The Anatomy of a Crash
When Rolling Blowouts Become Risk Off
In Release the Crackups and the Era of Rolling Blowouts among other notes, I have tried to explain how seemingly unrelated ruptures in specific corners of the market run their course. The framework originally came to me in the summer of 2018 after the following sequence of events:
January 2018: bitcoin blew up.
February 2018: Volmageddon — short vol strategies and risk parity got torched.
March 2018: FAANGs, Facebook data scandal, Libor ripped.
April 2018: UST 10yr yield ripped through 3% for the first time in over 4 years.
May 2018: Turkey, Argentina, Brazil imploded.
June 2018: Italy BTPs and Spanish yields exploded.
My conclusion at the time was that even if the S&P would make new all-time highs (it did), a dramatic Risk Off lay ahead, because Rolling Blowouts have only ever ended in one way — Risk Off.
Today’s fragility combined with the Rolling VAR Shock of recent weeks has transitioned me from “general bearishness since late last summer” to “acutely concerned for risk.” However I had a realization in recent days that has notably affected positioning in my book, and to explain why, I want to paint a pretty comprehensive picture…so bear with me.
Setting the Table
Positioning
Credit and Collateral
Who is the Buyer?
Progression of Sentiment Anecdotes
The Anatomy of a Crash