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Citi’s Shocking Admission: “There Is A Growing Fear Among Central Bankers They’ve Lost Control”
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.
…click on the above link to read the rest of the article…
Matt King: Global QE And “ETFs Everywhere” Have Created An Unstable, One-Way Market
Matt King: Global QE And “ETFs Everywhere” Have Created An Unstable, One-Way Market
While the financial industry remains divided over what precisely is the cause of the malaise that affects modern markets, characterized by plunging volumes and trading activity, record low volatility and dispersion, a relentless ascent disconnected from fundamentals, and generally a sense of foreboding doom, manifested by an all time high OMT skew – or record high price for crash insurance – as discussed previously…
… it can agree on one thing: it has something to do with the interplay of QE, the artificial force that has disconnected market prices from values for the past 8 years, and ETFs, which as some prominent investors have said are “devouring capitalism.” They also agree that the combination of QE and ETFs have made the market almost entirely “one-sided”, and thus prone to collapse when conditions finally reverse.Indeed, as Citi’s Matt King – our favorite sellside cross-asset strategist – writes in his latest report, a growing number of institutional managers, from Oaktree to Elliott to Bridgewater, have recently been expressing concerns not only about elevated valuations and the potential for a correction, but in many cases also about the potential for herding and the risk that markets have grown one-sided.”
King points out a trend observed among the financial literature over the past 2-3 years (starting with Howard Marks’ March 2015 note in which he asked, rhetorically “What Would Happen If ETF Holders Sold All At Once? Howard Marks Explains”), “everyone’s number-one suspect in potentially creating such a tendency seems to be ETFs. In Paul Singer’s memorable words, passive investment through the likes of ETFs “is unsustainable and brittle” and “is in danger of devouring capitalism”.
Why The (Collapsing) Global Credit Impulse Is All That Matters: Citi Explains
Why The (Collapsing) Global Credit Impulse Is All That Matters: Citi Explains
But why is the credit impulse so critical?
To answer this question Citi’s Matt King has published a slideshow titled, appropriately enough, “Why buying on impulse is soon regretted”, in which he explains why this largely ignored second derivative of global credit growth is really all that matters for the global economy (as well as markets, as we will explain in a follow up post).
King first focuses on the one thing that is “wrong” with this recovery: the pervasive lack of global inflation, so desired by DM central banks.
As he notes in the first slide below, “the inflation shortfall isn’t new” and yet the current “level of credit growth would traditionally have seen inflation >5%”
To be sure central banks always respond to this lack of inflation by injecting massive ammounts of liquidity, i.e., credit, in the system: according to Citi, the credit addiction started in 1982 in the UK, while in 2009 it was in China. However, there was a difference: while in the 1982 episode, it took 3 credit units to grow GDP by 1 unit, by 2009 this rate had grown to 6 to 1. Meanwhile, central bankers “simply stopped worrying about credit.” That also explains the chronic collapse in interest rates starting in 1980 with the “Great Moderation” and their recent record lows: the world simply can not tolerate higher rates.
…click on the above link to read the rest of the article…
Citi: “We Have A Problem”
Citi: “We Have A Problem”
Take Matt King’s September 2015 piece in which he warned that one of the most serious problems facing the world is that we may have hit its debt ceiling beyond which any debt creation is merely pushing on a string leading to slower growth and further deflation. Or his more recent report which explained why despite aggressive easing by the BOJ and ECB, asset prices continue to fall as a result of quantitative tightening by EM reserve managers and China, which are soaking up the same liquidity injected by DM central banks.
Overnight, he put it all together in a simple and elegant way that only Matt King can do in a presentation titled ominously “Don’t look down: You might find too many negatives.”
In it he first proceeds to lay out how things have dramatically changed in recent months compared to prior years: first, the “appalling” asset returns and the “rising dislocations” between asset prices in recent months and especially in 2016, or a broken market which is not just about Crude (with correlation regimes flipping back and forth), or China (as YTD bank returns in Japan and Switzerland are far worse than those in the China-exposed Eurozone), as appetite for risk has effectively disappeared. Worse, as the Japanese NIRP showed, incremental easing in the form of QE actually triggered ongoing weakness, sending both the Nikkei and the USDJPY plunging, suggesting that central bank grip on markets is almost gone.
…click on the above link to read the rest of the article…
