Kolanovic: “The Current Crisis Is Playing Out Exactly The Same As The Aug 2015 Crisis”

Thursday, February 8, 2018
By Paul Martin

by Tyler Durden
Thu, 02/08/2018

Earlier this week, JPM’s head quant Marko Kolanovic did a “sort of” mea culpa when he admitted that his note from last week, in which he projected that there would be no systematic selling, was not exactly “correct” in light of what would end up being the “biggest VIX buy order in history” as VIX ETPs were crushed in a terminal short squeeze, that sent the VIX soaring by the most on record. However, in what has become a bizarre transformation, Kolanovic who until recently endorsed a prudent and cautious approach to investing, urged investors to once again “BTFD”, going so far as suggesting that central banks would step in to halt any potential rout. Judging by Bill Dudley’s just concluded comments amid today’s plunge in stocks, that does not appear to be the case, at least not for a while.

Fast forward to today, when Kolanovic has released an unprecedented third note in one week. In today’s edition he takes a step back, to more objectively examine the sources of the rising VIX wave, saying that the current crisis has played out exactly the same as the August 2015 crisis.

But first, now that the “current crisis” is panning out much more seriously than Kolanovic first expected, here is how the JPM quant frames the current situation:

In our note on Monday we argued that the current selloff is entirely technical in nature, that fundamentals did not change, and as such that we believe that it is an opportunity for human investors with some tolerance for market volatility to step in (the market is up ~1% since). In our previous research we highlighted how liquidity shocks may develop and argued that the collision of selling from various systematic strategies and diminished equity liquidity provided by electronic market making in times of stress will produce liquidity crises. In particular, strategies that are selling are those that use realized volatility, correlations, VIX and price momentum as signals to adjust exposure, and AUM in these strategies increased greatly over the past decade. On the other side, electronic market making depth becomes severely diminished at the same time these signals are triggered. In our previous research, we also mapped out how some popular exchange traded volatility trading products will collapse. Finally, we outlined in our 2018 outlook that low VIX levels are not a new normal, and that volatility and tail risks will rise in 2018.

The Rest…HERE

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