Citi’s Shocking Admission: “There Is A Growing Fear Among Central Bankers They’ve Lost Control”
Earlier we showed a variation on a VIX chart from Citi’s Hans Lorenzen which, if it doesn’t impress, or scare you, then nothing probably will.
However, leaving readers unimpressed – and unscared – will not satisfy Lorenzen, which is why the credit strategist who works together with the godfather of rational doom, Matt King, and has been warning for weeks that now is the time to sell credit, unloads in one of the more effusive missives of dripping negativity to hit during this holiday week when one after another equity sellside analyst has been desperate to outgun each other with their ridiculous 2018 year end S&P forecasts.
And while Lorenzen touches on many things, at its core, his warning is straight out of Shumpeter: the longer nothing changes, the greater the crash will ultimately be, a topic which DB’s Aleksandar Kocic dissected over the summer, even defining an entirely new term in the process: metastability.
So without further ado, here is Lorenzen explaining why “embellishing the status quo will be the market’s undoing.
Ultimately, extreme valuations, the lack of risk premia, and a lack of responsiveness to tail risks are merely symptoms. The real question is what the skewed incentive structure resulting from that backstop has done to the fabric of markets after so many years. To our minds the answer is that trades and strategies which explicitly or implicitly rely on the low-vol environment continuing, are becoming more and more ubiquitous.
Realised historic vol is de facto an exogenous input to much of the risk management framework that underpins modern finance. With lookbacks extending a few years, an extended period of market stability reduces VaR measures and improves Sharpe ratios.
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