So, you’re now thinking, after the biggest rally in GBP in 9 years, what next? What other crazy over-crowded positions could get hosed down after someone repeats what they had always been saying, but no-one wanted to listen? Because we know, don’t we, deep down, that the fundamentals go out of the window when positions are skewed versus the possible path of future outcomes? This chart of the US 10yr was always vulnerable to a correction:
No surprise then that in December, “stagflationary collapse in the bond market” was the second biggest tail risk on fund managers’ minds (according to the BAML survey). Let’s just look at how that survey has shifted this month:
Yep, paring back of the bond market worries, but rushing right into the top 2 places, it’s Trump related mayhem. Now, this doesn’t mean that we are about to see a reversal of trades that have been placed to take advantage of this “Trade War Protectionism” – because actually not that many positions have yet been put on to reflect this. The question is whether, after this weekend, and Days One, Two and Three of the hyperactive orange man’s Presidency, will they be?
Interestingly, Brexit risks were considered a low tail risk last month and low this month. So price action is not always about the long-term part of the market – and this suggests that the risk of a disorderly Brexit is thus far underappreciated.
Yes, it’s a game of poker, but where every round the chips are all thrown up in the air and no-one is quite sure where they’ll land…