Last week's market chaos could be a harbinger of worse to come

Business Insider | 2/14/2018 | John Mauldin, Mauldin Economics
lukealukea (Posted by) Level 4
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Risky market strategies and investment products played a role in the stock market chaos of last week.

Similar levels of risk exist in bigger markets, like high-yield bonds.

Fed - Levels - Risk - Rates

The Fed could raise those levels of risk by hiking rates.

We've heard endless explanations for the market's big "Oops!" and the return of volatility.

Commentary - Fed - Banks - Inflation - Balance

The commentary is focused on the Fed and its sister central banks as they begin to prepare for inflation and trim their balance sheets.

For a long time before the sell-off, my good friend Doug Kass has been something of a voice shouting at us: "Kill the quants before they kill our markets!"


Here's Doug, explaining himself:

"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…"

Thing - ETNs

There is an interesting thing about ETNs.

These are exchange-traded notes. And while I don't want to get too arcane on you, a key feature of them is that there has to be a bank or a guarantor on the note.

Shortfall - ETNs - Investors - Funds - Withdrawal

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 a good case that you are due your money.

And of course, the ETN fund doesn't have any money.

Bank - ETN - Hook - ETNs

But the bank that guaranteed the ETN is on the hook. One of the ETNs was evidently backed by...
(Excerpt) Read more at: Business Insider
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