Kolanovic: This Is What The Next Crisis Will Look Like

Wednesday, September 5, 2018
By Paul Martin

by Tyler Durden
Wed, 09/05/2018

As part of an extensive, cross-asset effort summarizing JPMorgan’s views in a 168-page report issued to commemorate a decade of the Lehman failure, and titled appropriately “Ten Years After the Global Financial Crisis: A Changed World”, JPMorgan head quant has published a section in which he lays out his thought on “What the next crisis will look like.”

To frequent readers of Kolanovic, the report is very similar to a similar effort he put together last October, in which he also previewed the “next crisis” – which he dubbed the Great Liquidity Crisis – and said would be defined by severe liquidity disruptions resulting from market developments since the last including i) decreased AUM of strategies that buy value assets; ii) Tail risk of private assets; iii) Increased AUM of strategies that sell on “autopilot”; iv) Liquidity-provision trends; v) Miscalculation of portfolio risk and vi) Valuation excesses.

Fast forward to today when despite his recently optimistic shift, Kolanovic reiterates many of the same underlying apocalyptic themes, making one wonder just how “tactical” his recent bullish bias has been.

Echoing what he said last October, Kolanovic writes that “the main attribute of the next crisis will likely be severe liquidity disruptions resulting from market developments since the last crisis”. A key feature of this market transformation, is the shift from active to passive investment, and the prevalence of trend-following investors and market makers, which “reduces the ability of the market to prevent large drawdowns.” In some bad news for the risk-parity crowd, Kolanovic writes that “in multi-asset portfolios, the ability of bonds to offset equity losses will be reduced” while PE firms won’t be spared either as private assets that are less frequently marked to market may understate the true risk exposure of portfolios. Combining these views with his core competency, market volatility, Kolanovic writes that “these factors may lead to a miscalculation of true risk due to a reliance on recent volatility as the main measure of portfolio risk.”

Which is an odd statement for Kolanovic to make considering the just two weeks ago, he was pushing the lack of market vol as a key support pillar for his continued bullish outlook on the market.

Cognitive dissonance aside, it is a breath of fresh air to glimpse a return of the old, “skeptical” Kolanovic, even if it is in the context of a strategic piece, while he maintains his bullish facade when it comes to his periodic tactical reports.

The Rest…HERE

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