hugomanenti95 @hugomanenti95: "Dear all, I hope this finds..."

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Dear all, I hope this finds you well. There has been extreme volatility in the markets since Wednesday and it warrants an update. 𝟭. 𝗪𝗵𝗮𝘁 𝗶𝘀 𝗵𝗮𝗽𝗽𝗲𝗻𝗶𝗻𝗴 𝗮𝗻𝗱 𝘄𝗵𝘆? So far, this seems to be a knee-jerk “sell everything” kind of move. The trigger is growing recession fears, combined with Fed and BoJ policy decisions. But the core of the issue is the overstretched and one-sided positioning that I mentioned as a key risk in my previous posts - long megacaps, short bonds, short volatility and long US Dollar. We are now seeing this positioning unwind, with extremely sharp moves across asset classes: USD down, yields down, volatility exploding higher, and stock markets crashing. What is important to understand is that all of the above is inter-related – this is essentially one trade blowing up. Let’s get through the mechanics. 𝘈) 𝘜𝘯𝘸𝘪𝘯𝘥 𝘰𝘧 𝘵𝘩𝘦 𝘤𝘢𝘳𝘳𝘺 𝘵𝘳𝘢𝘥𝘦 A carry trade is when an investor borrows in a currency with low interest rates (e.g. the JPY), and invests the proceeds in assets denominated in a higher-yielding currency (e.g. the USD). This trade has been extremely popular of late, and its size is estimated at 20 trillion USD. The problem is as follows. Last week, the Bank of Japan hiked rates and came out hawkish, which caused Japanese rates to rise, and the JPY to firm up. In addition, the Ministry of Finance continued to intervene in FX markets in order to support the value of the Yen. At the same time, soft US economic and labour data caused US rates to drop, and the USD to weaken. Double whammy! Due to the FX move, the value of trader's assets (in USD) dropped relative to the value of their debts (in JPY), while their borrowing cost (in JPY) rose as well. This fuelled a wave of selling that added significant fuel to the fire. 𝘉) 𝘞𝘩𝘢𝘵’𝘴 𝘸𝘪𝘵𝘩 𝘵𝘩𝘦 𝘝𝘐𝘟? Another popular trade has been to sell volatility, often in the form of put selling, and reinvest the premium. The amount of capital invested in short volatility strategies is multiple higher than before the infamous Volmaggedon of 2018. Problem – when mechanical selling of stocks happens, such as described above, volatility spikes. And what you get is a short squeeze of volatility. 𝘊) 𝘐𝘮𝘱𝘢𝘤𝘵 𝘰𝘯 𝘴𝘵𝘰𝘤𝘬𝘴 The unwind of the carry trade and the short volatility trade means that traders are stopped out of their positions and forced to “degross” (i.e. reduce leverage), for risk management reasons, as losses accumulate and VaR rises. Selling creates more selling and it is difficult to know when and why it will finally stop. 𝟮. 𝗪𝗵𝗮𝘁 𝘀𝗵𝗼𝘂𝗹𝗱 𝘄𝗲 𝗱𝗼 𝗻𝗼𝘄? I hope the above explains how a number of interconnected factors are causing mechanical, indiscriminate selling. Unfortunately hindsight is 20/20 and due to the sharpness of the move, it was hard to do anything about it. The question for investors is now whether to hold on to positions or to hedge / sell them. As a long term fundamental investor, my focus is on what the fundamentals are saying. My view has been constant this year – the economy remains robust although normalising, while inflation is set to fall towards the Fed’s target. So far, this is what I am seeing. Last week’s manufacturing PMI was weak, and so was labour data. But this is only one month, which was impacted by Hurricane Beryl. Both household and corporate balance sheets are solid, which should mitigate any short-term deterioration in economic conditions. In addition, the drop in rates across the curve should provide support to the interest rate sensitive parts of the economy. And the Fed has room to cut! 𝗖𝗼𝗻𝗰𝗹𝘂𝘀𝗶𝗼𝗻: 𝘄𝗲 𝗰𝗼𝗻𝘁𝗶𝗻𝘂𝗲 𝘁𝗼 𝗯𝗲 𝗼𝗻 𝗮𝗹𝗲𝗿𝘁, 𝗯𝘂𝘁 𝘀𝗼 𝗳𝗮𝗿 𝘁𝗵𝗲𝗿𝗲 𝗶𝘀 𝗻𝗼 𝗿𝗲𝗮𝘀𝗼𝗻 𝘁𝗼 𝗽𝗮𝗻𝗶𝗰. 𝟯. 𝗨𝗽𝗱𝗮𝘁𝗲 𝗼𝗻 𝗲𝗧𝗼𝗿𝗼 / 𝗰𝗼𝗽𝘆𝘁𝗿𝗮𝗱𝗶𝗻𝗴 You might have received a notification that starting August 11th, eToro will charge a $1 commission on all US, UK and European stock trades, and a $2 commission on stocks listed on other exchanges. 𝗧𝗵𝗲 𝗴𝗼𝗼𝗱 𝗻𝗲𝘄𝘀 𝗶𝘀 𝘁𝗵𝗮𝘁 𝘁𝗵𝗶𝘀 𝗱𝗼𝗲𝘀𝗻’𝘁 𝗮𝗽𝗽𝗹𝘆 𝘁𝗼 𝗰𝗼𝗽𝘆𝘁𝗿𝗮𝗱𝗶𝗻𝗴 – making it even more attractive to you guys! Secondly, the copytrading system was also changed this year to make sure copytraders’ portfolios reflect the PI's actual allocation, rather than their initial invested %. In addition, your portfolios are automatically rebalanced whenever you or I decide to add funds. This is again very good news. As a result of the above, I plan on adding funds to my portfolio more regularly, as I know that this will not have any impact on you. 𝗖𝗢𝗡𝗖𝗟𝗨𝗦𝗜𝗢𝗡 We are in a treacherous environment, where flows and positioning move markets more than fundamental developments. However, I view that as an opportunity - as long as fundamentals remain the same. I’ll keep you tuned on my plans as they evolve. In the meantime, please let me know if any questions! Regards, Hugo