They shouldn't have survived
February 9, 2018

Mint - Blain's Morning Porridge

They would never evolve. They shouldn't have survived.…. Evolution was something that happened to other species…

The Morning Porridge is unrestricted market commentary freely available to all investors on an unsolicited basis. It is not investment research. 

Not looking like a positive morning out there. Stocks are down 10 percent - so officially it's a correction! Markets are still wobbling. Folk who thought they'd survived Monday's carnage intact are now beginning to wonder if they should press the panic button, or pull the dump lever just in case this gets worse and liquidity dries up. The US has managed to shut itself down again. Our best hope at the Winter Olympics has broken her heel. If this all feels sickeningly familiar – Welcome to 2008 Part 2. Market wobbles, you heave a sigh of relief, and then it pukes massively all over you.

Early this morning it was raining. A storm is coming. And I must have dropped my wallet after paying for a taxi early this morning. 

My gut feel – based on active participation in every single market Donnybrook/Stramash since 1987 - is this gets worse before it gets better. And that's a good thing – because this is when the great opportunities present themselves!! Cry havoc and unleash the brokers…

But first we need to talk about my wallet. I appreciate most of you are more concerned with markets than my wallet, but does life care? Losing my wallet is probably far less worse than will happen to most folk. Yet, it's illustrative of something: I called my Amex card to cancel. Lots of help, new card with me early next week. Called my bank. Lots of unhelpful questions and the impression I was the 10 thousandth idiot to have lost a wallet this morning. Sympathy? Look for it in a dictionary is the best advice. New card after six business days? Perhaps. Asked if I can get some money out from the branch to buy me a train ticket back home tonight, and they said not unless I've got photo ID – which is problematical as my driving licence was in the wallet. Any alternatives? Nope.. computer says no. I really must move my accounts from the Bank of Vogon.

The lesson? Don't assume anyone will help you out. (We will!) Dealing with the Bank of Vogon parallels what's going to happen when the liquidity crunch hits. As folk wake up to the reality that credit spreads are ridiculously tight and don't reflect risk, that yield tourists don't have a breeze on the risks they've been buying, and start considering exits, the proverbial bubble will burst. While the New York Stock Exchange has 27 entries, but only one proverbial exit, I fear many ETFs (exchange-traded funds) and other passive strategies may have even fewer.

Modern life is particularly painful when it comes to markets. You can never be sure if it's doom and gloom, or bloom and zoom. (Wow, that's good…I must patent the line.) It would be nice to think the current renewed tremblors are simply due to the weight of short volatility strategies still being unwound – but you just can't be sure. In a rational market, that might explain what's roiling sentiment today, and will continue to do so for the next few days if not weeks. JP Morgan analysts say there is a US$200 billion short-vol stock dump unwind occurring. The algos and AIs are learning – and it surprises me how predictable yesterday's slide into the close was.  

Yet, some folk are even getting bullish again. There is a fascinating story in the Financial Times that $200 million was invested in a short VIX ETF – SVXY – over the last few days. It's the one short vol ETF that didn't break. Their strategic view is vol is set to tumble again. At some point markets will stabilize, normalise and vol will fall – but already? This game still has a few legs before it plays out – and vol remains an elevated risk.  

Ten-year treasuries tested 2.90 percent at one point. My colleague Are Levonian downstairs in BGC points out a Bloomberg survey in January showed the highest forecast for Q1 rates was 2.85 percent. Yesterday the Bank of England went distinctly hawkish – more hikes to come. The nascent rally in oil got stomped on this week – US supply fears have spooked the market. So much for oil. 

My fear is the market still doesn't understand something fundamental about sentiment and mood has been shaken. Markets are only rational for as long as they are rational. Although the fundamentals of growth look strong – confidence is a very fickle commodity. If this "correction" deepens, the effects could become chaotic in the flutter of the proverbial butterfly's wing, difficult to predict and impossible to anticipate. That's when it gets messy – but also when the opportunities emerge – which is why we are watching…yep, like vultures.

Yesterday I was expressing some concerns on liquidity re fixed income ETFs – where package yield tourists and illiquidity in high-yield, investment grade, bank debt etc might suggest problems if there were a rush of sellers. More than a few client comments, one noting ETFs in general seem to "Confuse Passive with Docile." Another said: "There is no problem with liquidity until there is." Sage words. What triggers it? 

Probably something surprisingly simple. Which is why I'm paying attention to HNA – the China conglomerate facing an almighty liquidity crunch that's embarking on a $16 billion car-crash fire-sale (including my old office on Park Ave!) The Chinese government clampdown on irrational investments and unwise real estates could well prove a squeeze of Spice Weasel too many.

The other side of the equation is the possibility/likelihood of policy action if this does get "messy". Many folk are playing the central bank put game. However, we have a new US Federal Reserve Head, and many other central banks are wrestling with policy change and normalization – the last thing they want to do is repeat the distortions that led to this crisis.

Out of time… have a great weekend.

Bill Blain

Head of Capital Markets/Alternative Assets

Mint Partners





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Mint - Blain's Morning Porridge

They would never evolve. They shouldn't have survived.…. Evolution was something that happened to other species…

The Morning Porridge is unrestricted market commentary freely available to all investors on an unsolicited basis. It is not investment research. 

Not looking like a positive morning out there. Stocks are down 10 percent - so officially it's a correction! Markets are still wobbling. Folk who thought they'd survived Monday's carnage intact are now beginning to wonder if they should press the panic button, or pull the dump lever just in case this gets worse and liquidity dries up. The US has managed to shut itself down again. Our best hope at the Winter Olympics has broken her heel. If this all feels sickeningly familiar – Welcome to 2008 Part 2. Market wobbles, you heave a sigh of relief, and then it pukes massively all over you.

Early this morning it was raining. A storm is coming. And I must have dropped my wallet after paying for a taxi early this morning. 

My gut feel – based on active participation in every single market Donnybrook/Stramash since 1987 - is this gets worse before it gets better. And that's a good thing – because this is when the great opportunities present themselves!! Cry havoc and unleash the brokers…

But first we need to talk about my wallet. I appreciate most of you are more concerned with markets than my wallet, but does life care? Losing my wallet is probably far less worse than will happen to most folk. Yet, it's illustrative of something: I called my Amex card to cancel. Lots of help, new card with me early next week. Called my bank. Lots of unhelpful questions and the impression I was the 10 thousandth idiot to have lost a wallet this morning. Sympathy? Look for it in a dictionary is the best advice. New card after six business days? Perhaps. Asked if I can get some money out from the branch to buy me a train ticket back home tonight, and they said not unless I've got photo ID – which is problematical as my driving licence was in the wallet. Any alternatives? Nope.. computer says no. I really must move my accounts from the Bank of Vogon.

The lesson? Don't assume anyone will help you out. (We will!) Dealing with the Bank of Vogon parallels what's going to happen when the liquidity crunch hits. As folk wake up to the reality that credit spreads are ridiculously tight and don't reflect risk, that yield tourists don't have a breeze on the risks they've been buying, and start considering exits, the proverbial bubble will burst. While the New York Stock Exchange has 27 entries, but only one proverbial exit, I fear many ETFs (exchange-traded funds) and other passive strategies may have even fewer.

Modern life is particularly painful when it comes to markets. You can never be sure if it's doom and gloom, or bloom and zoom. (Wow, that's good…I must patent the line.) It would be nice to think the current renewed tremblors are simply due to the weight of short volatility strategies still being unwound – but you just can't be sure. In a rational market, that might explain what's roiling sentiment today, and will continue to do so for the next few days if not weeks. JP Morgan analysts say there is a US$200 billion short-vol stock dump unwind occurring. The algos and AIs are learning – and it surprises me how predictable yesterday's slide into the close was.  

Yet, some folk are even getting bullish again. There is a fascinating story in the Financial Times that $200 million was invested in a short VIX ETF – SVXY – over the last few days. It's the one short vol ETF that didn't break. Their strategic view is vol is set to tumble again. At some point markets will stabilize, normalise and vol will fall – but already? This game still has a few legs before it plays out – and vol remains an elevated risk.  

Ten-year treasuries tested 2.90 percent at one point. My colleague Are Levonian downstairs in BGC points out a Bloomberg survey in January showed the highest forecast for Q1 rates was 2.85 percent. Yesterday the Bank of England went distinctly hawkish – more hikes to come. The nascent rally in oil got stomped on this week – US supply fears have spooked the market. So much for oil. 

My fear is the market still doesn't understand something fundamental about sentiment and mood has been shaken. Markets are only rational for as long as they are rational. Although the fundamentals of growth look strong – confidence is a very fickle commodity. If this "correction" deepens, the effects could become chaotic in the flutter of the proverbial butterfly's wing, difficult to predict and impossible to anticipate. That's when it gets messy – but also when the opportunities emerge – which is why we are watching…yep, like vultures.

Yesterday I was expressing some concerns on liquidity re fixed income ETFs – where package yield tourists and illiquidity in high-yield, investment grade, bank debt etc might suggest problems if there were a rush of sellers. More than a few client comments, one noting ETFs in general seem to "Confuse Passive with Docile." Another said: "There is no problem with liquidity until there is." Sage words. What triggers it? 

Probably something surprisingly simple. Which is why I'm paying attention to HNA – the China conglomerate facing an almighty liquidity crunch that's embarking on a $16 billion car-crash fire-sale (including my old office on Park Ave!) The Chinese government clampdown on irrational investments and unwise real estates could well prove a squeeze of Spice Weasel too many.

The other side of the equation is the possibility/likelihood of policy action if this does get "messy". Many folk are playing the central bank put game. However, we have a new US Federal Reserve Head, and many other central banks are wrestling with policy change and normalization – the last thing they want to do is repeat the distortions that led to this crisis.

Out of time… have a great weekend.

Bill Blain

Head of Capital Markets/Alternative Assets

Mint Partners



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