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Fragility: Don't Shoot The Messenger

The Heisenberg profile picture
The Heisenberg


  • What do you divine from the systematic strat unwind we saw from June 27 through July 7?
  • Hopefully, you learned something about market fragility.
  • If you didn't, then here's what you should have taken away.

The investing community has a penchant for shooting the messenger.

I don't know how many times I've heard readers on this platform dismiss my posts with the tired, old "fear sells" refrain over the past six months.

To be clear, Heisenberg isn't "selling" you anything. All Heisenberg does is writes posts - posts which you're free (figuratively and literally) to read or not read at your leisure.

Additionally, what I try to do is communicate something about the extent to which the market has become exceedingly fragile due to a number of factors including the evolution of market microstructure.

If I didn't know that to be true, then I wouldn't be saying it. It's just that simple. That is, I don't have an agenda. If this market were getting less risky, then that's what I would be saying.

So again, don't shoot the messenger just because the message isn't what you want to hear.

What's disconcerting about the current state of affairs is how the reflexive nature of the relationship between central banks and investors is interacting with modern market innovations to create what amounts to a one-way trade.

Consider this from the brilliant Aleksandar Kocic (full note here):

Everyone is incentivized to participate in the reinforcement of the state of exception, while various forms of contestation of the power are inhibited. For example, attempts at shorting bonds are penalized by a steep curve, protection against volatile unwind is discouraged through wide vol calendars, negative carry, etc. Collapse of short-dated volatility is a referendum on the near-term power of central banks, and softening of long-dated (and forward) vol. represents first signs of acceptance of its extension and possible permanence. In this way, the accommodation and QE have acted as a free insurance policy for the owners of risk. As long as the Fed remains dovish, there is little upside in holding gamma.

This article was written by

The Heisenberg profile picture
Perhaps more than any other time in the last six decades, the fate of markets is inextricably intertwined with the ebb and flow of geopolitics. It's become increasingly clear that one simply cannot fully comprehend market movements without a thorough understanding of concurrent political outcomes. Drawing on extensive experience in both politics and finance, Heisenberg will help demystify a world in which investors can no longer hope to conceptualize of markets as existing in anything that even approximates a vacuum.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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