Pod: They think it's all over!

The full Monday note can be found at www.blindsquirrelmacro.com

The Monday Note:

They think it's all over!

Show Note Visuals:

SpotGamma note the vanna and charm effects of the index options market.

Dispersion explainer: These days everyone is a seller of volatility and the dispersion trade (long single stock volatility, short index volatility - explainer here) continues to be crowded.

David Dredge’s excellent April Risk Update - “Wittgenstein’s Ruler” elegantly points out some long-term patterns from the past, highlighting how extreme compression in FX vols often acts as a harbinger for major (unforeseen) risk events. With hindsight it all looks so obvious!

David Dredge: “We would, of course, argue that the actual risk is indicated by the red circles. It is the fragility in the accumulation of snow ahead of the avalanche. It is the fragility in the buildup of combustible material on the forest floor ahead of the wildfire. It is the compression of risk premium through the application of leverage in the procyclical risk and accounting ecosystem of Sharpe World.”

CBOE 3M Implied Correlation (yellow) and spot VIX (red)

The chart of the infamous XIV (inverse VIX ETN). The 2018 Volmageddon event reminds us that short volatility trades are great…until they are not!

es.

Voters do not feel the Fed’s preferred ‘Core PCE’ measure of inflation. They also recognize that the world feels pretty recessionary for those not in direct receipt of fiscal largesse. They also may understand that trade wars are ‘no bueno’ for prices.

This view is not just coming from a single private poll. It is also starting to show up in the University of Michigan sentiment data. Long-term (5 years +, i.e. “entrenched”) inflation expectations are like kryptonite for central bankers, and they do appear to be ticking up.

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