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You Mortals Weren't Ready For JPMorgan's Marko Kolanovic - And Marko Wasn't Ready For You Mortals

You know what? I'm not sure you people are emotionally stable enough to be trusted with Marko Kolanovic notes anymore.
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You know what? I'm not sure you people are emotionally stable enough to be trusted with Marko Kolanovic notes anymore.

And that goes for all of you - bloggers, money managers and journos.

It's almost like all of you thought Marko was "on your side" and so now, instead of reading his notes like you would read any other note (because back here in a fun place called reality, that's all these are - just short missives written by a guy named Marko who puts on his pants one leg at a time just like the rest of us), you read them like you might read a letter that was written specifically to you.

Marko's star has risen over the years in lockstep with the investing public's interest in the systematic strats he covers (e.g., risk parity, vol. control, CTAs) and while he was always the bane of the quant crowd's existence, now it's gotten to the point where every time he puts something out, everyone from bulls to bears to crypto crazies seems to think there's some hidden meaning in the .pdfs that's only discoverable by waving a black light over the screen.

This absurd propensity to overinterpret seems to stem directly from what is now a years-long effort to pigeonhole this poor guy into a category. Quants think he's an agitator and a fearmonger. Bulls think he might be a closet "short seller" (at least according to people who have Googled him on the way to Heisenberg Report). Bears adopted him as one of their own (possibly against his will), believing (mistakenly) that his penchant for warning about the risks of forced de-leveraging gave him the credentials he needed to be a card carrying member of the doomsday blog crowd. CNBC decided he might be a lesser-known son of Zeus and Alcmene, dubbing him "half-man, half-God" in a 2016 Fast Money segment. And back in September, the Bitcoin contingent decided he might be more like "half-man, half-devil" after he suggested that cryptocurrencies have "some parallels to fraudulent pyramid schemes."

And yes, that is all just as absurd as it sounds, but it is unequivocally true. Marko has been mythologized and unfortunately for him, that means that literally everything he writes is now the subject of vociferous debate, even when he's seemingly just trying to do his damn job which, as far as I know, is simply to faithfully execute the duties of "quantitative derivatives strategist" at JPMorgan, a position he probably never imagined would end up requiring him to slay the Nemean lion, slay the nine-headed Lernaean Hydra and capture the Ceryneian Hind, whilst fending off angry quants, dodging accusations of fearmongering and pacifying an army of bearish bloggers who demand that everything he writes be a retelling of Revelations.

This all kicked into high gear in early February when Marko made the "mistake" of suggesting that volatility tied to the worsening bond selloff (which, even before the February 2 above-consensus AHE print started really tipping dominos, had flipped the stock-bond return correlation positive leading to pain for risk parity and balanced portfolios) was "not large enough to trigger broad deleveraging."

An innocent statement, no doubt, but one that would be proven wrong just days later when, following the Friday rout that accompanied the above-mentioned AHE beat, the dreaded VIX ETP rebalance risk was realized, leading to the largest single-day spike for the VIX in history and catalyzing a subsequent bout of systematic de-risking that, on some estimates, summed to ~$200 billion across risk parity and CTAs.

Marko quickly suggested that once the systematic selling was behind us, buying the dip would probably be a good strategy and that was borne out, as stocks rebounded from the February lows. As that bounce continued, Kolanovic penned what amounted to a series of victory laps, much to the chagrin of the bearish crowd, and those "I told you so" pieces culminated in a fantastic note that found Marko taking a game theoretic approach to the Fed and the trade war threat. The latter, he said, was being overstated by markets because if Trump started a full-blown global trade war it would imperil his cherished equity rally ahead of the midterms, leading, in Kolanovic's words, to "an election loss, open[ing] a path to impeachment, and other complications."

Well since then, markets have been jittery for a variety of reasons including ongoing trade tensions, tech regulatory fears and, most recently, the return of inflation jitters and the prospect of 10Y yields rising sustainably beyond the "magic" 3% threshold.

Fast forward to Tuesday, and Marko was out with a new piece that carries the following completely innocent title:

Seasonality and Flows, Analysis of Market Risks: Balance Sheet, Liquidity and Political Risks

He might as well have just called it:

Just A Guy Lookin' At The Market Environment, Just One Man's Opinion, Nobody Freak Out

And listen, this note is about as balanced as balanced gets. I'll just excerpt the very first paragraph to show you what I mean:

In our annual outlook we forecasted equities, volatility, and tail risk to all rise this year. So far, volatility and tail risk have significantly increased, but equities are struggling and are roughly flat YTD. Our positive equity view is based on two exceptionally strong fundamental drivers: 1) record-setting US corporate earnings (by some metrics, the strongest 1Q season ever); and 2) robust global economic growth, by some metrics the best in last 10 years. Our view on rising risks was based on: 1) reduced monetary accommodation in the US, 2) unsustainably low levels of volatility in 2017, 3) stretched equity positioning, and 4) pockets of high valuations. Given these factors, we forecasted an “upside down” relationship between risk and equity returns in the year of transition from monetary to fiscal stimulus in the US. One should note, however, that there is still substantial monetary accommodation globally, and G4 central bank balance sheets on aggregate have increased by ~$150bn so far this year.

Again, there's something for everyone there. And the rest of the note is equally balanced. There's this on the risk of forced de-risking by systematic investors:

We have noted in the past that a combination of computerized sellers, and computerized market makers poses a threat to equity price stability. As volatility increases, systematic investors have to sell, and at the same time market depth as provided by electronic market makers quickly disappears. For instance, S&P 500 futures market depth dropped over 90% during the February selloff.

But there's also this on the extent to which political risks may be overstated:

Headlines (often tweets) dealt a blow to the confidence of US markets and businesses. While still a destabilizing factor, risks can be walked back by the administration or undone by new deals. On the other hand, positives such as tax reform will stay, and cannot be undone regardless of e.g. the outcome of mid-term elections and related political changes.

And then this on the possibility of a Fed-induced downturn (more on that here):

A potential policy mistake by the Fed is still one of the largest risks facing the economy long-term, but we think that in the near/medium term, risk of Fed-induced recession is relatively low.

You get the idea. Marko's latest is the very definition of "balanced".

But you sure wouldn't know it if you listened to the peanut gallery.

Depending on whose take you care to read on Kolanovic's Tuesday note, you'd be inclined to think he was either more bullish than Jeremy Siegel after an Uma Thurman-Pulp Fiction adrenaline shot, more bearish than an Albert Edwards who's gone too long without a trip to Jamaica, engaged in a conspiracy to drive markets higher at the behest of Jamie Dimon and/or still trying to start an anti-CTAs/anti-risk parity revolution.

And look, I'm not making those characterizations up. I'm not going to link to them, but you can find them if you really want to, and again, they come from all corners.

Just to underscore the notion that people might be reading a little too much into Marko's analysis and/or getting a little too bent out of shape when he doesn't say exactly what one crowd wants him to say, keep in mind that the myriad interpretations of his latest missive that I've seen over the past 24 hours are all related to a note that is a grand total of 6 pages long, 4 of which are disclosures and disclaimers. In other words: it's 2 pages.

So I don't know folks. I think maybe the world wasn't ready for Marko Kolanovic.

And I'd be willing to bet that on some days when he's particularly exhausted with people reading too much into his analysis, Marko feels like he wasn't ready for the world.




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