“We are replaying an age-old storyline of financial bubbles that has been played many times before…”

“This market’s current temperament feels so much like either Japan in 1989 or the U.S. in 1999.
And the events that have transpired so far this January make me feel more convinced than ever of this repeating history.”

– Paul Tudor Jones, founder Tudor Investment Corp. (source)

“I believe the precipitous market drop in the last week has little to do with the projected course of interest rates or, for that matter, fundamentals.
It likely was a function of the distorted, dangerous world of new investment products and strategies….
[T]he proliferation of short vol, volatility trending and risk parity strategies when combined with an explosion of leveraged ETFs
and ETNs – many of which were derivatives of derivatives and had no business existing except to please gamblers – had altered the market structure…”

– Doug Kass

ETNs are “exchange-traded notes.” “…There is an interesting thing about ETNs. These are exchange-traded notes, and while I don’t want to get to arcane on you, a key feature of them is that there has to be a bank or a guarantor on the note. Even though we’ve had at least two shortfall ETNs literally blow up and go to zero, the investors in those funds are going to get “something.” If you put in your withdrawal request while there was still a price, there is an extraordinarily good case that you are due your money.

And, of course, the ETN fund doesn’t have any money. But the bank that guaranteed the ETN is on the hook. One of the ETNs was evidently backed by Credit Suisse. Credit Suisse made an announcement before the market opened yesterday morning that they had 100% of their liabilities hedged out in the marketplace. Of course, they didn’t say hedged out to whom, and that will make us all wonder about counterparty risk; but we won’t have answers on that for a long time, and while a significant amount of money is involved, it is not life-threatening to a bank the size of Credit Suisse. More like annoying than life-threatening.” My friend, John Mauldin, wrote in his Outside the Box letter.

It’s been a violent few days as you well know. John and I spoke mid-week and discussed the relative current calm in HY, the losses happening in the managed futures space, risk parity and how the naked “short” volatility trade is blowing up. We’ll try to make some sense of this today.

I shared the following list with John and he added with his customary flair, “I submit this list of the largest shareholders in SVXY, one of the short-vol VIX funds. Interesting to see Harvard Management in there. Really? Harvard is reaching for yield?”

Source: The Wall Street Journal, The Daily Shot

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