The Systemics

Financial Stability Risks

There are 4 potential systemic risks that investors are worried about.

1. Oil: A catastrophic rise that breaks demand and the economy. While not explicitly tackling that question, I covered oil extensively in Commodity Outlook: Scarcity.

2. VIX Apocalypse: Complacency in the volatility markets results in a vicious cascade higher in risk premiums, destabilizing markets.

3. Equity Leverage: Equity investors are increasingly using margin and/or levered ETFs for trading. Historically, this reaches a level of peak euphoria, which often coincides with cycle peaks in the market.

4. Private Credit: Investors are concerned that the losses are so large, or that this is the canary in the coal mine to economy wide losses.

We will focus in this note on #2-4, and see where these land right now in terms of risks for the cycle.

Let’s dig in.