investors were paranoid that other investors were even more paranoid, in other words while the survey respondents said that the biggest tail risk in the market remains the EM debt crisis/China recession, they felt confident that this is “contained” because 3 of the 4 trades these same investors thought were the “most crowded trade” and if something is a crowded traded it can’t possibly be a risk, right?
Well, fast forward one month where we find… exactly the same reflexively soothing thing!
According to Bank of America clients, while the “tail risk” of a China recession has receded somewhat, the bigger threat of a wholesale EM debt crisis is still out there. Which really is the same trade: a Chinese/EM collapse.
Where it gets particularly amusing, however, is that according to the same sample of respondents, the most crowded trade currently in the market are… drumroll… being short EM equities!
In other words, the threat of an imminent EM crisis is looming in everyone’s mind, and yet nobody is really concerned or even short EMs, because they think that “everyone else” is short EM – so it is best to just stay long EM for the inevitable squeeze because everyone knows one has to do the opposite of what the (alleged) herd does.
Meanwhile nobody is actually short Emerging Markets!
And that is why despite the ongoing collapse in emerging markets, and the deterioration in China, stocks today are higher, because while the EM crisis is getting worse, “someone else” will be forced to cover, akaReflexivity 101.
