Every so often Chris Cole, of Artemis Capital, perhaps one of the deepest and most provocative thinkers in the volatility trading space, graces us with a rare glimpse into his imaginarium.
His latest publicly available research report offers this:
The Prisoner’s Dilemma is the most important paradigm for understanding shadow risk in modern financial markets at the pinnacle of a multi-generational debt cycle unparalleled in the history of finance.
In their masterwork tapestry entitled “Allegory of the Prisoner’s Dilemma” the artists Diaz Hope and Roth visually depict a great tower of civilisation that rests upon a bedrock of human cooperation and competition across history. The artists force us to confront the fact that after 10,000 years of human civilisation we are now at a cross-roads. Today we have the highest living standards in human history that co-exist with an ability to destroy our planet ecologically and ourselves through nuclear war. We are in the greatest period of stability with the largest probabilistic tail risk ever.
David Beckworth, economist, disagrees with Larry Summers’ secular stagnation theory because he reckons it overlooks the fact risk premiums are falling. Once this phenomenon is recognised, he claims, there is no long decline in real interest rates.
Beckworth puts the decline of the risk premium down to improved economic management and policy over the last 20 to 30 years. Essentially, central bank intervention in markets has been much more effective, leading to a smoothing out effect of the boom and bust business cycle, and an overall improvement in price stability.
Yet contrast that with BoE chief economist Andy Haldane’s new theory of risk in complex systems. As Haldane recounted in a speech at the end of March, central bankers — if they are to continue to be effective — need to understand the economy is no longer just a system, but rather a “system of systems”. This new nature of the economy, he suggests, is something brought to light by the 2008 crisis. Read more
$80 oil, $70 oil, $60 oil, $50 oil and counting… If you suspect the structure of the oil market has fundamentally changed, you may be on to something.
There was a time when all you needed to balance oversupply in the oil market was the ability, and the will, to store oil when no-one else wanted to.
That ability, undoubtedly, was linked to capital access. For a bank, it meant being able to pass the cost of storing surplus stock over to commodity-oriented passive investors and institutions happy to fund the exposure. For a trading intermediary, that generally meant having good relations with a bank which could provide the capital and financing to store oil, something the bank would do (for a fee) because of its ability to access institutional capital markets and its reluctance to physically store oil itself. Read more
Alternate title: the market isn’t entirely nuts, when’s the crash?
While tech titans and buyers of initial public offerings dream of a wondrous future, bank investors appear to be saying something very different.
Here’s the FT’s Tom Braithwaite and co, recently foreshadowing the US bank earnings season:
Citigroup and JPMorgan Chase have warned publicly that fixed income revenues – the engine of most investment banks’ profits since 2000 – will be down by double digits when they report first-quarter earnings next month.
Confidence in the stability of the UK financial system as a whole over the next three years, charted by the Bank of England…
Something has been nagging at us this month — why were there so few market nerves apparent ahead of the possibility of a US government default, if the debt ceiling wasn’t lifted?
Not because we have any fresh insight into the chances of a political-cum-financial crisis in the US, but for what it says about a concept we think may describe much of the current situation in markets: sticky risk. Read more
This is another reminder about completing your Annual Risk Awareness Test. Our records show that you have yet to complete the Insider Trading Module.
Please note — for like the 30th time or something — that completion is mandatory. You must complete the test by Friday, October 4th. Read more
FT Alphaville is (still) poring over (and enjoying) the staff report from the Senate Permanent Subcommittee on Investigations on the JPMorgan “whale” trades in its Chief Investment Office that lost the bank over $6bn. It takes
a lot of coffee awhile to get through all 597 pages of exhibits along with the 307-page report, and all the glorious footnotes, so please kindly bear with us.
As it stands, the more we read, the more dirt we turn up. And the uglier we realise this whole episode was, the more we become concerned: if this happened at JPMorgan, where else could it happen?
The below on risk limits serves as a case in point. The tl;dr version in graphs below, but first from the staff report (emphasis ours): Read more
On Monday, the results of the Bank of England’s Systemic Risk Survey were out.
How confident are 79 market participants — from hedge funds, banks, building societies, large complex financial institutions, asset managers and insurers — in the UK’s financial system?
Well, it would appear that they’ve gone from approximately umm-errrr-dunno to hmmm: Read more
The trauma and cost of a public rescue must surely teach the bank management concerned to behave in a more prudent manner, right?
Wrong, according to a recent Bank of International Settlements paper. Read more
FT Alphaville has intercepted a recent phone call between banks and their regulators!!!
Regulators: “We’re going to revise the capital adequacy framework and increase transparency in the reporting of risk on bank balance sheets.” Read more
There might be some wiggling about liquidity but the worldwide work of getting banks ready for Basel III goes on. Though there’s been an interesting development in Australia recently.
Australian banks and other savings institutions were this week given some guidance on how they’ll be expected to meet Basel III capital requirements when the Australian Prudential Regulatory Authority (Apra) came out with a discussion paper (PDF) which suggested an accelerated timeline for adopting new rules. Read more
Bullion gained more than 2 per cent on Tuesday, Reuters reports, roaring to all-time highs for a second consecutive session to stand above $1,750 as equity markets dived on growing fears of a global recession following last week’s US credit downgrade. Traders said investors ranging from sophisticated hedge funds to European savers were turning to bullion as they pulled money out of tumbling equity markets, the FT reports. Investors in gold through exchange traded funds hold a record 2,276 tonnes of gold, more than most central banks. Dealers said sales of coins and small bars to European investors were on Monday the highest so far this year.
Deutsche Bank’s fixed income research team don’t see any need to beat around the bush.
We’re in the early stages of the Global Sovereign Crisis. End of. Read more
It’s an answer — of sorts — to the $2,200bn dollar question. Read more
We bring up this dangerous malady, because Citi FX strategist Steven Englander does in his latest piece. But first, take a glance at these charts. The first is the S&P 500 — which is almost at the second anniversary of rebounding from its cycle low:
Never short a Japanese government bond — no matter what you think of the country’s debt-to-GDP ratios, demographics, savings and the like. The JGB market can stay irrational longer than you can stay solvent etc. So swaption it, instead.
Here’s Bank of America Merrill Lynch’s Bin Gao on why: Read more
The last time Nomura talked ‘risk on/risk off‘ they thought it had ruptured.
Now they think the market phenomenon — which had seen correlations intensify in recent (QEased and crisis-ed) years — might be ruined for good. Read more
Believe us, it’s taken all our willpower to not headline this post as Basel Faulty.
The London Banker has returned to blogging after a two-year hiatus. And boy, that 24-month break has done nothing to quell this former central banker’s ire. Read more
The European Central Bank made headlines on Thursday, with its request for a €5bn capital increase. The stated reason was all about covering volatility in fx, interest rates and gold prices “as well as credit risk” on other (SMP-bought) securities.
Nomura’s European rates team, however, are having none of it: Read more
Quelle surprise. Or should we say, was fur eine Überraschung?
A new working paper from the European Central Bank describes the augmenting effect of government guarantees on bank risk-taking. In a nutshell: Read more
Traders have sought safe havens in gold and the dollar, after a day of international unease begun by North and South Korean forces firing artillery at each other, the FT reports. The Dow’s energy components brought it down to 1.3 per cent in edgy trading also influenced by the developing crisis in the eurozone, but the Dollar Index was up 1.1 per cent, the WSJ adds. Russia, China and the United Nations have urged restraint following North Korea’s attack on civilian targets, the FT says, although South Korea said its military remains at ‘crisis status’, the NYT reports. FT Alphaville captures earlier Asian market sell-offs.
Kathleen Brooks, research director at Gain Capital, warned on Wednesday how a quantitative easing boost from the Fed would, most likely, reverse a recent and unusual trend in the Vix Index.
As she explained, for most of October, the Vix rather unusually has been rising alongside the S&P 500 — the index from which it’s derived. The two indices ordinarily move inversely to each other. Read more
Risk’s Life & Pension edition draws attention to an interesting development occurring in the pensions and insurance arena.
Banks have supposedly been touting insurance and pensions funds for their liquidity. Read more
Never were truer words spoken of a mathematical formula.
Out on Friday — some über-Geeky weekend reading for those (still?) interested in financial risk management. It comes courtesy of The Joint Forum, the taskforce set up by the Basel Committee on Banking Supervision, IOSCO and the International Association of Insurance Supervisors, to examine topics of mutual interest. Read more
Whilst much has been written about the rise in correlation recently — what’s been less frequently observed is the strange disconnection that’s occurring between correlation and volatility.
The two traditionally move together. That is, correlation tends to rise and fall with volatility. Read more
Nomura’s fixed income team reckon ‘risk on, risk off‘ is too simple.
In fact, they say the recent bout of QE2-inspired herding of risk is breaking down. Read more
A rather unusual chart from RBC Capital Markets:
The Federal Reserve didn’t mean for its recent QEII announcement – that it would be reinvesting proceeds from its maturing securities portfolio — to so greatly affect investors. Read more