tired and overworked.
It seems endless.

Someone in another forum posted about "little money units" buying the bid under all assets.
When asked what "little money units" were he replied each time debt is created, either by central banks or commercial. they need to buy assets to balance the books.

oh well for another time...

still haven't done my daily wrap-up and its past bed time

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BY: HANS ALBRECHT, CIM®, FCSI, VICE PRESIDENT, PORTFOLIO MANAGER AND OPTIONS STRATEGIST, HORIZONS ETFS

In the game of poker, a great way to gain an edge is by effectively reading an opposing player’s “tell”. A tell can be a change in behavior that a player unknowingly exhibits when they perhaps have a good or bad hand, such as scratching their nose or suddenly becoming very serious.

As an options trader, I like to watch volatility products for a tell that can sometimes help me to determine which way the market will go in the short to medium term. Option pricing (as depicted by the VIX) tends to be negatively correlated to equity market direction. For example, when stocks rally, option prices will generally sell off, and vice-versa. At times, however, this relationship can weaken, particularly during times of market turbulence or even after a steady rally. Near the end of such a rally, we often see option pricing begin to firm up even though stocks continue higher.

This is something important to note, because it signals a higher level of skepticism and perhaps the impending exhaustion of buying power on the part of equity bulls. I’ve seen this play out again and again. With the VIX on the upswing this week, pay attention to what it’s telling you.

The views/opinions expressed herein may not necessarily be the views of AlphaPro Management Inc. All comments, opinions and views expressed are of a general nature and should not be considered as advice to purchase or to sell mentioned securities. Before making any investment decision, please consult your investment advisor or advisors.

soruce:
horizon etf

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This grind, or melt-up, is so discouraging.

I recall about three years ago it did the same thing in Jan&Feb. I remember thinking "how long can this go on?"
And it continued and continued.

It doesn't matter if people like Jim Rogers say, "interest rates will go so high you won't believe if I told you." And then when asked how the US govt will fund its' debt if rates go to 6 percent, will not it go bankrupt? "What makes you think that countries cannot go bankrupt? Indeed that is what has happened so often before in history." "I hope you are worried, very worried. This will end very badly. A lot of people will disappear."

A lot of people will disappear? Mass starvation?

Today I read an article how lost-at-sea experienced, well-known fund managers, some with 30 years experience, are. They must buy or be dammed, or, not buy and be dammed. Yet that is no solace.

There is my reality - sitting in a snowbank (metaphorically) alone. At times like these Gann's words haunt me: "the market can remain solvent longer than you can remain solvent."

I recall when Fed chairman (Alan Greenspan) ... called the markets "irrational exuberance" - yet they roared on for months more before the tech bubble burst.

Today I read that on Oct 16, 2016 Trump called out Yellen for keeping rates low for "far too long" for political reasons to help the Obama administration. Well it is the truth (though perhaps to help her Goldspan friends) but so what? Who listens to the truth when the pigs are snorting at the trough? The pigs? They are at the trough? Who cares about the elderly who have no retirement income and must decide between electricity or rent? Yellen? - I laugh in your general direction.

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As profiled previously, one of the biggest legends in the hedge fund world, Elliott Management's Paul Singer has cautioned about the risk of “deep underlying complacency” in the face of U.S. stocks that continue to reach record highs.

Another iconic name, Seth Klarman of the Baupost Group, best known for his sermons on value investing, advised that “the cynical exploitation of fake news is a threat against which we must all remain vigilant.”

Basso Capital Management’s Howard Fischer, a 30-year hedge-fund veteran, summed up the investing world as a “stew of uncertainties.” His take on Mr. Trump’s first few weeks: “Dizzying, startling and amazing.” In an interview, he added another adjective: “Disorienting.”

Quoted by the WSJ, Fischer summarized how most traders feel these days: “I have to divorce how I personally feel from the way I trade and invest,” he said. “You can call it somewhat of an internal conflict.” He would have add "just BTFD" if there were any dips to buy.

- - -
“You see all time new highs day after day, a trajectory with very low volatility, valuation metrics that scare you. You’re terrified when you’re in and terrified when you’re out,” said David Kotok, chief investment officer at Cumberland Advisors, in Sarasota, Fla. He held 20% or more cash in some accounts in recent weeks, much of which he subsequently invested.


"Terrified", "Hostile" Hedge Fund Managers Find Themselves Unable To Trade In Trump's World | Zero Hedge

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4. Chinese Debt: The Next Financial Crisis

The outstanding loans held by China has topped $28 trillion. That total equals nearly the entire commercial banking systems in both the U.S and Japan combined.

--
Beginning in September 2016, the Bank for International Settlements (one of the most influential banking organizations in the world), released for the first time data on the credit-to-GDP ratio gaps since 1961.

The information revealed that China reached an astronomical total of 30.1 in this ratio gap. Typically anything over a figure of 10 offers room for concern and the Chinese economy has tripled that.

That puts the major Asian giant at the highest ratio to date, and above all other major economies evaluated by the governing institution.

The 30.1 ratio gap is higher than the numbers seen during the Asian boom in 1997 and the subprime mortgage bubble experienced just prior to the Lehman Brothers crisis of 2008.

All of this mounts the story for a Chinese debt bubble that continues to inflate.

Former Reagan White House insider and bestselling author David Stockman noted even at the beginning of 2016 that, “The fact is, no economy can undergo the fantastic eruption of credit that has occurred in China during the last two decades without eventually coming face to face with a day of reckoning.”

Stockman did not skip a beat saying that, “Massive borrowing to pay the interest is everywhere and always a sign that the the end is near. The crack-up phase of China’s insane borrowing and building boom is surely at hand.”

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Somebody needs a bong hit...bigly.

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Speaking of complacency, last week for the first time in ages the VIX call 30 strike, which is where the semi-smart money draws the line in the sand, was not at the top of the volume rankings.

So the pension funds risk models say that there's no further need to hedge?

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In our Love Panic model, we try to identify distress and euphoria in an attempt to predict forward market returns. In order to successfully predict the market we have chosen parameters with good predictive capabilities during different market cycles but also those that make qualitative sense. Investment should be dispassionate but not automatic. Some investors solve this problem by hiring a mechanic (or quant) to build a machine to invest on their behalf. This indicator is not for them. Instead, this indicator highlights when market sentiment is either overly depressed or excessively optimistic. This helps one at least adjust for ones mood. So we suggest that when the market has reached a level of distress, it’s a good time to buy. Meanwhile, when investors are euphoric,we advocate a sell. As a result we have developed a contrarian indicator model. When our signal is in panic (negative), it indicates a buy. While when the signal reads positive it’s a sell signal. In our Love Panic model, we try to identify distress and euphoria in an attempt to predict forward market returns. In order to successfully predict the market we have chosen parameters with good predictive capabilities during different market cycles but also those that make qualitative sense.

When in 'love' mode, the average drop in stocks has been 12% in the next six months. The biggest drivers of this "love" have been investor confidence, CoT positioning, short-interest, relative trading volumes, and sectoral outperformance with fund-flows shifting away from "love" suggesting the short-term top is in. The index itself peaked last week at the highest level of "love" in two years

BNP Risk Indicator Flashes "Love" Warning Signal For US Stocks | Zero Hedge

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table of % declines in S&P
When A Black Swan Isn't A Black Swan | Seeking Alpha

a key point of the morgan stanley article is that a bond rise is needed to cushion a fall in equities in a bond equity portfolio.


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Simply put, the massively overcrowded hedge fund herding into US equities has created a crisis situation. With liquidity levels at record lows, the market will be unable to smoothly absorb any concerted selling pressure from large money managers.

“Their ability to sell in the marketplace is really going to depend on their peers who are trying to sell at the same time,” Stan Altshuller, chief research officer at the analytics firm, said by phone. “It becomes the prisoner’s dilemma.”

Finally, we note that the last bear market started in October 2007, just four months after liquidity appeared to be drained out from hedge funds.

'Cash On The Sidelines' Crashes Near Record Lows | Zero Hedge)

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Stocks Suffer Longest Losing Streak Since The Election As Crude Crashes | Zero Hedge

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The S&P 500 index, closing today at 2,373, hovers near its all-time high. Total market capitalization of the 500 companies in the index exceeds $20 trillion, or 106% of US GDP. In the three-plus years since the end of January 2014, the index has soared 33%.

And yet, over these three-plus years, even with financial engineering driven to the utmost state of perfection, including $1.7 trillion in share buybacks and despite “ex-bad-items” accounting schemes that are giving even the SEC goosebumps – despite all these efforts, the crucial and beautifully doctored “adjusted” earnings-per-share, perhaps the single most manipulated metric out there, has gone nowhere.

“Adjusted” earnings per share are back where they’d been at the end of January 2014. It’s a sad sign when not even financial engineering can conjure up the appearance of earnings growth.

Companies report earnings in two ways:

All companies report as required under GAAP (our slightly inconvenient Generally Accepted Accounting Principles). These earnings are often a loss or way too small and shrinking, instead of growing, and hence not very palatable.
So most companies also report pro-forma, ex-bad-items, “adjusted” earnings, based on the companies’ own notions of what matters. Analysts and the media hype that metric. This is just a method of reporting the same results in a more glamorous manner.

Then there’s financial engineering. Companies borrowed heavily over the past few years and used those funds to purchase their own shares. This hollowed out equity and left companies with piles of debt. Over the past three years, companies blew $1.7 trillion on share buybacks. This money was not invested in productive activities that would have expanded the company and the economy, and generated cash flow to service this debt. All it did was reduce the number of shares outstanding. This has the effect of increasing earnings per share (EPS) though the company didn’t actually make more money.

Add this system of share buybacks to the system of “adjusting” earnings per share via reporting schemes, and the result should be a miracle of soaring “adjusted” EPS. But no.

For the trailing 12-month period, “adjusted” earnings per share in aggregate for the S&P 500 companies was $109, as of March 16, according to global data provider FactSet, just a hair above where it had been on January 31, 2014:

But over the same period, the S&P 500 index has soared 33%. What gives?

I previously dissected the lack of growth in total adjusted earnings – not earnings per share, but total earnings for the S&P 500 companies. Since this is not a per-share metric, it excludes the effects of financial engineering, such as share buybacks. It showed that total earnings on a 12-month trailing basis in Q4 2016 were stuck at 2011 levels, though the S&P 500 index had soared 87%.

So financial engineering – share buybacks to reduce the number of shares outstanding – works, kind of: It made the results look less terrible. But even these expert financial engineering methods, at a cost of $1.7 trillion, couldn’t doll up results enough to show any kind of earnings growth over the past three years.

Yet stocks have soared despite these miserable growth fundamentals. So what gives in this no-earnings-growth environment?

Turns out the only thing that has soared is the price-earnings multiple. Over the three-plus years, it expanded by 47% from a P/E ratio of 18.15 on January 1, 2014, to P/E ratio of 26.64 today:

This combination of flat earnings and soaring stock prices, and thus expanding P/E ratios, is not uncommon. It comes in cycles: periods of multiple expansion are followed by periods of multiple compression. The current cycle of year-over-year multiple expansion has lasted for 57 months, the longest on record. The prior three record cycles – which ended in 1987, 2000, and 2009 – turned into periods of multiple compression associated with blistering crashes. Read… This is Worse than Before the Last Three Crashes ( This is Worse than Before the Last Three Crashes | Wolf Street)

source:
The One Chart That Your Portfolio Manager Does Not Want You To See | Zero Hedge

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Today's downmove went through
2246.50
which had been support.

The o/n session and tomorrow morning early trade will show what is next.
We had a low of 2338.00
and a close of 2342.25
at 10 percent of today's range.
(temp.png)



Price has to move above the 2246.50 tomorrow RTH and close above it for the bulls.
Failing this, (unless their is strong FED/USgovt buying) the chart suggests moves to the next supports.

Next possible supports are
2291.00 and 2270.75
(see chart -temp1.png)

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Interesting article on risk parity and CTAs:

"The question investors need to ask themselves is what will happen if China's issues start to manifest themselves in global markets (remember August 2015? Me too. We're all in this together). The combination of large risk-parity funds and CTAs being quite long equities at the exact moment that China's credit bubble is starting to show signs of stress could end quite badly. The pension funds that have hired CTAs to sell into the next selloff will exacerbate what would have in the past been a normal correction."


https://seekingalpha.com/article/4058060-tigers-ghosts-kryptonite-risk-parity-ctas-trend-surfing

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Bloomberg’s Stephen Spratt calculates that the balance sheet’s Treasury holdings longer than 20-years maturity represents a full three years worth of long-bond supply. Not even mentioning all the MBS.



source:
"No One Knows How This Is Going To Work" Trader Warns | Zero Hedge

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Interesting unwind today of Eurodollar spreads that made dollar and indexes surge up today @ 1330, EST and clobbered the PM's.

The market has been making some interesting moves as of late.

You miss 100% of the shots you don't take. - Wayne Gretsky
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Just as portfolio insurance caused the 1987 rout, he says, the new danger zone is the half-trillion dollars in risk parity funds. These funds aim to systematically spread risk equally across different asset classes by putting more money in lower volatility securities and less in those whose prices move more dramatically. Because risk-parity funds have been scooping up equities of late as volatility hit historic lows, some market participants, Jones included, believe they’ll be forced to dump them quickly in a stock tumble, exacerbating any decline.

“Risk parity,” Jones told the Goldman audience, “will be the hammer on the downside.”

Paul Tudor Jones Has A Message For Janet Yellen: "Be Terrified" | Zero Hedge

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Hello @aquarian1

this might be of interest for you. Below a link to a short article from Cullen Roche. He is having a different view on Risk parity funds.

The Most Dangerous Narratives are Usually the Smartest | Pragmatic Capitalism


Kind regards

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Tellur View Post
Hello @aquarian1

this might be of interest for you. Below a link to a short article from Cullen Roche. He is having a different view on Risk parity funds.

The Most Dangerous Narratives are Usually the Smartest | Pragmatic Capitalism


Kind regards

Thank you Tellur


Ian

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Having read Cullen Roche's article I noticed that he seems unaware to the leverage of the risk parity funds and therefore his analysis appears to be flawed.

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  #79 (permalink)
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I have cut and paste what I felt were relevant clips

------------------ clips from two articles :


A far more immediate problem as a result of China's housing bubble may be the acceleration of Yuan outflows. According to Cui, a major driver of China's capital outflow is high asset prices.

In another word, the local rich may prefer NY condos to Shanghai apartments for better value, for example. From this perspective, for the outflow pressure to ease, either housing price in Rmb terms has to decline or Rmb devalues. This assumes that the government cannot control capital outflow effectively in the long run, a reasonable assumption in our view given how open the Chinese economy is.

How will the government react? BofA predicts that "if it comes down to it, we expect the government to choose Rmb devaluation over asset price deflation" aka a housing hard landing. " Arguably the biggest driver behind high asset prices in China is leverage in our opinion. As a result, any major asset price decline may quickly trigger a debt deflation spiral and financial system instability."

If it is too aggressive, a hard landing is in store, coupled with what a crash in the country's financial system, where the bulk of the banks' $35 trillion in assets is collateralized by housing values.

source:
Why The Fate Of The World Economy Is In The Hands Of China's Housing Bubble | Zero Hedge

----------------------------------------------------------------

In his latest weekend notes, One River Asset Management CIO, Eric Peters, picks up where BofA's Mike Hartnett left off on Friday when he said that the "QE Monster" will only end when "the Wall Street bubble" finally shocks the Fed.

...as Beijing cracks down on shadow banking, . . . will certainly have a dramatic impact on China's cost of funding, which in turn would unleash the next deflationary shockwave around the globe

“By closing the capital account, the Chinese once again have complete dominion over their domestic credit machine,” continued the same CIO. “When they were actively opening up the capital account, China relinquished control over their interest rates to the Fed.” The volatility of Jan/Feb 2016 was one of many consequences; a lesson not soon forgotten.

source:
Hedge Fund CIO: "Normally The Fed Would End This Bubble, But It Can't This Time For One Reason" | Zero Hedge

===========

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My understanding of what was said:

1. China has a closed capital account giving it control over its domestic credit machine.
2. much of local govt revenues are linked to China's housing bubble (which has created a large "wealth effect" among participants ie house buyers)
3. prices have become very high even by global standards and some Chinese buyers are now viewing other real estate (e.g NY city apt) as better value one of the causes capital outflows from China.
4. China is tightening on shadow banking (which will cause rates to rise)
5. China would prefer RmB devaluation to crashing its housing bubble.


My conclusion:

This situation may cause the Chinese govt to have a surprise weekend devaluation in the Rmb. Given the priced to perfection USA equity market bubble, this could easily cause a overnight 10% fall in the S&P as we experienced before.

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And this should increase the bid for Bitcoin at the same time.

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The article is primarily B of A report about large sigma moves.
Most of it I don't really understand but the link is at the end for those who are interested.

BTW I'm looking for votes in the July contest - click on Thanks button at link below
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https://www.zerohedge.com/sites/default/files/images/user5/imageroot/2017/07/05/qq%20CTAs.jpg


Driven by the decoupling between stocks and bonds and the volatile, countertrend move in commodities and oil in particular - which was nowhere more evident than in the world of Risk-Parity funds and CTA, which suffered their worst two-week plunge since 2003.

For the answer we go to one of the foremost vol experts on Wall Street, the team of Chintan Kotecha, Ben Bowler et al at Bank of America, who today described what took place last week “Quant quake”, and who continues a long trend of pointing out just how "weird" and fragile the market is (no really, in late May he wrote "While not obvious on the surface, these Markets Are Very Weird") by noting that markets continue to set long-term records for price instability or “fragility”, with a five standard deviation (5-sigma) sell-off in the S&P 500 on 17-May, a 3-sigma drop in the Nasdaq 100 on 9-Jun, and most recently a sharp rise in the bank's cross-asset Fragility Indicator.

However, while price trends and vols indicate CTAs may have unwound Fixed Income and Commodity positions, according to BofA risk parity portfolios have yet to adjust their leverage. In other words, despite the volatile market gyrations, risk-par did not deleverage. For risk parity, it is important to distinguish between changes arising from slower-moving shifts in cross-asset allocation versus dynamic adjustments in leverage due to target volatility overlays. Typically the larger and more significant deleveraging comes from vol control overlays. The amount of deleveraging is a function of a risk parity strategy’s target volatility and maximum leverage allowed. But more significantly, the deleveraging is a function of the prevailing volatility prior to a large move and the specific magnitude of those large moves.

source:
"Quant Quake": What Was Behind Last Week's Historic CTA Crash, And Is Another One Imminent | Zero Hedge

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Along similar lines is this must-read piece from Harley Bassman:

https://www.convexitymaven.com/images/Convexity_Maven_-_Rambling_near_the_Edge.pdf

Seemed appropriate for this thread, in that it actually seeks to answer the question of the risk-parity unwind tipping point.

To those not familiar with the concept of "negative convexity" it's a term most often associated with mortgage backed securities where the investor is short the refi option, which slows the rate of price appreciation of the bond when interest rates decline (as borrowers refinance and the MBS investor is repaid early at par) and increases the rate of price declines when interest rates rise (as mortgage borrowers reduce their rate of pre/repayment, leaving the MBS investor stuck with a longer duration security at the worst possible time.)

A similar concept can be applied to risk-parity and other volatility-conditional investment constructs, where portfolios are essentially forced to buy high and sell low.

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Bladesmith View Post
Along similar lines is this must-read piece from Harley Bassman:

A similar concept can be applied to risk-parity and other volatility-conditional investment constructs, where portfolios are essentially forced to buy high and sell low.

Thanks for the article!

Re:
In simple terms, would you prefer to buy an asset (strategy) with a 15% return and a
30% Vol (IR = 0.5), or a 5.1% return asset with a 3.4% Vol (IR = 1.5)? Seemingly the latter
is better, especially if we lever it 3x to a 15.3% return (with a lower volatility). But this is
somewhat similar to selling a deep OTM put; usually a winner, until it isn’t.

1. is 3.4% Vol mean percentage change in price on a daily basis - so 100 to 103.4 or to 0.957?
2. when levered 3x does the Vol of the investment go up 3x to 10.2?

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While nobody knows what catalyzed for the sharp selloff over the last hour, with Citi blaming it on Acrophobia, or fear of heights, saying that "US equities opened at record highs, key levels were being approached in fixed income while USD enjoyed a bid across the board... However since then, it looks like markets have gotten a small case of cold feet", Bloomberg had a different idea, when it observed that stocks erased gains around 12:30 p.m. as S&P 500 fell 0.5% over 60 minutes to low of 2,469.51. It notes that the "weakness occurred as traders circulated a note by JPMorgan quant strategist Marko Kolanovic that cautioned investors on the risks of record-low volatility in the equity market."

In his latest note, reposted below, Kolanovic, aka the JPM quant "Gandalf" popularized on this website over the past two years writes that "volatility near or at record lows by a handful of measures should “give pause to equity managers,” and that “low volatility would not be a problem if not for strategies that increase leverage when volatility declines.”


which MS explained what would happen if VIX went "bananas", Kolanovic writes that "strategies that boost leverage when volatility declines, such as option hedging, CTAs and risk-parity, share similar features with the dynamic ‘portfolio insurance’ of 1987,” which “creates a ‘stop-loss order’ that gets larger in size and closer to the current market price as volatility gets lower.”

"We May Be Very Close To The Turning Point": Selloff Blamed On This Note From JPM's Marko Kolanovic | Zero Hedge


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Negative convexity:

“How did you go bankrupt?"
Two ways. Gradually, then suddenly.”

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Today US Govt bought up the dip after opening as < 2583 is 10% so with 256.98 in pre-open they bought at open.
(This is in regards to last sentence below.)

clippings from article:

"While CTAs have the potential to continue selling via turning short, we believe the risk to that is low as CTAs often use moving average crosses to determine long and short positions. While specific parametrizations can vary tremendously across CTAs, in our opinion an important combination worth monitoring is both the 1M vs. 3M and 1M vs. 10M moving average crosses. Given the strong rally in equities over the last year and longer, the 1M moving average still remains well above the 10M and we do not believe shorts build up until we see that set cross.

However, speaking of CTAs, there is another potential major risk factor: a sudden spike lower in Treasury yields. Recall our article from January 24 "Momentum Traders Wreak Havoc For 2Y Treasurys, Could Unleash Sharp Bond Liquidation" in which we explained that some of the biggest marginal buyers, and sellers, of 2Y notes are CTAs.
----------
In other words, if only central banks provide just enough support to stocks today, we may all simply forget that on "Black Monday 2017" (2018?) we saw the biggest volatility freakout in history and the algos will be back to buying the dip, as they always have been, in no time as nobody learns any lessons once again."

source:
https://www.zerohedge.com/news/2018-02-06/was-just-start-risk-parity-ctas-are-process-selling-200-billion-equities

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from Anthony Crudele
2 Feb 2108

Yesterday on Periscope I spoke about the action I was seeing in the Bond/Treasury Market and the S&P (ES). With yesterdays weakness in the ES we did not see a bid come into the Bond/Treasury market. I actually saw the opposite as they were all trading weak together. If you look at the chart below you can see the 30 yr, ES & 10 yr have been moving together over the past 5 days.

In my opinion this type of action could be a problem for the Stock Market. There is a ton of money invested in this Risk Parity trade and even a small amount of unwinding of this trade could result in big moves for both Equities and Treasuries to the downside.

I use a strategy that dictates my trading so noticing this action in Bonds/Treasuries & ES is only a warning sign, not a reason to be short ES.

Which brings me to my ES strategy chart. Today’s close is very important to me. A daily close below 2835 indicates a possible test of 2768 in the coming days/weeks. Two ways I typically execute this type of trade. One way is using options and the other way is day trading futures using shorter term charts to look for short opportunities. Typically when I have a daily signal for direction I only trade that direction until the daily chart changes. That means I will only look at shorts until the target of 2768 hits or we get a daily close back above 2835. If we close today above 2835 then all bets are off for me looking short & I think that we continue to grind higher.

With the look that I am seeing between ES & Bonds/Treasuries I will use that as confirmation when executing. If Bonds/Treasuries are going down with ES I will look to be more aggressive with shorting ES. If Bonds/Treasuries are not going down with ES, then that correlation I noticed is breaking down & will no longer use it for confirmation.

source:
A Warning Sign For S&P - FuturesRadioShow

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Battlestations! Show us your trading desk - $1,500 in prizes!

March
 

Importance of Finding Your Own Way w/Adam Grimes

Elite only
 

Journal Challenge w/Jigsaw

April
     



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