ML-Implode News - Doug Noland: Subprime and Short Vol

For nine long years now, CBB analysis has posited "the global government finance Bubble," "The Moneyness of Risk Assets" and the "Granddaddy of all Bubbles" theses. I believe the Bubble has likely been pierced. The spectacular blowup of all these "short vol" products is a replay of subprime in the summer of 2007 - just so much bigger and consequential. The "insurance" marketplace has badly dislocated, concluding for now the environment of readily available cheap market protection.
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A Paradox of Dysfunctional Contemporary Finance: The higher home prices inflated (and the greater systemic risk) the cheaper it became to "insure" mortgage Credit risk. More recently, the higher stock prices have inflated (and the greater systemic risk), the cheaper it has been to "insure" equities market risk. These highly distorted "insurance" markets became instrumental in attracting the marginal source of finance fueling late-stage "Terminal Excess" throughout the risk markets.

Variations of these "short vol" strategies have essentially been writing flood insurance during a prolonged drought. Key to it all, global central bankers for the past nine years have been intently controlling the weather.

Relevant:

Doug Noland: Subprime and Short Vol