My favourite strategist is back.
Macquarie strategist Viktor Shvets sees the potential for what he calls a “Lehman Brothers moment”.
…Volatility indices and credit spreads are not at crisis point yet, Shvets says, but “it seems that short of abandoning current policies, the self-reinforcing loop of deleveraging – and there is no healthy deleveraging in a highly leveraged model – might persist”.
…The basis trade on US Treasuries – whereby hedge funds put on leveraged bets of up to 100 times, with the aim of profiting from the convergence between the prices of bond futures and the bonds themselves – is a great example of an investment strategy that isn’t a problem until it is.
…Shvets concedes the risks in these shadowy parts of the market are harder to assess. But private equity and debt, he says, are “essentially highly leveraged public assets with delayed pricing” while basis point trades “are prone to rapid sell-downs and deleveraging”.
What worries Shvets is the toxic mix that could be emerging as geopolitical tensions, tariff shocks, and the degradation of regulatory agencies (particularly in the US) combine with pockets of leverage that don’t spiral as market stresses worsen.
Not only could this “create a Lehman Brothers moment [but] it is also unlikely that tech titans, voters or politicians fully understand complexities, and hence, might not react until it is too late”.
“Chaos is not a temporary bug but a permanent feature of the new world.”
It was only a few months ago that Schvets was singing from a different hymn sheet.
“We don’t really have any more economic cycles.
We don’t really have any more capital market cycles,” Shvets says.
“We live in a world of abundant and unconstrained capital, which means most pricing signals don’t work.
So you don’t need to worry as much about things like inversion of the yield curve.
You don’t need to think that much about credit spreads.
And so people are subconsciously already absorbing all of that.
The only thing that one needs to focus on is risks that lie outside the economic and capital market cycles.”
Or not!
