I see a lot of people calling this the "everything bubble", but to my mind, history may record this as the "leverage bubble". With such low interest rates and free money being shoveled out of the helicopter as fast as it can with more than a whiff of desperation about the whole exercise, there's leverage everywhere, and leverage stacked on that leverage, and leveraged assets being held up as collateral for levered leverage. It seems, at least for today, that this was not The Great Deleveraging, but at some point in the not-too-distant future one seems inevitable to me.
(Subject to the usual "the market can remain irrational longer than you can remain solvent" timing issues, in that I wouldn't dream of trying to call a date on this, but I can't help but think The Great Deleveraging is inevitably coming, when something somewhere pops like this, and the act of margin calling to make up for it pushes down other assets in value, which causes more margin calling and assets getting automatically sold, which pushes down other assets in value, which causes more margin calling and asset selloffs, and it just doesn't stop until there's hardly a speck of leverage left in the market and valuations are a smoking crater, along with every account that was based on leverage. A basic understanding of differential equations would suggest that it's likely the market will at some point experience a phase transition, where we don't gradually go from this being impossible, to kinda happening more and more as leverage increases, but instead we can go in very short time from this being essentially impossible to completely inevitable, and nobody actually knows when this threshold will be crossed.)
I don't have anything valuable to add, but hell, your response was very interesting to read!
It also sent me down some fun rabbit holes on credit cycles.
Cheers from South Africa.
"[T]he practice of 'buying on margin' allowed a person to acquire stock by expending in cash as little as ten percent of the price of a stock. The balance was covered by a loan from a broker, who was advanced the money by his bank, which, in turn, accepted the stock as collateral for the loan. Credit was easy, and the Federal Reserve System did little to restrict the availability of money for stock investment." -- article on the stock market crash of 1929
https://www.encyclopedia.com/history/encyclopedias-almanacs-...
You can also look at it probabilistically, rather than differentially. Consider even just "If the probability of a margin call causing a margin call is X, and a margin call occurs, how many margin calls will occur in a chain?" The number sharply goes up as your raise the probability close to one, it doesn't just smoothly increase. It's even worse once you add in to the model that the probability is not independent, but as more occur the probability of the next one also would increase. Especially if you add that non-independence in, what you'll see is a phase change, where you get a surprisingly sharp transition between "a margin call doesn't usually cause another one" to "a never-ending cascade of margin calls occurs", rather than a smooth one.
(I may post a model of this. Someone may beat me to it, too. It's not that hard.)
import random
import itertools
def withProb(p):
return random.random() < p
def avg100(f):
return sum(f() for i in range(100))/100
# Independent probabilities; look what happens as you get close to 1.
def marginCallChain(prob):
total = 0.0
while withProb(prob) and total < 100000:
total += 1
return total
# Dependent probabilities:
def marginCallDependent(prob):
total = 0.0
while withProb(prob) and total < 100000:
total += 1
prob = 1 - 1 /((1 / (1 - prob)) * 1.01)
return total
"avg100(lambda: marginCallDependent(.95))" shows more interesting behavior. That only slightly raises the probability of the next margin call based on the fact that one occurred, and what you can see is that around .93-.95, you start seeing that every once in a while, the probability manages to occasionally work itself up to effectively 1 and the chain hits the upper limit I set. As you raise up towards one, you start to see it more and more often; .96 still sometimes manages to have a run of 100 without a crash, but even .965 the odds that one will occur in that run of 100 start to approach 1. There's a phase change between where 100 runs of the model have almost no probability of having a runaway to where the probability of at least 1 runaway is quite probable, and it's more sudden than a linear understanding of the process would suggest.
Again, this is not a model of the financial system; this is a simple model of the point I was making.
Archegos had secured identical positions with a number of investment banks, including Morgan Stanley, Goldman Sachs, and Nomura.
Credit Suisse was just stuck holding the bag while other banks quickly unwound their positions.
The margin call references are quite apt. I believe it was a literal margin call. Goldman and Morgan Stanley forced Archgeos to square up their position, which forced Archgeos to liquidate their stock, which drove down the stock, which left Credit Suisse (who had been hoping for the banks to slowly unwind the position) in a terrible spot.
Hedging doesn't mean zero risk. It just means removing the risk of whatever it is being hedged. In this case it wasn't a general market decline that took out Archegos. It was a decline in the specific basket of stocks they were holding relative to the broader market.
"Credit Suisse’s investment bank under Chin acted as prime broker to Archegos funds, lending it large sums of money to allow it to build up bigger positions in the shareholdings of quoted companies. Hwang had placed big bets that certain stocks, including Chinese technology company Baidu and US media group ViacomCBS, would see their share prices rise. When the stocks fell, both Hwang and his lending banks suffered heavy losses."
This reads as if Credit Suisse was bankrolling a maverick fund manager's speculative investments.
Strikes me as a rather unhealthy disregard for risk, and completely goes against the spirit of capital preservation.
That's four thousand seven hundred million dollars down the drain - by one of the world's most prestigious banks.
Leaves a bitter taste in my working class mouth.