Friday, June 24, 2016

The Economy: "Lights Out Stories Making The Rounds On Huge Losses"; Updates As Available

"Lights Out Stories Making The Rounds On Huge Losses"
by Charlie McElligott

"Quick Update: "Correlations Go To One" On Brexit Napalm: Pockets of risk are notably higher off the initial "shock" levels seen last night (i.e. GBP trading back to 1.388 last from 1.323 low/JPY to 103.1 last from 99.0 low/FTSE from -8.7 to now  just -5.1%/SPX at worst -120 handles to 1999, now 2032 last), as tactical market participants front-run expected liquidity injections and interventions from CB's to either  dip buy  for a trade, or sell into. 

Nonetheless, the  psychological damage overnight is simply jarring, and the long-term implications of the first domino in a potential "unwind" of globalization/shift to populism/protectionism/nationalism (see every nationalist right party calling for referendums throughout their respective countries in the EU) plays-out against a trading world lulled to sleep by the siren-song of "free carry," low vol and leverage. As stated last week, when people, goods and money are unable to move freely, it's a global growth negative, period.

Commentary: The "left tail" scenario has played-out, and now, we are in the midst of a real-time "Minsky Moment"* in Europe. The UK has voted to leave the EU, shocking pollsters, book-makers, statisticians and- even just a handful of hours ago- the universal "market" embrace  of an assumed "remain" scenario. I was part of that complacency. On account of this "all clear" view, many market participants had spent much of this past week "grossing back up."

The market carnage is staggering with regards to the violence seen in such a short period of time, as the stress and convexity of the move is exacerbated by the inability and unwillingness of market-makers to provide liquidity. There are few bodies capable of catching the falling knife right now, which has been the exact "unintended consequences" of post-crisis regulation that banks and brokers have warned about. Markets could SURE use that dealer balance sheet, prop desk or stat arb market-making book to mitigate such exaggerated price-action, i.e. JPY moving 450pips in about 7 seconds last night when it made absolute lows.

Moves of this magnitude are pure reads on "force outs"... that wasn't discretionary selling/covering, as NOBODY was positioned for this. The tide has "gone out"...and we are about to see who's been swimming naked.

It's "game over" for anybody out there who was short duration. CTA's/systematic trend strategies/ managed futures funds/Crude and FX carry traders- all of whom exist on leverage- here comes "Mr Margin" calling on your risk longs. Obviously the "long cyclical beta" equities trade, which has been the basis of the recovery off the February lows, is about to come unglued when the US opens. Bank options dealer desks who by definition are "short volatility," as well as many clients who've made a living shorting vol in the post-GFC era as well- there are going to be some "lights out" stories making the rounds on huge losses... very scary stuff."  
* A post here from Tuesday, October 21, 2008: "A Minsky Moment"
The numbers mentioned in this post from 2008 have now grown enormously larger by degrees
 of magnitude, hence the catastrophic nature of what's happening is likewise magnified.

"Who Was Hyman Minsky?"

Updates As Available:
June 24, 2016 6:30 AM  “Brexit Meltdown!” -

June 24, 2016 11:26 AM "Worse Than Lehman"- European Bank Bloodbath Sparks Dollar Funding Crisis" -

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