Monday, February 6, 2017

"The VIX Will Be Over 100 due to Central Bank Created Tail Risk"

VIX 11.75
We don't really think we'll see the VIX at a hundo but this link gives us an opportunity to reprise one of the bits o'brilliance out there on the web. First posted January 2015:

"I like… fat… tails and I cannot lie, You vol sellers can’t deny..." 
From The Mercenary Trader:

Baby Got Black (Swan)
(With apologies to Sir Mix-a-Lot)
I like… fat… tails and I cannot lie
You vol sellers can’t deny
When a hot trend breaks with a well-timed stop
and a great big black swan pop you get
Paid… P&L year gets made
‘Cause you noticed that trade was packed
Buncha mean reversion suckers got jacked

Oh baby I wanna get lumpy
Long gamma for when it gets bumpy
Central banks tried to haze me,
But those carry trades just don’t faze me!...MORE
See also:
Aaarrrggghhh: I Can't Get Matthew Klein's Song Out Of My Head

And from EconMatters via ZeroHedge:
We discuss the manner in which Central Banks have destroyed financial markets, and have the stage for what I label as the Red Swan Event in this video. When the Swiss National Bank holds risky Tech stocks in its portfolio, we are in unchartered territory!

We had the Financial Crisis of 2008, and instead of learning from the mistakes of incentivizing excessive risk taking, the Central Banks were allowed to buy outright assets without any formal authority, no checks and balances whatsoever, and have since destroyed the entire financial market system globally.

In short, Financial Markets are broken, any sense of properly pricing risk has been completely removed from the market, as such, risk has been distorted to such a degree, the future ramifications for financial markets, and financial market participants is profound.

Expect the VIX, to blow past the elevated levels that occurred during the financial crisis of 2008 in the 60 range, to well over 100, and even 200 is possible, maybe even 1,000. The Central Banks have no clue to what degree they have distorted financial asset prices, I can tell you my model stops at a 20 Sigma Event over the next decade. I put the 20 sigma event as high as a 35% probability over the next 10 years, 35 percent, that is just how much asset price distortion has occurred in financial markets by more than 10 major Central Banks around the Financial System since the 2008 Financial Crisis, which was a bubble then. 

If we think of China`s massive credit bubble and real estate crash implications for the Asia Pacific Rim Region alone, or the complete dissolution of the European Union (remember the debt crisis of 2012) debt has gotten worse in the European Union since then, to the massive stock market and bond market bubbles in the United States one will start to realize that I am not being alarmist, but that this is a real possibility, and poses a substantial threat to the entire global financial system.
In essence to modern civilization as we know it. Central Banks are so worried about this potential Bubble popping, that they just are afraid to take any responsible action to try and reduce the impact of the ultimate asset unwind.

The problem with this strategy is that the bubble gets substantially bigger every additional month they wait to either raise interest rates, sell assets on their massive balance sheets, or withdraw additional liquidity from the market through other available monetary tools. Moreover, the subsequent risks become exponentially greater as well the more asset prices get distorted from previous historical norm valuation levels through never before attempted artificial Central Bank Balance Sheet Purchases....MORE 
"Unchartered territory"? Sounds like half the shipping industry.