Diego Parrilla

And what you see is that as volatility goes up, if correlations remain negative, then portfolio risk increases, but relatively marginally.

But what happens if I shook correlations, leaving volatility unchanged?

What you see is that the portfolio risk is significantly more sensitive to correlation than it is to liquidity on a standalone basis.

But what happens in practice is that the increase in volatility compounds and polarizes correlation from plus one, everything goes to plus one or minus one.

And so as volatility goes up and you start getting your valued risk increases, you get a margin call from the exchange, you start to force liquidation and deleveraging and correlations start to polarize between, let's say, crowded consensus positioning, etc.

What you end up, it's the compounding of volatility and correlation impacting liquidity through a negative feedback loop.

And what you end up having is risk, I love this expression in English, literally off the charts.

This is what it means.

It went off the charts.

So what you thought was effectively a very well-diversified portfolio with low risk ended up falling in this risk of false diversification and hidden leverage.

That's in a way what's happening with the 60-40 potentially, where you're in that quadrant two, where volatility increases, fixed income comes to the rescue.

What happens when correlations break?

And what happens, you know, as this crisis mechanically take us to that level?

And these are things like the VIX kicking in and inflation or whatever.

The challenge with high inflation, and the reason I agree with you,

is that high inflation is the path for lower fixed income and lower equities potentially.

And that exposes that correlation risk, increases volatility, et cetera, et cetera.

And in some ways, this nightmare of the tariffs has been, again, we keep it evergreen, but the idea is that it's a path where you're effectively increasing inflation, volatility, uncertainty, destroying value.

And that's why I think at first instance was so negative.

And you have, in the case of the US, this trifecta of lower US fixed income, lower US equity and lower dollar, which is just an emerging market behavior.