For those wanting an interpretation, Cole is saying that people think they are buying a diverse set of portfolio assets but they are really not diversified at all in terms of volatility. 97% of the usual assets, including those run by very sophisticated outfits, will do poorly during the next market correction.
To pick one example, in a “risk parity” fund you might be balancing back and forth between equities and bonds seeking to balance the risk under the idea that reward tracks risk. When either stocks or bonds does poorly, the other does well.
Last week we saw both stocks and bonds sell off. Oops! So much for the risk parity strategy.
The market gods are going to be working overtime this week to assure that the twin sell-offs from last week don’t continue. There’s too much unedged (and unhedgeable) risk out there to allow both stocks nad bonds to keep falling. If they do, the losses would be enormous.
Hence the central banks and their proxy agents will work extra hard this week to reverse the damage from last week because we now have “”markets”” that cannot tolerate even modest weakness without threatening something sinister.
I call them the “snowflake markets”. To special and too precious to ever get a “B” in class, the deserve an “A” at all times, and the overprotective central banks will step in whenever necessary to make sure their precious markets never experience any volatility.
Of course, every snowflake has to eventually leave the nest and that’s when you discover that all those years of being coddled were actually more harmful than helpful.