"Worst Case Scenario" Emerging: Morgan Stanley Warns "Selling Has Shifted" | Zero Hedge
Description: Confirming JPMorgan's "worst case scenario" that forced de-levering in vol-based strategies would lead to retail ETF outflows and create a vicious cycle downwards, Morgan Stanley's Christopher Metli warns that today’s moves lower are likely not being driven by systematic supply – this appears to be more discretionary selling...

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## Stock and bond investors are now paying the price for the Fed’s dangerous experiment

by Vitaliy Katsenelson - Feb 8, 2018 3:14 pm

The Federal Reserve’s changing of the guard has me remembering what it was like to grow up in the former Soviet Union.

## FDA Treats Homeopathy as More Dangerous than Opioids

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The FDA is concerned that people might be spending money on unproven natural cures instead of their FDA approved opioids.

## Buckle Up, It's About to Get Nasty

by Phoenix Capita… - Feb 8, 2018 9:18 am

The bond market is doing the Fed’s job for it.

# "Worst Case Scenario" Emerging: Morgan Stanley Warns "Selling Has Shifted"

Confirming JPMorgan's "worst case scenario" that forced de-levering in vol-based strategies would lead to retail ETF outflows and create a vicious cycle downwards, Morgan Stanley's Christopher Metli warns that today’s moves lower are likely not being driven by systematic supply – this appears to be more discretionary selling.

Risk-Parity funds are seeing some of the biggest losses in history...

But, as we previously detailed, JPMorgan offered hope that this vicious circle of de-leveraging could be stalled - and had been in the past - by dip-buyers from greater-fool retail inflows.

In the past, just as we have seen this year, these risk-parity-correlation tantrums have been cushioned by equity market inflows, and we note that, in particular, YTD equity ETF flows have surpassed the $100bn mark, a record high pace.

> If these equity ETF flows, which JPMorgan believes are largely driven by retail investors, start reversing, not only would the equity market retrench, but the resultant rise in bond-equity correlation would likely induce de-risking by risk parity funds and balanced mutual funds, magnifying the eventual equity market sell-off.

Which could be a problem...

As ETF outflows are surging...

And as Morgan Stanley's Christopher Metli - who previously explained what happens when VIX goes bananas - notes, today’s moves lower are likely not being driven by systematic supply – this appears to be more discretionary selling.

Systematic supply from vol target strategies is largely out of the way now, while consensus trades are getting hit: NDX is underperforming SPX, momentum is down 1%, and the Passive Factor is up, indicating actively held names are underperforming names better held by passive funds.

So why now, even though the systematic supply is largely out of the way?

Well as noted in previous comments, consensus was that this was a dip to be bought and that vol should be sold. While systematic funds delevered this week, there has been less discretionary supply and end users have bought very little protection.

This makes the market still fragile to negative shocks – in aggregate less fragile than coming into the week for sure, but still at risk.

The shock today has been higher real rates on expectations of more Fed tightening to come. After ignoring the original driver of this whole episode earlier in the week, investors have finally returned to the fact that the Fed is going to have to react to a stronger economy. 10y real rates today hit the highest since 2015 indicating tighter financial conditions, and breakevens are down slightly.

In some sense, Metli points out, these ups and downs are a normal reaction to the shock and pain of the Monday selloff, and as noted in previous comments the market usually remains choppy after these events. A focus on rates and the upcoming CPI report on Tuesday, plus dealers remaining short gamma, likely means the market remains choppy for the next few days.

But Metli does offer some silver-lining hope - just as JPMorgan's Kolanovic did on Tuesday, another -4% SPX move is unlikely given lower systematic supply and less VIX ETP gamma, and the point of max pain is very likely behind us.

Choppy means +/- 1 to 2% moves for a few days followed by a gradual moderation in volatility as the market digests a more hawkish Fed.

...unless the bond market becomes truly unhinged, he adds.

Finally, Metli notes that right now, the options market does not fully price in a higher volatility environment for longer, and the inverted curve means forward volatility is relatively inexpensive.

June VIX futures are only in the 35th 10-year percentile, while even further out volatility between June and Dec of 2018 is only in the ~10th 10-year percentile – good value versus a VIX that is in the 90th percentile.

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Banks - NEC
Investment Banking & Brokerage Services - NEC

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Jack Offelday Feb 8, 2018 5:32 PM Permalink

"Discretionary selling" = margin calls

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A Sentinel Jack Offelday Feb 8, 2018 5:40 PM Permalink

And it is Thursday (which matters to some old guys.)

In reply to "Discretionary selling" =… by Jack Offelday

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new game A Sentinel Feb 8, 2018 6:20 PM Permalink

lower highs and lower lows, until higher highs and higher lows.

we will never see an 08-9 again as the banksters, shysters and corrupt congress and senate learned that letting the free markets do what it is going to do could harm themselves bigly. as in: gone, bankrupt, jobless, loose everything. it will never ever happen(again), hence a china style manipulated market for a long long tyme...

In reply to And it is Thursday (which… by A Sentinel

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oddjob new game Feb 8, 2018 6:55 PM Permalink

Sounds like another good reason to sell.

In reply to lower highs and lower lows,… by new game

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lloll oddjob Feb 8, 2018 7:04 PM Permalink

Still, no politician is addressing America's REAL problems.

Everything they talk about is like a Band-Aid. Not the solution.

In reply to Sounds like another good… by oddjob

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Neighbour lloll Feb 8, 2018 7:29 PM Permalink

"Still, no politicians are addressing America's Real problems."

Wait till the rest of the world deals with our problems, ie: Foreign investment morale in USA, unethical economic regulations, currency manipulation and trade wars!

Bottom line llol- shut-out of world markets because a new one has taken over.

Swift(ly) will come down, reserve currency status "Kaput".

In reply to Yep by lloll

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New England Patriot Neighbour Feb 8, 2018 8:07 PM Permalink

You keep using this word (worst case scenario).

I do not think it means what you think it means.

In reply to "Still, no politicians are… by Neighbour

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IH8OBAMA lloll Feb 8, 2018 7:35 PM Permalink

Its Rand Paul's fault.

In reply to Yep by lloll

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guru69 lloll Feb 8, 2018 8:08 PM Permalink

BACK OFF racist mother fucker

In reply to Yep by lloll

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CatInTheHat guru69 Feb 8, 2018 8:13 PM Permalink

Not racist. Anti ZIONIST. And ZIONISM is racism.

In reply to BACK OFF racist mother… by guru69

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Baron von Bud oddjob Feb 8, 2018 7:09 PM Permalink

Fact is, the stock market could go much higher before it goes down. Rising tbond rates won't affect stocks much until they hit 4.5%. At that point the Fed Model kicks in and investors watch the compared earnings yield and bond yield. Lots of room and time here for disciplined money to play the yield gap both ways.

In reply to Sounds like another good… by oddjob

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HungryPorkChop new game Feb 8, 2018 6:59 PM Permalink

Release the Kraken!!

https://youtu.be/38AYeNGjqg0?t=38s

In reply to lower highs and lower lows,… by new game

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MaxThrust new game Feb 8, 2018 6:59 PM Permalink

This correction in the Dow may offer China a chance to sell into this decline.

Beijing desperately need an excuse to crush their own market and wash away many of the insolvent companies but without a scapegoat they wont do it. Enter a US market meltdown which can take the blame.

In reply to lower highs and lower lows,… by new game

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idontcare new game Feb 8, 2018 7:01 PM Permalink

You R soooo wrong. OTOH, this downturn might be steep, but it will not lead to a collapse. Healthy would be back about 18K on the Dow.

In reply to lower highs and lower lows,… by new game

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new game idontcare Feb 8, 2018 7:11 PM Permalink

18k is NOT gone, loose everything, looking for a job. do you not recall 08-09? afer lehman everything was going to the shitter. goldman sacks would be gone. wells, indy, citi, usbank. fuking gone. complete reset. didn't happen did it? down 18k would all ok and fine and doing the usual for these fuks...so we agree? lol...

In reply to You R soooo wrong. OTOH,… by idontcare

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hannah new game Feb 8, 2018 7:40 PM Permalink

wrong...the banks did die in 08-09. the lid was closing on the casket and the fed reserve stuck their fingers inand stopped it. doesnt mean the banks arent dead. you dont create a quadrillion dollars of fake bad financial shit and jst walk away. the whole fiat system is dead. printing trillion wont save it or bring it back to life.....

In reply to 18k is NOT gone, loose… by new game

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JamesinNM idontcare Feb 8, 2018 8:09 PM Permalink

Perfect would be zero. Who wants healthy?

In reply to You R soooo wrong. OTOH,… by idontcare

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101 years and … new game Feb 8, 2018 8:09 PM Permalink

"we will never see an 08-9 again"

unless the banksters are short now like they were in 08-9. the fed saved stocks in 09 when wall st was convinced retail was all out.....and once retail finally jumped in at the highs over the last 12-18 months....stocks tank. wash, rinse, repeat.

In reply to lower highs and lower lows,… by new game

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TeethVillage88s new game Feb 8, 2018 8:10 PM Permalink

Ya all heard that the dollar devalues each week with new credit/debt... with unstated inflation... with planned Inflation by Central Banks, Private Banks, Fiscal Policy, Local Govt budget increases.

- I think I nailed that

- MSM can blow me

In reply to lower highs and lower lows,… by new game

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johngaltfla A Sentinel Feb 8, 2018 6:58 PM Permalink

Yup. Nothing like hanging on by your fingernails on a Friday then getting that margin call at 11 a.m. on a Crash Monday when the market is already down 10%+.

Gonna be fun to watch the rookies freak out.

In reply to And it is Thursday (which… by A Sentinel

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asteroids Jack Offelday Feb 8, 2018 6:26 PM Permalink

"Cash is King", always. You think today is bad, imagine what will happen when the bond and FX markets start selling off and credit and liquidity really really dry up. Add in a long hot dry summer, and earthquake or whatever and....

In reply to "Discretionary selling" =… by Jack Offelday

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Lost in translation asteroids Feb 8, 2018 6:47 PM Permalink

#SellSellSell

In reply to "Cash is King", always. You… by asteroids

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Mr.Danglemeat asteroids Feb 8, 2018 7:00 PM Permalink

Yep, how about a persistent drought in PRC or India after all of the lay-offs due to slack demand?....boom,..booM,...BooM,...BOOM!! (cue the mushrooms...)

In reply to "Cash is King", always. You… by asteroids

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natronic Jack Offelday Feb 8, 2018 6:27 PM Permalink

Discretionary selling= CRASH IT to keep Clinton and FBI out of the news

In reply to "Discretionary selling" =… by Jack Offelday

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Endgame Napoleon natronic Feb 8, 2018 7:33 PM Permalink

They are keeping this crash out of the news, with that latest abuse scandal preoccupying the MSM. Most of Trump’s voters are much more concerned about any backdown on illegal immigration, but I can empathize with people who lose a lot. Frankly, it looks like the stocks go up and down, so unless they are needing to cash it out, they’ll probably recoup a lot of their losses over time. The day traders on here have to make their money much quicker. I guess they have a lot more risk. People who invest in the the day trading probably know the risks and are looking for higher returns.

In reply to Discretionary selling= CRASH… by natronic

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Exponere Mendaces Feb 8, 2018 5:33 PM Permalink

http://sadguysontradingfloors.tumblr.com/

Fuck 'em. Let them crash and burn.

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gatorengineer Exponere Mendaces Feb 8, 2018 5:44 PM Permalink

They lost me at rapidly strengthening economy...... Does anyone see anything improving?

In reply to http:/… by Exponere Mendaces

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Lost in translation gatorengineer Feb 8, 2018 6:48 PM Permalink

Bu, bu, but... muh DREAMers! What about muh DREAMers!?

In reply to They lost me at rapidly… by gatorengineer

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Shpedly gatorengineer Feb 8, 2018 7:17 PM Permalink

Absolutely nothing improved. The economy for working class folks is no better now than in 2008 and most cases worse.

In reply to They lost me at rapidly… by gatorengineer

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KenilworthCookie Shpedly Feb 8, 2018 7:42 PM Permalink

Exactly.All time Highs in the stock market and Higher real estate values all came because of the currency they are priced in weakened significantly thanks to the Fed.And at the same time costs of food and health insurance have sky rocketed.

In reply to Absolutely nothing improving… by Shpedly

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Endgame Napoleon gatorengineer Feb 8, 2018 7:38 PM Permalink

No. The jobs are still mostly part time, temporary, high turnover and 1099 gigs. Rent still consumes more than half of monthly, earned-only income. The Uniparty Swamp is kicking most of us in that situation in the head, allocating a Fake Tax Cut that will add a ton to the deficit, while financing a Costco membership for most of us. Meanwhile, they loaded on doubled child-tax-credit welfare for part-time workers with kids. Their maximum refundable child tax credit was already at $6,444, and they are the ones who are eligible for multiple layers of monthly welfare, not all of us getting the $24-per-paycheck Fake Tax Cut.

In reply to They lost me at rapidly… by gatorengineer

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TeethVillage88s gatorengineer Feb 8, 2018 8:05 PM Permalink

What????!

In reply to They lost me at rapidly… by gatorengineer

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shankster Feb 8, 2018 5:34 PM Permalink

Not buying it or buying that either. And just what is there to prevent the bond market from going berserk?

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Oldguy05 shankster Feb 8, 2018 5:39 PM Permalink

That truly depends on what the meaning of is is.

...and now you've thrown this and that into the mix!

In reply to Not buying it or buying that… by shankster

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Lost in translation Oldguy05 Feb 8, 2018 6:49 PM Permalink

#InTheMix96

... paging ...

In reply to That truly depends on what… by Oldguy05

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A Sentinel shankster Feb 8, 2018 5:44 PM Permalink

One or two flimsy bulwarks at most. But they haven’t crumbled yet, so they’re sure to last forever.

Like: who in their right mind would ever think of buying oil with commie Russian or chicom money.

In reply to Not buying it or buying that… by shankster

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Oldguy05 Feb 8, 2018 5:38 PM Permalink

Discretion is the better part of valor...or sumthin like that.

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zorba THE GREEK Oldguy05 Feb 8, 2018 5:47 PM Permalink

I think "Better safe than sorry" is what you really mean.

In reply to Discretion is the better… by Oldguy05

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Seasmoke Feb 8, 2018 5:39 PM Permalink

This could be it. Chinese New Year next week !!!

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Oldguy05 Seasmoke Feb 8, 2018 5:43 PM Permalink

I bet I can get an amazing deal at Atlas Fireworks here in NH!

There's a Gazillion Chinese restaurants in the area.

In reply to This could be it. Chinese… by Seasmoke

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gatorengineer Seasmoke Feb 8, 2018 5:43 PM Permalink

China closed will certainly take one variable out of the equation and make it easier to stabilize....

In reply to This could be it. Chinese… by Seasmoke

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Newbie lurker gatorengineer Feb 8, 2018 7:22 PM Permalink

I seem to recall the last time things went sideways, it was when China closed for some holiday.

Its almost as, dare I say, it’s almost scripted.

Maybe just (((coincidence)))

In reply to China closed will certainly… by gatorengineer

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MusicIsYou Feb 8, 2018 5:40 PM Permalink

They aren't acquiring millions of ounces of silver for no reason. Silver is actually better than gold because silver is usually a byproduct and seldom discovered in pure mass quantities.

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JustPrintMoreDuh MusicIsYou Feb 8, 2018 5:42 PM Permalink

Silver? WTF is that?

In reply to They aren't acquiring… by MusicIsYou

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MusicIsYou JustPrintMoreDuh Feb 8, 2018 5:55 PM Permalink

Well don't buy it then, nobody is twisting your finger.

In reply to Silver? WTF is that? by JustPrintMoreDuh

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Hipower MusicIsYou Feb 8, 2018 7:20 PM Permalink

Please twist my finger!

In reply to Well don't buy it then, … by MusicIsYou

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Oldguy05 MusicIsYou Feb 8, 2018 5:45 PM Permalink

And silver went down today. Hmmm! Quality and quantity of silver being mined has been dropping as well.

In reply to They aren't acquiring… by MusicIsYou

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MusicIsYou Oldguy05 Feb 8, 2018 5:57 PM Permalink

Haha the "quality and quantity" has been dropping. You're a total idiot. I have no sympathy for you.

In reply to And silver went down today… by Oldguy05

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Dewey Cheatum … Feb 8, 2018 5:42 PM Permalink

It's finally great to see all of these so called market geniuses get a face full of reality, when their bullshit synthetic portfolios, get a margin call...while everyone rushes to liquidity...and there is none.

been waiting a long time, to see just how deep their pockets really are.

Hopefully worth the wait.

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aliens is here Feb 8, 2018 5:42 PM Permalink

Is the end near? Is the world going to war? That's all I want to know.

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