Another week, another warning regarding financial crash scenarios from those keen minds at the IMF.
In ‘Here Is The IMF’s Global Financial Crash Scenario’ last week, we highlighted the institution’s surprisingly candid discussion hidden away in its latest Financial Stability Report ‘Rising Medium-Term Vulnerabilities Could Derail the Global Recovery”…or as we paraphrased the IMF’s ‘politically correct way of saying the financial system is on the verge of crashing’.
As we noted previously, in the section also called “Global Financial Dislocation Scenario” because “crash” sounds just a little too pedestrian, the IMF uses a DSGE model to project the current global financial situation, and ominously admits that “concerns about a continuing buildup in debt loads and overstretched asset valuations could have global economic repercussions” and – in modeling out the next crash, pardon “dislocation” – the IMF conducts a “scenario analysis” to illustrate how a repricing of risks could “lead to a rise in credit spreads and a fall in capital market and housing prices, derailing the economic recovery and undermining financial stability.”
This week the IMF has gone a step further, courting the mainstream financial media to publicise its warning about the dangers of historically low volatility and related short volatility strategies.
As The FT reports, The International Monetary Fund has warned that the increasing use of exotic financial products tied to equity volatility by investors such as pension funds is creating unknown risks that could result in a severe shock to financial markets. In an interview with the Financial Times Tobias Adrian, director of the Monetary and Capital Markets Department of the IMF, said an increasing appetite for yield was driving investors to look for ways to boost income through complex instruments.
‘The combination of low yields and low volatility facilitates the use of leverage by investors to increase returns, and we have seen rapid growth in some types of products that do this,’ he said. It explains some of the short vol strategies that we’ve been expressing concern about for several years. To wit.
This post was published at Zero Hedge on Oct 31, 2017.