John Hempton at Bronte Capital recently blogged about the puzzling condition of rising gold prices and falling bond yields. Indeed, we have seen rising commodity prices in the form of the CRB Index (pictured below) and the CRB Raw Materials Index, which is largely composed of nom-traded raw materials, is only 3% from its all-time highs.
Normally, bond yields rise as inflationary expectations rise. But instead of rising yields, we have seen falling bond yields – which is typically associated with deflationary episodes instead of rising inflationary expectations.
Rising tail risk
I interpret these conditions as Mr. Market being worried about both inflation and deflation. Moreover, when we see stories like Titan Capital Joins Black Swan's Taleb in Raising Bets on Crash, it seems to me that Mr. Market is also worried about rising tail risk, i.e. extreme events.
This may be an indication that tail risk is becoming a crowded trade.
Is this a time to sell tail risk volatility?