Heisenberg’s Doom Loop Update – Required Reading Edition

Presented without further interruption…

Hopefully you don’t need a refresher on this, because if you do it likely means you haven’t been paying much attention to how shifts in market structure are creating systemic risks that no one understands, but just in case, the idea is that thanks to the low starting point on the VIX, a nominally small spike could force inverse and levered VIX ETPs to panic buy VIX futs into said spike, thus exacerbating the situation and ultimately forcing CTAs, vol. control funds, and risk parity to deleverage into a falling market.

via Market Doom Loop Update: Risk From VIX ETPs, CTAs Flashes Red


Global financial regulators urge caution over rise of robots – FT

Does this represent the ultimate in the “tight coupling” risk management problem (e.g., Feynman’s view of the Challenger disaster, Rick Bookstaber’s take on financial meltdowns, etc.)?

“Applications of AI and machine learning could result in new and unexpected forms of inter-connectedness between financial markets and institutions, for instance based on the use by various institutions of previously unrelated data sources,” said the FSB, in its first dedicated report on AI.

via Global financial regulators urge caution over rise of robots

Beta is the New Alpha … or Whither (Wither?) 2 and 20?

Excellent post on active investment management’s Hobson’s choice – retreat to the sidelines or get your high-fee ass kicked by de minimis fee index funds.

From Heisenberg Report:

We – and plenty of others – have noted that active management has begun to throw in the towel when it comes to besting passive. How do you outperform a benchmark that’s being driven by a perpetual motion machine? You can’t. And especially not when you’re playing from behind by virtue of the fact that the people replicating that benchmark are paying as little as 5bps in fees to participate. And so, what do active managers do? Well, they just stop trading. They become passive investing vehicles themselves.

via ‘Passive Is The New QE!’: One Bank Admits We’ve Entered A ‘Black Hole’


“Sorry, I gotta go pick some stocks….”
“No, baby. That business is dead….”


Heisenberg Knocks at Ray Dalio’s Door

Heisenberg’s take on Ray Dalio’s new LinkedIn view on inequality. Bile ducts everywhere, rejoice.

See, it’s not that hedge fund managers are virtue signaling from the comfortable confines of their weird forest kingdoms, and it’s not that fake populist Presidents are feeding uneducated white Americans a big ol’ plate of steaming bullshit just so they can get elected and pass tax cuts that save their own families $1.1 billion, and it’s not that millionaire bloggers are just spewing outright lies and clickbait conspiracy theories in order to buy expensive toys and lounge around in their mansions with pet poodles. No, that’s not what it is. None of that is true. I swear.

The truth, rather, is that Janet Yellen is out to get you.

via Let’s Listen To Ray Dalio Explain How Janet Yellen Is Creating Inequality |