What happened with US stocks? Why did they tank so suddenly after months of steady gains?
No, there was no irrational exuberance, no massive leveraging, no pernicious balance sheet shenanigans at banks, no NINJA loans, no CDS/CMO/CDO (plain, squared or cubed) baloney. Valuations weren’t even that high, given forward P/Es around 18-16x.
There was, however, a sort of “complacency bubble”, aka very, very low volatility. This in turn spawned a variety of listed and OTC trades that shorted volatility for profit. It worked like a charm - until it didn’t.
The following chart makes things quite clear. It’s the price of an ETF (exchange traded fund) that shorts VIX futures. Yes, Virginia, there IS volatility!
In my opinion that’s all there was to it - the snap unwinding of short vol trades.
No, there was no irrational exuberance, no massive leveraging, no pernicious balance sheet shenanigans at banks, no NINJA loans, no CDS/CMO/CDO (plain, squared or cubed) baloney. Valuations weren’t even that high, given forward P/Es around 18-16x.
There was, however, a sort of “complacency bubble”, aka very, very low volatility. This in turn spawned a variety of listed and OTC trades that shorted volatility for profit. It worked like a charm - until it didn’t.
The following chart makes things quite clear. It’s the price of an ETF (exchange traded fund) that shorts VIX futures. Yes, Virginia, there IS volatility!
In my opinion that’s all there was to it - the snap unwinding of short vol trades.
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