Raoul Pal Warns The Day Of Reckoning Looms For VIX Shorts: "Reminds Me Of Portfolio Insurance In 1987"
By Tyler Durden
ubmitted by Patrick Ceresna via Macrovoices.com,
In a podcast interview on MacroVoices, Macro Guru Raoul Pal makes some comments on some of the biggest imbalances in the markets today.
He compares the VIX contango trade to the portfolio insurance problem that was blamed for the 1987 crash…
- they don't realize the rate of change of the VIX can be so extraordinary that the losses can mount up massively and super quickly
Pal then goes on to discuss the record level of speculative long positions in the oil markets compares to the conditions in the summer of 2014 prior to the bear market decline
- The other thing was speculative position in crude oil was all time high in fact if I took the trend going back from the early 80's it was seven standard deviations above that trend and well over three standard deviations maybe four standard deviations from the trend in the last 20 years or 15 years.
- I've seen a similar situation with copper driven by China and a few other things where copper position is wildly extreme and so I start to think well too much reflation is priced into these things maybe there’s an interesting opportunity on the short side
- What is interesting oil volatility has been coming lower. Look, I don't think it's going to get back to where it was in 2014 when it was trading below 20 but it has come down from a peak of 80, a kind of a real trading range of 50 down to 30. If it comes any lower the ability to buy options start to make sense because oil volatility can go to 80 can go to a 100
Full podcast:
Erik: One of the risk factors that we discussed last time was this crazy VIX contango trade where basically people are shorting VIX futures because each time they roll that contract forward they capture the contango by being short and they see it as a way to produce income. Of course, you know that's not just picking up nickels in front of a steamroller, that's pennies being pried out from under the steamroller and so far a big downdraft in equity prices has not happened which was the big risk that you saw there. You described how if there was a sudden downward move in equity prices it could really blow up in these guys' faces. Is that risk still in the system, is that trade still on or have people wised up and gotten out of it?
Raoul: No, that trade still goes on to this day and it reminds me a lot of the portfolio insurance stuff around 1987 or some of the kind of spread trade Low Vol trades that happens around 1998 people go over their ski tips with this stuff. They think it's all manageable and they think …read more
