E Flattening Yield Problem & Death By Low Volatility

We are definitely approaching a "Minsky Moment" after years of cheap debt and low rates. Markets are becoming more expensive and illiquid. Especially if the Fed will attempt to unwind its bloated balance sheet.

Instead of only focusing on a 2% inflation objective and low unemployment rate, they really should address what else is going on and all the unintended consequences they've conjured.

I see more downside optionality than any upside going forward for the economy. I don't see any catalysts which will suddenly spike, sending GDP and the Markit PMI or inflation higher.

Do you?

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I look for investments that have the positive asymmetry (see-saw analogy) and that give favorable optionality. I use tail-hedging when the opportunity arises I normally use Long dated options for ...

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Moon Kil Woong 2 years ago Contributor's comment

The issue is that many run ups in the past were driven by excessive risk taking whereas this market run up is more a case of putting money in one of the few last asset classes that make decent returns more than a desire to take on risk. Because of this the move has been longer and more sustained and the risk has stayed hidden far too long.

It takes a trigger event to unwind it. For now, an obvious and predictable trigger has not presented itself. We will see if one appears on the near term horizon the next 12 months.

Lorimer Wilson 2 years ago Contributor's comment

Adem makes reference to Hyman Minsky who "taught that years of prosperity and extended periods of low volatility are what breed excessive risk-taking and speculation. Thus prolonged low volatility today sets the foundation for extreme volatility in the future. Or, otherwise said, when you feel safest and most confident things won't change, you undertake more risk because you feel secure."

You might be very interested in Minsky's 5 Stages of a Bubble - Where Are We Now? (www.munknee.com/minskys-5-stages-of-a-bubble-where-are-we-now/) which identifies the 5 stages and concludes that "How much longer and higher stocks and bonds may run in the Everything Bubble, no one can predict, but for those who stay invested in inflated assets, be aware that you are implicitly increasing your risk tolerance well beyond levels which typical risk-averse investors would be comfortable with."

What stage do you think we are in - Boom, Euphoria or Profit-Taking and why?