The Old Regime Is Done: Why The “Equilibrium Market Volatility Is Higher”

Friday, February 9, 2018
By Paul Martin

by Tyler Durden
Fri, 02/09/2018

Rafiki Capital Management’s Steven Englander has emphasized a macro underpinning to the sell-off, basically arguing that rising inflation expectations and a hawkish Fed mean that they have suspended the ‘Fed Put’ for the time being.

Others emphasize the collapse of inverse vol funds and deleveraging of risk-parity portfolios.

As Englander details below, these explanations are two sides of the same coin…

Consider the chart below which shows 10 year yields and the S&P. The obvious point is that yields and equity prices were moving in the same direction from September through late January and since have diverged. Bond prices and equity prices were moving in opposite directions. This green area corresponds to the period in which tax reform optimism was getting priced into asset markets, and the pink area to the sell-off period.

From a macro viewpoint I would argue that in the first period investors saw tax reform as a shock to demand and quite possibly productivity that would raise profits and generate higher real rates, but these would coexist peacefully with moderate inflation and real interest rates moving in line with productivity and equity prices.

So far so good. Around the middle of January inflation expectations began to rise sharply.

The Rest…HERE

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