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How Low Can the VIX Go?
What's going on with market volatility? You'd think with Standard and Poor's putting the US government on notice that it risks losing its AAA credit rating and Greece teetering on the abyss, markets would be going haywire waiting for the next shoe to drop.
David Berman of the Globe and Mail asks, Why did stock market panic?:
Here’s
yet another theory why U.S. government bonds are failing to react much
to the Standard & Poor’s cut to the U.S. credit rating outlook:
The bond market had already priced it in.
From Jan Hatzius at
Goldman Sachs: “Clearly, the U.S. fiscal situation is unsustainable
unless a large, multi-year fiscal tightening is implemented. However,
there is no information in today’s report about the fiscal situation
that was not already known. Academic research has generally found that rating agency actions lag market pricing, rather than lead it.” [Double SIGH!!]
This sounds reasonable, though it raises the question why the stock
market was so quick to panic. The Dow Jones industrial average was down
nearly 250 points at its low point during the day. Even though the Dow
recovered about 100 points in afternoon trading, the stock market
nonetheless stood out for its hysterical reaction to the S&P report.
The CBOE volatility index,
or VIX – which is considered a fear gauge of the market – had jumped in
early trading. But the gains were still slight: The index hit an
intraday high of 19 before settling back to 17 in the afternoon, which
is exceptionally low.
Last spring, during the stock
market correction that followed the European debt crisis, the VIX had
shot above 40. And during the initial reports of the Japanese
earthquake and tsunami in mid-March, it rose close to 30. By
comparison, Monday’s blip looks like nothing.
True, after surging as much as 23% Monday, the VIX dropped 7% closing at 15.83 on Tuesday, just above the 15.32 close of last Friday, its lowest finish since July 2007. So what's going on? Why are markets so complacent? Isn't the world coming to an end?
Perhaps the VIX isn't the right gauge of fear. At Zero Hedge, Tyler Durden posted a comment late Monday afternoon that the SKEW does not paint a remotely as rosy picture as does the VIX.
Moreover, Tyler noted that the Credit Suisse Fear Barometer, another
measure the "pros" look at is exploding up, suggesting that smart money
is very scared right now.
I read the comment and then asked one of the best TAA pension fund managers I know to share his thoughts:
With vol at 15..it is reasonable for skew to be so steep. This market is a very low vol market, point in fact is 100 day realized vol on spx is below 12. However, it is prudent risk management to buy short term vol or gamma at these low levels because you benefit if a you have a big move in the markets. But the biggest anomaly is still long term volatility, which is sitting at 30. The past 5 years realized vol on spx is at 28. Unless you think we will have another banking crisis it will be very difficult for vol to realize this level. Interest rate curves are steep and the Fed hasn’t yet increased short term interest rate.
He added:
"...that is why I am moderately bullish..hedge funds are quick to short and real money is hedged.... We are climbing a wall of worry!"
We talked about the S&P debt warning on US debt and both quickly dismissed it as "bullshit". I want you all to repeat this sentence a trillion times: The US will never default on its debt -- EVER! Get that silly thought out of your head. It's beyond stupid and I'm sick and tired of the media fueling this nonsense.
Some
lady on CNN tonight was painting a "nightmare scenario" where the
Chinese "woke up one morning and stopped funding US debt". I was rolling
my eyes as I listened to this nonsense. The Chinese need the US
consumer and they're still an export-led economy. China's middle class
is growing by leaps and bounds but they're nowhere near the point where
they can wake up tomorrow and tell the US to screw off.
I'm also
sick and tired of hearing about how Bill Gross is selling US bonds (yeah
right!) and how the US is the next Greece. Total rubbish! When a
possible Greek restructuring hit the newswires, investors fled to the
safety of US Treasuries.
On the subject of Greece, that TAA
manager sold his 2-year Greek government bonds last week and made a nice
profit. On Monday, the yield on those 2-year Greek bonds rose to 20%.
On Tuesday, risk appetite was buoyed after Greek debt sale:
Athens
sold €1.625bn of 13-week notes and although the yield demanded by
investors was 4.1 per cent – up from the 3.85 per cent paid at its last
sale of these notes in February – there was healthy demand with orders for 3.5 times the bonds on offer.
I asked another sharp pension fund manager his thoughts on 2-year Greek bonds and here is what he had to share:
I’d want to buy ones with lower prices (discount to face); the assumption being that restructuring could take the form of a haircut off of face value. However, you don’t want to get too long a maturity, so you end up looking at 5- to 10-years. With short maturities, you’re playing the game of guessing how long they can delay any restructuring event, which we have no expertise in.
It looks reasonable from a risk-return standpoint even under the assumption that they will restructure; and if for some insane reason they don’t restructure, you make out like a bandit.
Even though Greece is forced to pay sky-high rates to borrow, and restructuring looks more likely than ever, I have a feeling some large hedge funds and asset managers are going to "make out like bandits" snapping up Greek debt at these levels.
As far as how low the VIX can go, it's anyone's guess, but it can go much lower and stay low for a very long time as the market continues to climb the wall of worry, which I predicted back in January in my Outlook 2011. There is a tremendous amount of liquidity which will propel all risk assets higher. Don't say you weren't warned.
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Semantics. What's the difference to a creditor between outright default and being paid back in "chits" that have zero purchasing power? None.
Leo, you're being very silly. The debt will not be repaid in real terms, because people like me won't pay it. There are about 300 million other people like me. We're not going to pay $20,000 each (or whatever our per-capita share is). Even if we wanted to pay it, we couldn't. There will certainly be a default in real terms. 100% probability.
Read everything, especially articles with opposing points of view. Thanks for this article Leo.
Good Luck to Everyone...
Leo, very few people here probably believe that the US is close to defaulting outright on its debt. Did you list low junk-bond default rates as a reason to be bullish in 2007?
I would like to again thank the Delusional optimists for providing a second chance to make a fortune. How can they price risk so cheaply?
Once again, I was ultra bearish back in 2006 and warned everyone of the looming credit crisis. I was fired for being ''too negative'' right after I got promoted. Funny world in finance...if you clash with egos, you'll get burried alive.
Leo, very few people here probably believe that the US is close to defaulting outright on its debt. Did you list low junk-bond default rates as a reason to be bullish in 2007?
I would like to again thank the Delusional optimists for providing a second chance to make a fortune. How can they price risk so cheaply?
Read this article http://uk.ibtimes.com/articles/20061206/hrare-zimbabwe-stock-exchange-bull-run_3.htm , note the date, and then look at this chart http://en.wikipedia.org/wiki/File:ZWDvUSDchart.png and again reference the same date.
Then read this article http://www.time.com/time/world/article/0,8599,1881330,00.html
What would the value of a VIX be in such a situation.
i was taught never say never.
like in the last 8hrs asia has been going long on eveything, with a EZ debt contagion starting up again, it's all banks acting stupid. we are at the start of a correction
VIX aka Chump Index
Ah, you mean like Moody's.
And Standard and Poor's.
And the CFTC.
And the SEC.
And the FDIC.
And the FDA.
And the TSA.
And the DoD.
And ..... and .... and ......
Yes, as long as debt making profit for banks is carried on the backs of individuals and families the world over - the VIX will stay low - and the parties on the Titanic, the Lusitania, and the Space Shuttles will continue.
I agree the US government won't default. Not officially at least.
They'll keep borrowing until the dollar collapses ...then keep borrowing ...and keep borrowing.
People seem concerned about the 14 trillion debt ceiling being raised.
Why? It'll eventually be 100 trillion. Then 200 trillion. Then 300 trillion. And keep going.
But the US dollar will be worthless.
And Leo's cherished (dollar-denominated) public pension funds will be worthless.
Oh sure, pension checks will still go out.
They just won't buy much. Maybe a loaf of bread or a gallon of gas.
I seriously think they want to destroy the baby boomer pension funds. This was always the plan from day one. They created laws which caused a flow of funds into various IRS governed investment vehicles. Then these were allowed to grow and prosper. Now , it is time to sheer the sheep. Not only do they profit from this thievery, they usher in plan b as well, that being destroying what's left of the middle class. When this plan is complete, you will have a large group of older people with no money , and when a man has no money, he has no real power and must look to the government, his daddy to help him in his time of need and many will bow the knee to moloch in that day ,very soon. After all, it it is easier to believe the lie and be slaves than rock the boat shall we say. This mindset is part of a brainwashing campaign that has gone on now for almost a hundred years. When we see young americans joining a army that invades countries for no reason and fights for no reason and we see continually as these same people continue to re up on their contracts, we know for a fact that something is very wrong with the minds of these young people who do this. I am not sure if is the flouride in the water (seriously) or what it is that causes this. I have never drank the water so I don't know. One thing is for sure, there will be many who will bow the knee and kiss the ring of the slavers and the spirit that was here in the late 1700's is for all intents and purposes is dead. This is apparent to all who can see and believe me, those who want to enslave us even mroe than we are now, know this all too well. So the takedown of the pension plans will happen again and again over time and most of this money will be stolen and the problem was and always has been a situation of control. How often I have told them. You simply must control your own money. You simply must control it. Control means , it must be within your grasp in this day for sure. But they will not listen. They are not listening now. Too many people trust the system and cannot bring themselves to believe that people in authority will do these things to them, on purpose. Sad commentary but true, all true.
It's indoctrination from the cradle to grave -- brain-washing -- not the floride (although the floride not good for you either) that makes this control possible.
The middle-class' pension plans are the last bastion of wealth in America (tens of trillions). What did Willie say about why he robbed banks? That wealth is disappearing as we speak through the magic of negative real interest rates. The Fed's monetary policy is the enabling mechanism to transfer the pension plan wealth to the Power Elite "where it rightfully belongs". The Power Elite are reclaiming the earth's real wealth -- PMs, farmland, minerals, productive factories, etc. -- with these paper claims on wealth.
The American middle class: RIP.
"Religion is regarded by the common people as true, by the wise as false, and by the rulers as useful." -Lucius Annaeus Seneca (4?BCE - 61CE)
"The conscious and intelligent manipulation of the organized habits and opinions of the public is an important element in democratic society. Those who manipulate this unseen mechanism of society constitute an invisible government which is the true ruling power of our country." Edward Bernays
“The law in its majestic equality, forbids the rich as well as the poor to sleep under bridges, to beg in the streets, and to steal bread.“ —Anatole France, (Jacques Anatole Francois Thibault) The Red Lily, 1894.
The VIX is like an alarm clock that the Fed sets. Keep sleeping, you dont have to wake up for quite some time yet. (BTW, when you do wake up, your country will be gone.)
How low can the VIX go? Who the fuck cares? Is there a market that isn't manipulated? UST's? Ha! Stock market? Ha!
Oh, and what I'm also tired of is you bulls trying to make fun of the bears missing out. My silver, ammo, and food have outperformed the indexes thank you very much...
Vix?
Leo, you read ZH, right?
http://www.zerohedge.com/article/forget-vix-skew-tells-true-story-about-...
Right LP, and also because the Fed is selling puts.
Did you bother reading my comment carefully? I referred to that post on ZH and asked a TAA manager to comment on the SKEW and CS Fear Barometer.
leo, I disagree with you, I think it is the fact that most trading is hft, quant with very few people. this has the ability to slowly drop the index and keep vix low and makes sure there are no down gaps (they are all filled.
We saw this effect when we had two months of day and fter day down from Jan to march on 09. thank the goldman wuant desk for that as we used to get trading desk info published by volume which is now secret (as seen on this web site).
the person you are speking with, and yourself are fallinginto the classic trap of thinking there are real reasons for things to happen and the market is rational. that's Bull shit. I have also seen you complain about the way the market trades and making no sense, a kind of scalpers market. Joe saluzi has also done a klt of info on thecnical trading and the quants and how indicators that worked for yours never work anymore
I am afraid I think your analysis is way off base and totally wrong.
good post. that is why the hedge funds will make a killing. a low VIX, low liquidity, sudden shock and you'll see the market short like no tomorrow. the only longs are dumb ass investment banks that get bailouts and liquidity pumps
When you're on the South Pole, you can go any direction you want as long as it's north.
The US could 100% default no problems. The gov has to increase taxes to cover interest payments + inflation + oil blowouts = US gov FUBAR
The only way (just saying) the US could get out of this, is increase protectionism, start exporting, rev up R&D and become a creditor and sink China.
Well because, it's all priced in.
Are you an antagonist Leo?
How low can the VOX go? Well, how about 9.39 for starters, which is where it was at the end of 2006...
Jesus Leo,
Seriously it's pretty easy if you don't have your own HFT machine. But you don't. For around 10k you can buy one that does a crappy job. Or make your own. Kanata is FULL of guys that trade, know math and could in a weekend build something to kill an entire country. Otherwise they work at the Home Depot. Might want to hang around a couple of the pubs there.
Since you are a babe in the woods what you are seeing is machines trading against machines. Volume is so low...the tide doesn't even bother coming in right now. Mainly because nobody cares...it's all bullshit. Play the "trend" but make sure you are in high volume and more than 10k shares otherwise its'worth FUCK ALL in trade value.
Don't pretend in the "investment" anymore. That's long gone. Got food? That's investment.
Taking the deficit to zero = great depression. Cutting the deficit by 50% = massive recession and Dow 6,000 plus continual accumulation of national debt. No change in policy = 1.5% GDP growth and accumulation of debt to (obvious) guaranteed default levels.
Don't claim that the US cannot default, it very much can. 110 million fulltime workers, each having $40 of new national debt being stacked on their shoulders daily, guarantees problems. I would rather move to Central America and live a relaxed life than be a slaveworker trying to repay my share of $20+ trillion in national debt (which is where we are rapidly heading).
Fuck this huge military, fuck this obscene federal government, fuck the complete lack of sense and reason at the top.
It's not a matter of default Leo...it's a matter of currency devaluation which has been the single thing driving the markets higher since the start of QE. That is something that not even the most blindly bullish can argue with. The charts speak for themselves. The market is not going to continue higher unless the dollar continues lower. If the dollar continues lower...what will that do the the cost of food and fuel as well as all other commodities? What will that do to profit margins?
This game is not sustainable in a unidirectional manner. You seem to think that the market can just go higher and higher and higher and higher without consequence. I think you are wrong. VERY VERY VERY WRONG.
NOTE: oops...this was supposed to be a reply to your reply. My bad:-(
Roach's global labor arbitrage guarantees that there will be at least short term reductions in standard of living. We cannot escape these and other losses. The smoothest way thru, a.few examples notwithstanding, is to hide the real losses with nominal gains, provided it doesnt get out of control.
You said the US will default on its debt, I don't see it happening. Sure, the USD might go lower, especially if more QE is in the offing, but there will be snapbacks so tread carefully. And let me tell you something else, if my US solar stocks are up 80% since last year, what do I care of I lost some return on USD devaluation??? Yes, it means higher inflation, tougher on retired persons and families living on tight budgets, there we agree.
Nowhere in my post did I say the US was going to default. What they are doing is pulling out the Nixon playbook and devaluing the currency to repay debts with cheap money. The problem with this is that the country and the world cannot absorb the side effects of this monetary debasement any more. Not with food costs at all time highs and oil steadily over $100.
There seems to be far too much consideration given to the well being of "the market" and not enough consideration given to the well being of "the people". And that is dangerously irresponsible.
<<< Nowhere in my post did I say the US was going to default. >>>
Do you believe the US can overcome unfunded liabilities (including Medicare, Social Security and Medicaid) by printing money? Some estimate this future liability to exceed $100 Trillion. I, for one, do not believe the collective political will exists to make deep cuts in these areas. Default may be unavoidable.
There was a mini-default on social security this year. There was no cost of living increase as was promised. A default is a default! Believe it! It doesn't matter what name they conjured up for it.
There will not be a default on U.S. govt securities that are denominated in USDs. The Fed can get their hands on all the FRNs they need to ensure that doesn't happen. It's absolute fucking nonsense to believe otherwise.
<<< The Fed can get their hands on all the FRNs they need to ensure that doesn't happen. It's absolute fucking nonsense to believe otherwise. >>>
BS. There is no way the Fed can generate $100+ Trillion in FRNs to cover the unfunded liabilities of Medicare, Medicaid and Social Security. In case you hadn't noticed, many global leaders are calling for the end of the global reserve status for the US Dollar right now. Imagine how much momentum that effort would gain when the Fed really starts cranking the notes out.
The Fed might not generate enough FRNs to pay for the prole's entitlements (as they did this year with Social Security), but they will, without a doubt, generate enough FRNs to ensure Treasury is still able to borrow and fund the PTB's programs. Your straw man nonsense about American entitlement programs and whether they have adequate funding is irrelevant. The PTB don't give a shit whether the proletariat gets their cake.
Thanks to the PTB's energy programs, both fossil and nuclear, the prole's will likely get much less numerous in the next couple decades so the entitlement problem will become moot. The PTB has already made it clear that they don't need or want as many proles. They have more than enough to take care of necessary business. You may be one of the redundant ones.
No I don't believe that this debt level is sustainable or even serviceable.
However, before taking the ax to Social Security and Medicare, I'd like to see a serious cut in military spending and an end to these seemingly endless wars. Then see what you have and adjust accordingly.
Before taking the Ax to Social Security, remember that it is not a "gift" from the government to the people. People have paid into this for their entire working lives. It is their money also and they do have a right to it.
The current path is not a way out of the problem...it's just taking us deeper into the abyss.
"However, before taking the ax to Social Security and Medicare, I'd like to see a serious cut in military spending and an end to these seemingly endless wars. Then see what you have and adjust accordingly."
Here! Here! When are these spineless Tea Party buffoons going to stand up and say this very same thing?
You're a moron... A lot of those people didn't put shit in or they are pulling out WAY more than they put in... The whole fucking system is flawed. It should have always been a system where whatever money you put in goes into YOUR OWN "SS/401k" account. I'm tired of this socialist utopia where lazy dumb people get a check every month to sit on their ass and do nothing! I do not think we should be anywhere in the middle east nor think we should have troops in over 100 countries but I don't believe we should slash defense spending a whole lot. When your guard is down, enemies will come lurking!
We have met the enemy and he is us.
Actually you would look at the low VIX as a warning. We still have relatively thin liquidity and marked up distribution. Cheap puts etc
Good point.
You should always buy your houses, cars, and puts at a discount.
You seem to dismiss every possible nightmare and downgrade as "bullshit" and then you ask why is the VIX so low?
Leo...it's so low because of people who think like you. that's why. Is that simple enough?
The market is now ABOVE where it was prior to the S&P downgrade warning. the /Es is in fact 6 points higher right now than it was before the warning. How's that for complacent and a reason why the VIX is so low?
alien-IQ,
I know, the market is wrong and S&P is right. C'mon, get real! All you bears who think the US is going to default are DEAD WRONG! Blast away at me, I don't care, tired of hearing the doomsayers here post utter nonsense. Good night.
Leo ... Sorry for the junk
I am a Bear of the First Order, but I enjoy reading your posts, not only for the opposite opinion, but for the insight into what the pensions are doing. I think they are the lynch pin of the final solution (default). When you see the gobberment give up on pensions ... the end is near. I will continue reading your posts ... thank you
I've been bearish in the past and it takes a lot of courage, especially in these markets. Right now, I wouldn't call myself ultra bullish, but do see this market creeping higher. Thx Bear.
kiss kiss bang bang!
Game is done Leo. You shoot poor pool and worse stocks. It's okay, there is only one reknown Greek that can do buisness. You aren't him, he has the working ability of his limbs. God bless and may TO burn down.
Sincerely those that you rscrewed and rural Canada BELIEVING YOU TO THE PROVINCIAL AGREEMENTS ON GENERATING YOUR POWER.
Funny thing happened on the way to the junk yard. The return came from selling the crap to your followers in the city. There is no body that will house a cripple past August 10th this year. Reason why all of you are seeing a gap on food prices.
Canada is not "first". "first" buyer first after local of the valley. Same in all other locations. Enjoy the shortage asshole. Too much water this year. Translated half corp. Toronto isn't getting fed. Well...that's not true...how much "money" you got?
Sorry forgot to put that in quote you garbage can. Cabbage town CAN burn down the rest of the city putz. How about Saturday retard? Sick to death of you maggots sucking to death what is left of people lives...
Fuck the election...this is on...Irish rules. Black and white...run or join.
USD/CAD 1.10 - .90 and we watch all of it come down like a sugar cake with water on it. Thank christ that garbage can the National Post will be out of money you write for. No shortage of haters though. One ass mentions Chinese everythin in his diet, guess what? We are not your mother or papa, we will let them know the location. You were given your time.
67 grand for one owner of debt...you have a nice lease. Your parent have a nice business. Christ you are useless.
Im gonna assume you've been drinking..
LOL Why the fuck is this douchebag allowed to post here - can't we trade up and get Krugman,Geithner or Berskank?
While I may not agree with Leo on market issues, I have no problem whatsoever with him postings. If ZH were to become a blindly one sided blog...it would be useless and uninformative.
I think Leo is well aware of the crowd here and it takes some courage (or at least some thick skin) to post what he does knowing the kind of replies that will likely be coming. However, I think he deserves a little more respect than to be called a "douchebag"...If for no other reason than the fact that his post took substantially more thought and effort to craft than yours did.
If you don't agree with him, craft a reply that justifies your position. Don't just sling mud...any idiot can do that. And this goes for a bunch of people here. Be better than that shit guys.
Deserves respect? Sorry that is like asking me to "respect" Krugman or Bernanke if they posted here - ain't going to happen ever. You are either part of the problem or part of the solution.
Oh and the article was crap with most of it being information from either the MSM or un named "best" or "sharp" pension fund managers so give me a fucking break.
"David Berman of the Globe and Mail
"I read the comment and then asked one of the best TAA pension fund managers"
He added:
Some lady on CNN tonight was painting a "nightmare scenario"
"I asked another sharp pension fund manager"