Silver as an investment

The 10 “Grey Swans” Events For 2018

One of the traditional push backs against attempts to predict “black swan” events is that they are by default unpredictable, rendering the entire exercise moot. However, for the second year in a row, Nomura’s Bilal Hafeez has found a loophole, or rather loop-animal: the grey swan.

As Hafeez writes, while he would like to be able to predict black swans, by definition that is impossible. “However, its close cousin the grey swan can be foreseen. These are the unlikely but impactful events that, in our opinion, lie outside the usual base case and risk scenarios of the analyst community. So as we did last year we have put on our creative hats and have come up with 10 potential grey swan events for 2018.

For the purpose of this exercise, Nomura avoided the more widely discussed – and more probable scenarios such as the Italian elections, US Impeachment risk, North Korea conflict, which it covered in its event risk radar series, and has instead selected topics that have not been as widely discussed.

“Needless to say, none of them are our base case, but we think it is better to be prepared than not.”

So without further adoNomura’s potential grey swan events for 2018 include:

  • Shock 1: What the movies tell us about 2018
  • Shock 2: The “Amazonification” of inflation
  • Shock 3: 2% inflation targeting goes out of style
  • Shock 4: A United States of Europe
  • Shock 5: Another UK political turnaround
  • Shock 6: Bitcoin starts moving other markets
  • Shock 7: Housing market decline = rate cuts?
  • Shock 8: A bigger proxy war in the Middle East
  • Shock 9: “Get to the chopper!”
  • Shock 10: Credit: stealth leverage pops?

Here are the details for each of the swans:

1. What the movies tell us about 2018

Films may end up being better predictors of grey swans than research analysts. Remember it was a film that first predicted a black president of the US (The Man, 1972), the rise of China as an economic powerhouse (Americathon, 1979) and the rise of tabloid TV (Network, 1976). As it happens, we’ve found three notable movies that are based in 2018, and here’s what they foretell.

The 2009 film, Terminator Salvation, is set specifically in 2018. The backdrop is a conflict between Skynet and the human resistance. For the uninitiated Skynet is a computer system developed for the US military by Cyberdyne Systems. The system was intended to safeguard the world by pre-empting attacks. However, it soon developed artificial general intelligence and decided that humans were the biggest threat to the planet. Skynet among other things could control mobile phones, drones and cyborgs/ Terminators (or as Arnie says in Terminator 2: “I’m a cybernetic organism. Living tissue over a metal endoskeleton”).

It would be easy to dismiss this 2018 scenario, but let’s run through the necessary ingredients for it to emerge. We would need the existence of drones, computer-controlled power grids and networked transportation and food systems. Layered on top of this, we would need AI/machine learning capabilities. What would make the system much more fragile would be the replacement of all physical forms of mediums of exchange such as gold by say a cryptocurrency …hmmm, is Skynet reading this?

If this isn’t scary enough then 2018 could prove to be like it was depicted in the 1975 film Rollerball. This is when the world is run by a global energy monopoly, Energy Corporation. Energy Corp wishes to replace warfare with a violent sport called Rollerball, which consists of two teams racing around a circular track on roller skates attacking each other. The plot of the movie hinges around the star player of Rollerball becoming too popular for Energy Corp and they try to get him killed in a match. He, of course, survives and reveals the nature of Energy Corp to the world.

The essence of the movie is that behind any veneer of democracy and competition, there lays a corporate imperative to distract the masses with mindless and often violent entertainment. To be honest, many would subscribe to this view already! But to reach the scales of Rollerball control, we would need one or two global companies emerging to dominate the world – ideally in sectors that can distract us with fake news, fun games and constant distractions. Surely we’re not close to that are we?

Finally, I can’t ignore the 2012 film Iron Sky. Don’t laugh, but the plot revolves around a manned mission to the dark side of moon in 2018, where the descendants of Nazis are discovered. These Moon Nazis take some technology from the astronauts and invade Earth. Film connoisseurs will know that this is an unlikely scenario as the 2011 film Transformers Dark Side of the Movie already told us that the Decepticon transformers are on the dark side of the moon. They would have easily wiped out the Moon Nazis. But hang on, it would also mean that there would now be a fleet of Decepticons ready to invade the Earth in 2018…

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2. The “Amazonification” of inflation

2018 is expected to be the year when inflation kicks back. But the recent drag on US inflation has been caused by the sharp decline in goods price inflation and perhaps the “Amazon effect” won’t stop there. If you look at the amount of column inches dedicated to the disruption Amazon has brought upon industry you’d be surprised to learn that it still only operates in 14 countries. For two of them the focus until recently has been on just selling books. But to focus on this one company would do disservice to how far the deflationary force of technological disruption can go on a global basis.

Alibaba’s sales on “singles day” is four times bigger than Amazon’s Cyber Monday or Black Friday. Latin America’s Mercado Libre operates in far more countries and Silicon Valley is yet to replicate the take-up rate of Kenya’s M-pesa or scope of services offered by China’s Wechat. Innovation and disruption take place in many forms and under many different banners, so to quantify their impact we need to think bigger.

There are now more mobile phone subscriptions in the world than people, rising to a level where the world’s poorest households are more likely to have access to a mobile phone than to clean water. But the internet is still in its early growth phase. The number of active mobile broadband subscriptions in the world has only just breached the 50% mark. We are still far away from the world being truly “connected.”

The first wave of global internet connectivity coincided with the rise of globalisation when China joined the WTO. This saw a marked moderation in goods price inflation in the developed economies. Right now there has been an impressive rise in smartphone ownership in the developing world; there is clearly a second wave of internet connectivity taking place. The argument for lower goods price inflation is clear; with smart phones, not only is online shopping more convenient, but while trying out goods in typical bricks and mortar stores you can decide to buy online for less (“Showrooming”). It’s no wonder the rate of online retail sales in the developed world is picking up at a pace (Figure 2).

But there is an argument to say that the technological dampening of inflation may be more persistent than before. The outsourcing of services abroad is easier, the gig economy seems here to stay, AI is on the rise and the disruption from the widespread adoption of 3D printers or indeed cryptocurrencies is yet to be witnessed. Policymakers are split on the matter though, the ECB’s Mario Draghi said there was little evidence that e-commerce was depressing inflation, while the Kansas City Fed’s work (from 2004) on the matter points to clear higher productivity gains and therefore lower inflation. But FOMC members are still using a shotgun-like approach to explaining why inflation has been persistently low with long lists of possible but unquantifiable reasons. Further disruption and disinflationary pressures remain a clear risk into 2018. Our focus would be in Australia, where mobile broadband speeds are the second highest among the G10, inflation remains historically low and … Amazon has just opened its doors for one-day delivery services.

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3. 2% inflation targeting goes out of style

“We may need to adjust monetary policy frameworks accordingly” (BIS, 2017).

While inflation targets of around 2% are often viewed by markets to be an immutable force of nature, the truth is they are a relatively new phenomenon. First adopted by the Reserve Bank of New Zealand (RBNZ) in 1989, as recently as 1997 there were only five recognised inflation targeters – New Zealand, Canada, the UK, Sweden and Australia. According to the Bank of England, there are currently 29 countries that are fully-fledged inflation targeters (not including the ECB, which avoids describing itself as such).

So while we may take it as a given that inflation targeting is here to stay, a longer view could reveal it to be nothing more than an economic fad. In time, inflation targeting may either be jettisoned or modified. Since the GFC, price-level targeting or nominal GDP targeting have been popular subjects of debate since the GFC hit. In the US in particular, an active discussion has been taking place on  these fronts. One reason for the discussions are that given the low natural rate of interest, and hence a low terminal rate, the Fed would have limited ability to use short rates to battle the next downturn. Former Fed Chair Ben Bernanke has advocated a hybrid inflation-target/price level target approach, especially for times when short rates are near the zero bound.

Elsewhere, consideration has been given to lowering the inflation target. There are two key reasons for doing this. The first is the lack of success in hitting an inflation target over recent years. If we look at key inflation targets for the G4, US core PCE inflation has averaged 1.7% since 2000 (and 1.5% since 2010). In the euro area CPI inflation has managed 1.75% (1.3%) and Japanese core CPI -0.1% (1.1%). Only the UK seems to be hitting its target with 2% since 2000 (2.2% since 2010). The whole point of an inflation target is that it builds confidence in where inflation will be in the future. Constant misses, consistent in direction will erode that trust and at some point it become better to admit defeat and shift lower.

The other reason for considering a lower inflation target is demographics. According to the Oxford Institute of Population Ageing, within 20 years many countries in Asia and Europe will see a situation where the largest population cohort is 65+ and the average age approaches 50. For those in their sunset years, is inflation a pure cost eroding the purchasing power of their savings with little benefit for the economically inactive? So while central banks will (for now) likely retain their independence on the means to hit inflation targets, the executive / legislative powers in some countries could see political benefits in lowering this to 1%.

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4: A United States of Europe

2018 presents a unique political opportunity for the European Union and in particular those countries within the euro area to forge closer ties and perhaps embark upon a political journey that will end with the creation of a ‘United States of Europe’ – the longstanding dream of many federalists within the continent. The reasons for the propitious backdrop are threefold.

Less focus on domestic politics: There are still some near-term hurdles to be overcome (Germany actually getting a government, an Italian election in H1 2018 and Catalonian elections next week). If these are resolved, we have a decent gap with no major elections in major countries for some time (Germany 2021, France 2022, the Netherlands 2021, Spain 2020 and Italy…?). Not only does this free up bandwidth for key European political actors to think about European matters, but may also end the de facto ban on any European treaty change that has been in place in recent years. Against the backdrop of waning support for populist parties, an axis of Merkel / Macron, supported by pro-European leaders in other countries could look to define their legacies by driving forwards with an agenda of European federalism (it probably will not be called that though).

Brexit in the background: With one of the European Union’s largest countries deciding to go its own way (kind of) it naturally raises the question of what relationship other European countries want to have. If the answer is to have more integration and provide a positive case for a United States of Europe this would be the perfect riposte to Brexit and some of the nationalist, populist politics that have afflicted parts of the continent in recent years as well.

Fixing the roof while the sun is shining: One of the lessons learnt from the global financial crisis and the euro crisis that followed is to fix the roof while the sun is shining and don’t wait for when it rains. European growth is at its strongest in years. The EU unemployment rate has fallen from 11% in 2013 to 7.4% currently and shows no signs of stopping. The low in the previous boom period was 6.8% and at the current run rate that could be achieved in under 12 months. Increasing the pace of integration will bring with it some risks and possibly even some J-curve impacts. This suggests there is no better time to undertake this project than now.

Something like a United States of Europe cannot be built in a year. But steps on a path that the market understands to be leading there can be taken. A grey swan event for 2018 is that European politicians understand the temporal opportunity they have been given, and undertaking such a path starting with a treaty change that leads to increased mutualisation of debts and sharing of risks. It is important to note that comments from key European leaders are heading in this direction. You can see it in the rhetoric of Jean-Claude Juncker’s State of the Union address, Macron’s united defence speech and in Martin Schulz’s latest, looking for a United States of Europe by 2025.

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5: Another UK political turnaround

In a speech earlier this year at a regular spring conference, we boldly stated that having spent the 2014 edition of the conference discussing the Scottish referendum, the 2015 edition discussing the general election and the 2016 edition discussing the Brexit referendum, at least in 2017 there were no UK political events to discuss. Just over two weeks after this statement was made, Theresa May announced the 2017 general election.

Once bitten and twice shy and all that. So even if the REAL grey swan for UK politics in 2018 would be if nothing interesting happened, that would not give us much to write about. The tail risk we consider, therefore, is if political instability gets so bad that either / or another general election or a second Brexit referendum occurs in 2018.

While it is ex-post easy to see why Theresa May called the 2017 general election (a 20 point opinion poll lead is catnip to any politician), there is no such case now. Under the Fixed Term Parliament Act there are two ways to call an early election. The first, à la 2017, where the government chooses to dissolve parliament with a two-thirds majority in the Commons can be ruled out, we think. So if it did happen it would be because the government has lost a vote of no confidence (and not being able to win another one within two weeks). Ordinarily, this would be unlikely, but the government’s wafer-thin effective majority makes it a possibility and public attempts have been made before. In particular, we would highlight that all it needs is some Conservative (or DUP) lawmakers to get annoyed with the way Brexit is going that they are prepared to bring down the government and risk (from their perspective) a Jeremy Corbyn-led government. Because of how polarising Brexit has become in the UK, this is a risk that cannot be ruled out.

The other potential political event is a second Brexit referendum. Again parliamentary mathematics is the key here. Around 75% of MPs (including a slim majority of Conservative ones) are pro Remain. So why are they pushing through Brexit legislation? They are enacting the will of the people as set out in the 2016 referendum. Of course, the will of the people can change. Over recent months we have seen a slim majority in the polls saying in hindsight it was wrong for Britain to vote to leave the EU. If this trend continues and that slim majority becomes a commanding one this may embolden Remain MPs on all sides of the house to push for a second referendum, perhaps on the outline of the actual deal the UK agrees with the EU. There is an issue of timing here – as things stand there is not a huge amount of time to fit in a referendum.

This is why it would be a tail risk. The really interesting question is what sort of tail risk because there are two different options here. The question could ask whether to accept any deal or instead remain in the EU. Or it could ask whether to accept any deal or crash out of the EU altogether. The market implications of these two different questions would be very different!

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6: Bitcoin starts moving other markets

Are you a coiner? It’s hard not to be at least interested with the sharp rise in cryptocurrencies. The level of speculative mania has reached a point where stock prices have been boosted by companies simply inserting “Blockchain” onto the end of their names (yes that happened). This phenomenon echoes the dot-com era, but that’s all we will say about bubbles today.

The arrival of Bitcoin futures will likely see Bitcoin exchange traded funds expand in 2018. Now that cryptocurrencies are entering the “mainstream” could Bitcoin’s high volatility start to move other markets?

As it stands the market cap of Bitcoin is $280bn and that number rises to $523bn when all other 1358 cryptocurrencies are included (a number that seems to be ever rising too). Half a trillion dollars is no mean feat, but it is far away from the $79trn total world market cap or indeed the peak $2.9trn dot-com valuation in 2000. It may be too early for Bitcoin to have a global impact on other asset markets at this stage. Instead, we need to look where investors are most exposed on a regional basis for where this cross-market correlation could bite. With Japan accounting for nearly half of global trade in Bitcoin compared with just 25% in the US, it could be in Asia where Mrs. Watanabe pulls back.

Beyond the price action there is the issue of longevity of cryptocurrencies to consider. We admit we didn’t ‘coin’ the phrase but “before you climb the ladder make sure it’s leaning against the right building” applies here. In the crypto world or “crypto valley” as it’s coined in Switzerland its well understood that Bitcoin is unlikely to be the future of coins. Proof-of-work (POW) cryptocurrencies such as Bitcoin are energy intensive and time consuming, while proof-of-stake (POS) coins such as the coming Ethereum-Casper are much less so. There are a host of reasons why we have not yet moved on from Bitcoin, POS is in its early stages with security still a concern and people, in general, are not that good with change. When they get used to something, it is very difficult for them to get out of that comfort zone and for most they have only just got their heads around Bitcoin. But for as long as POW is the most common form of cryptocurrency, this could start to have an economic and environmental cost.

Bitcoin’s current estimated annual electricity consumption is 33.2TWh at an estimated cost of $1.6bn, while only 0.15% of the world’s current electricity consumption the rise in Bitcoin has been nothing but underestimated and is somewhat exponential in an age of exponential technologies. Estimates were made in March 2016 expecting Bitcoin’s energy consumption to match that of Denmark by 2020. Today Bitcoin already has matched that, three years ahead of schedule. So if it’s not risk-off inspired price action from Bitcoin that moves other markets how about higher energy costs? 71% of Bitcoin mining takes place in China powered by cheap coal electricity. So perhaps the grey swan of next year is not Bitcoin’s bubble bursting, as so many commentators tend to suggest, but instead it’s continued rise and a surging demand for coal.

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7: Housing market decline = rate cuts?

Solid growth, low interest rates and hot money inflows from overseas have fuelled rapid house price gains in Australia, Canada, New Zealand, Norway and Sweden (Figure 8). As discussed in Residential speed limits, these growing imbalances cannot be ignored by policymakers. Investors have been calling for a downturn for some time in these markets. 2018 could be the year – indeed we are already seeing declines in Norway and Sweden.

Residential investment has soared, driving increased supply which could outstrip housing demand and see prices move lower. Furthermore, to offset growing housing imbalances, regulators have tightened macroprudential policy through stricter lending standards and measures to deter foreign inflows. With limited historical precedent, there is a risk that policymakers have over-tightened and driven a slowdown.

The consumption share of GDP in these economies is large. Falling house prices (and negative wealth effects) could see the consumer hold back on discretionary spending, particularly with real wage growth still low/subdued. Moreover, debt-to-income levels are at historical highs, meaning households are more sensitive to adverse changes in income, asset prices and interest rates than usual. A recent BIS study argued that in a high debt economy, “interest hikes could be more contractionary than cuts are expansionary”, making it difficult for policy makers to use monetary policy to curb these imbalances from building.

A house price collapse would have significant market implications. Rates markets currently price these economies’ central banks normalising policy significantly over the next two years, with the Fed being the only central bank to outpace them (see Figure 9). If this grey swan materialises, expectations for normalisation would be significantly reduced.

In fact, central banks may cut under this scenario. The RBNZ has already flagged weaker domestic demand as a downward scenario that could lead to rate cuts. The RBA, BoC, Norges Bank and Riksbank have all noted that the housing market is a key risk to their outlook. A significant house price decline could push them towards much more dovish monetary policy stances with further rate cuts still on the table.

If this negative scenario unfolds, a substantial market repricing is likely. The timing for the first interest rate hikes in the Antipodeans and Scandies would be shifted back and even removed. Further hikes from the BoC would be priced out. Under extreme scenarios, rates markets may move to pricing cuts rather than hikes. Respective bond yields would move lower and currencies will depreciate versus the majors.

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8: A bigger proxy war in the Middle East

In recent years the conflicts in the Middle East have tended to start with a bang, but then assumed a “low intensity” character. The underlying problem that gave way to the conflict in the first place is not resolved, but the conflict remains relatively contained without degenerating into a flare up of tensions that engulf the whole region. This is what happened in Yemen, Qatar and more recently in Lebanon.

Our baseline is that this pattern will hold in 2018 too and these conflicts will remain “frozen”. However, 2018 may be different and the tensions may intensify in a manner to threaten regional stability. We see two theatres where the risks of imminent escalation are most significant (even though not part of the baseline):

Yemen: Houthi rebels have already shown that they can fire missiles targeting Riyadh, although they failed to inflict significant damage. If such attacks continue and prove more costly for Saudi Arabia, the Kingdom may decide to increase its military involvement in Yemen, increasing the risk of a direct clash with Iran.

Lebanon/Palestine: The immediate risk of a proxy war in Lebanon that emerged after the unexpected resignation of PM Hariri seems to have been defused. However, President Trump’s recognition of Jerusalem as capital of Israel may increase this risk again as Lebanon’s Hezbollah and Palestine’s Hamas have called for a renewed “intifada” in response to Trump’s decision. Against Hezbollah involvement in a possible intifada, Israel might decide to take the battle to the Lebanese territory, directly clashing with Iranian proxies/forces, with tacit support for Israel from some of the Sunni  countries.

If these risks materialise, CDS spreads and the currencies of the countries involved may come under pressure. However, one other point to consider will be the impact on oil prices and global inflation. If tensions reach the point where markets become concerned about oil supplies, then there might have a notable increase in global energy prices. It is difficult to forecast where oil prices will settle in such a scenario, but we stress-tested our baseline forecasts with the Brent oil price at $80, an increase of around 30% from its current price level.

With all the usual caveats that apply to such simulations, we find that an oil price shock of this magnitude would add 0.4 and 0.9 percentage points to 2018 headline inflation in the US and eurozone, respectively. Our colleagues in Japan see core inflation breaching 1.5% if the Brent oil price stays above $80/bbl, although they think it would be premature for the BOJ to modify its 10yr JGB yield target in response to such a shock.

In EM, we recently looked at the winners and losers of an oil price shock. Outside the countries that are directly affected by regional tensions, Russia, Colombia, Malaysia and Brazil would be among the winners, while China, India, Indonesia, Thailand, South Africa and Turkey would be among the losers of a high oil price.

The bottomline is with output gaps in major economies dwindling, an energy price shock may more easily lead to second-round effects on inflation, which may require a monetary policy response with knock-on effects on risk assets.

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9: “Get to the chopper!”

Helicopter money is now disappearing from investors’ minds (Figure 11). However, we may finally observe helicopters dropping money in 2018.

2018 is expected to be a year of further monetary policy normalisation globally. Inflation has been disappointing globally, but markets now expect central banks to stress the economic recovery and financial stability (higher equity prices), not inflation. However, investors may be surprised by how strongly a few central banks can adhere to their inflation mandate. The BOJ is one of the most likely candidates. In the Abe cabinet, conditions for the BOJ have completely changed, and a further dovish shift cannot be ruled out in 2018, as Prime Minister Abe is now deciding on the next BOJ governor and two deputy governors.

Although our central case is that Governor Kuroda will be re-appointed, an appointment of Mr. Honda, ex-economics advisor to PM Abe and currently ambassador to Switzerland, will be a significant shock to the market. The latest survey among FX investors shows that only 5% of them expect Mr. Honda to be the next governor, but the risk is higher to us (10-15%). Mr. Honda may be also appointed as one of the deputy governors to support Governor Kuroda, shifting the direction of monetary and fiscal policies to the more accommodative side.

What can the BOJ do? We think clearer cooperation with government deficit financing is likely. The government and BOJ released a Joint Statement in January 2013, which can be re-written to loosen fiscal discipline further. In his interview with Reuters on 8 November, Mr. Honda said that the joint statement must be rewritten to have a joint goal of JPY600trn of nominal GDP. The BOJ’s policy target will thus be revised to make the policy mix more accommodative. Mr. Honda also said current fiscal policy management is tight, while he also said the BOJ may accelerate its JGB purchases to JPY100trn per year if an economic shock occurs.

The government has already given up its target of achieving a primary balance surplus by FY2020, loosening its fiscal discipline. Further loosening of fiscal discipline is possible, and the appointment of Mr. Honda will be viewed as a clearer sign of further delays of the sales tax hike. If Mr. Honda is appointed, expectations for a much looser fiscal and monetary policy, i.e. helicopter money, may be ignited.

This is not just a story of Japanese politics. A step towards helicopter money is actually recommended by ex-Fed Chair Bernanke. At the conference held by the BOJ in May 2017, he stated that “if more stimulus is needed, the most promising direction would be through fiscal and monetary cooperation, in which the BOJ agrees to temporarily raise its inflation target as needed to offset the effects of new fiscal spending or tax cuts on the debt-to-GDP ratio.” For central banks facing policy limitations, helicopter money can be a natural step towards further easing. We should remember another major central bank, the ECB, also faces limited policy options for resolving negative shocks

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10: Credit: stealth leverage pops?

After years of accommodative policy, we think the risk is that leverage has built up in the system and as the Fed drains liquidity via the B/S and higher rates, the potential imbalance that may have been up could be exposed. So does US credit pop in 2018?

Policymakers are always fighting the last war and in many ways, that has been a good thing because from a variety metrics, the US banking system is now more sound. Years of re-stocking the capital base, lower overall leverage (versus other periods) and less reliance on short-term funding no longer put banks in the cross-hairs. Granted if there was a severe enough recession or sharp repricing in financial assets, US banks would be affected. However, the stress tests suggest the majority would come out ok.

Where is the leverage? It lurks in various forms; let’s call it stealth leverage

Commercial Real Estate: During 2008-12, banks with high concentrations of CRE loans were about three times more likely to fail than all banks nationwide, according to Richmond Fed research. As specialized knowledge on local real estate markets is often key to CRE loan markets, community and regional banks are major credit providers. Risks associated with construction and land  development loans (CLD), the riskiest component of CRE loans (Figure 12), appear concentrated in small banks, which may not have the stuffiest buffers to absorb potential losses associated with CRE loans. In addition, CRE valuation remains at the highs when compared with residential real estate.

Subprime Auto Loans: One area of consumer credit that has resurfaced on the radar is subprime, but this time in the auto loan sector. The recent peak in 2015 saw nearly 40% of all US auto loans go to subprime borrowers. There has been a slowdown since and  new origination versus total auto loans has decelerated (thus a lower flag). However, the total existing debt load of the past few years is about $0.4trn. During the oil fallout, defaults picked up quickly in shale-producing states. If the economy slows, the risk is that auto sector would get hit, but overall a pop here is not likely to be systemic.

Student Loans: Another concern among those worried about the consumer is the high levels of student debt. Instead, it has led to more of a behavioural shift of less home buying. But as wages rise, these debts will not all pop at once. This too is less systemic.

Financial Leverage: This is where the embedded leverage is in the system. Over the  past 10 years, the fastest-growing debt was in capital markets, as seen in corporate debt up roughly $3trn, as highlighted in our Fed QT Supply/Demand study (see link). Some of this was smart usage of debt, terming out to lock-in low costs of funding, but much of this went into stock buybacks and/or to highly leveraged corporates. In fact, the credit quality of the universe has moved towards BBB and higher duration (see link). A reprice of corporate credit when balance sheets are still thin could indicate that meaningful risk lies ahead. Deeper under the surface margin debt for stock purchases are also at all-time highs. Finally, some vol selling strategies in ETF form could be the pin prick to passive investing.