Irrational Exuberance Is Here: VIX Lowest Since July 2007 As Options Speculation Highest Since Dot Com Days

Tyler Durden's picture

The VIX has just hit the lowest level since July of 2007 as Sentiment Trader reports that "speculation in the options market has spiked to its highest levels since the spring of 2000." The government's endorsed moral hazard policy has now lead to the worst of both the and the housing bubbles. There is nothing that can ever again default or lose money: Uncle Sam is there with your money to guarantee it. Ben Bernanke sees no bubble anywhere.

At the same time, as VIX plummets, MOVE, or the Treasury volatility index, has surged to multi month highs.Once again, the market realizes that the next big shake up will not be in equities, whose worth is only there for so long as the government can keep issuing its pieces of paper, but in the Treasury market. And even as the Dow 36,000 is now guaranteed, a 4 Year at 5.5% is seeing as increasingly likely.

Presenting the ratio of the VIX to MOVE

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Ivanovich's picture

This is the stuff that makes this website a good place to visit.  Thanks.

N Rothschild's picture

"Dow 36,000 is now guaranteed"

getting proper sick of reading this drivel!

Assetman's picture

Then look at it as satire.

I know I am.

chindit13's picture

Either every economics text ever written has to be scrapped and new ones produced---which would surely be a green shoot---or the endless creation of new money via debt to solve problems resulting from endless debt via money creation is going to crash every market in the world.

What we are seeing now, in terms of market reaction to debt and money printing, does for economic theory what objects falling up would do for Newtonian physics or time moving backwards.  Thus I am waiting to be young again.

Jim in MN's picture

+1.  Ask not for whom the bell tolls, it tolls for thee, Mr. Capital Asset Pricing Model.


CAPM is dead and Bernanke killed it.  The compass is spinning, the stars are obscured, and even the migrating birds are flying into the vortex. 

All of this on the backs of my little babies?  No, no, it will not stand.  We will wean them of debt and repudiate this filthy system.  The Fed's balance sheet will be flushed down the crapper. 

But not this year, or the next....  When?  'Tis the ultimate timing game.

chindit13's picture

I have it on good word that the Nobel Committee has a call in to Bill Sharpe at Stanford, but apparently he's in the can reading Hank Paulson's book.

Calculated_Risk's picture


  I don't know if I could relive the 80's though.. :\

ExistentialSkeptic's picture

I think I don't have the right kind of mind for this game.  So maybe I'm missing something but let me know if I get lost somewhere:

The "money printing" that Bernake is doing devalues every dollar held worldwide and the majority of the (electronic) dollars in existence are held by entities outside of the United States as a consequence of the status of the dollar as the world's reserve currency in oil.

The countries that export real products in exchange for dollars to use to purchase fuel, not the American voting populace, are the people that suffer the consequences of the "QE to infinity" policy.

Would it not be, then, that the only true threat to the status quo would be political, in the form of a significant amount of real-world trade being diverted through an alternative currency?

What am I missing?

Jim in MN's picture

A couple of things

1. The money is not being printed exactly; it's brought into existence via the Fed's balance sheet.  For that to have 'meaning' it must at some point be put into a relationship with the actual economy, either the private side (reselling warrants or MBS or other garbage) or the public side (ditto but using T-bills or some other taxpayer financed loan vehicles).  So real debt is the result of the 'money printing' except in the case of actual debt monetization, which is still the exception rather than the rule.

2. Devaluation has many pernicious effects in country.  Distortions multiply as goods and services cannot all adjust to the same degree at once.  The complex interactions with the international markets cause inflation to creep through the system starting with oil (and everything that moves).  Meanwhile fixed investments including real estate and bonds are sitting ducks. 

3.  The real threats are numerous and unlikely to be properly anticipated or defended against, precisely because fiscal irresponsibility and corruption are by definition leaving our most precious resources vulnerable to any sort of shock or negative development.  Political threats are but one of many scenarios.  Bond implosions; sovereign defaults and contagion; consumer debt boycott and depressionary collapse; and hyperinflation (possibly in the form of 'bubbles' or manias detached from the rest of the economy) are all possibilities. 

4.  Even if the system succeeds in perpetuating itself, it has done so by incurring six figure debts on each and every baby born in the USA not to mention the so-called adults.  This is at least highly immoral, and quite possibly criminal (based on fraud and corruption).

Otherwise, carry on!

velobabe's picture

E.T....... no phone home?

ExistentialSkeptic's picture

Thanks for the explanation -- it really did help.  I was thinking about the issue as if the economy were a machine, when maybe a better analogy is with ecology; a complex system with many interacting parts.

That said -- my gut has been telling me to run away screaming since 2008.

Jason T's picture

The only thing we have to fear now.. is fear itself.  It's got next to nowhere to go but up from here.

cougar_w's picture

[nowhere to go but up]

State your time frame. For 2010, maybe. Beyond that ... meh. And then gravity wins.

lbrecken's picture

I would like an explanation as if things are so bearish like Tyler & company continues to spout why are credit spreads narrowing indicating econ is improving.  I dont disagree with Tyler's accessment mind you jsut asking////

jeb3's picture

In today's markets, looking to any one (or category of) statistic(s) as a barometer of "the economy" is a dreadful mistake.  If you think the economy is improving just because of all the good numbers you've been force-fed over the past 12 months, you're in for a rude awakening sooner or later.

The VIX today reminds me of another Chicago creation, The Kansas City Shuffle: "...when everybody looks left, you go right."

Caviar Emptor's picture

The real economy is stunted, portions have been tanking in a deflationary vortex (incomes, housing, employment, retirement assets). But everything on Wall Street is thriving on the taxpayer's credit card. You call that bullish? The market is functioning outside the laws of capitalism right now since much of Wall Street was essentially nationalized.

nedwardkelly's picture

since much of Wall Street was essentially nationalized.

Well, much of the losses were at least.


Divided States of America's picture

I doubt Benny will see any bubbles even if he was taking a bubble bath with all his banking cronies

Gimp's picture

It will crash of course, but when is  the question. The Central bankers can keep printing money for years trying to outrun the recession and stabilize the global economy.   The end result of huge debts and not enough cash flow to pay the interest on them is going to be the real problem. When will this happen? 18-24 months?  In the meantime I am going with the trend which is up.

Jim in MN's picture

Great empires tend to teeter and totter for decades before true failure.  Of course they usually actually HAD lots of treasure to squander, unlike the USA which has nothing.  Still, even allowing for technological acceleration and the empty gold vaults, it will take a long time.  I would presume an interest rate crisis and at least partial default during the Boomer retirement/entitlement crisis, say 2016-2020.  Marking about half a generation since we lost the last chance to stabilize government finance around 9/11.

The most important dynamic now is the remaining usefulness of the USA's prey class (AKA taxpayers) to the global elites. 

4shzl's picture

Great empires tend to teeter and totter for decades before true failure.

Make that centuries.

Still, even allowing for technological acceleration and the empty gold vaults, it will take a long time.

So true.  And in the meantime, the lethal carrying costs of leveraged short ETFs will eradicate all remaining financial terrorists (aka shortsellers).  VIX will be in single digits before the end of the year.  It's not about complacency -- it's about coercion.

Jim in MN's picture

What is the sound of one computer buying, buying, buying

cougar_w's picture

[the remaining usefulness of the USA's prey class]

This is not given nearly enough discussion. There is another thread here just today on the subject of what is happening "in the wild" but usually the discussions at ZH run around monetary policy and regulatory capture and GS machinations. But without taxable incomes or consumer activity the US and global economies are toast. And it won't matter who got a bailout then.

hedgeless_horseman's picture

Green shoots become green charts.  

“The fundamentals are in place for a return to sustained healthy growth,” said Alan GREENspan!

As Gordon said in the movie, "Green is good."

Kermit the Frog for President!

Have a dance with The Green Fairy (la fee verte):

Even Captain Kirk has gone green:

But my favorite Green will always be Eva Green:

Dehrow's picture

Word, Eva Green was like super hot in Casino Royale, even though she probably wouldn't fit the mold of a traditional "Bond" Vixen. Good movie though, good visuals, good story, good times.

Alexandra Hamilton's picture

Does that mean that the crash is imminent?

mr brincq's picture

it just means that the fun is better watched from the sideline....

Fish Gone Bad's picture

You ain't seen nothing yet.  Watch the $VIX go below $10.  There is some  reason for all this.

Assetman's picture

I agree... the VIX could get that low.

At the same time, if Bernanke is wrong in his assessments, the VIX could hit 100 on the other side.

What is the reason for the VIX to hit 10?

Cyan Lite's picture

Seriously, I should get a HELOC and then buy front-month SPY in-the-money calls.  Rinse, Repeat, Recycle.


My target last week was $120 on the SPY.  We got within 12 cents of there, so I'll still take credit for it.  This week, aim is $123 (SPX 1229'ish), which is the 61.8% retracement of the entire bear market.

williambanzai7's picture

Since we are headed to the biggest bubble explosion yet, perhaps all of these indicia also need to hit suitably insane levels before we move on to the main event.

Lord Peter Pipsqueak's picture

"And even as the Dow 36,000 is now guaranteed".......................

So how is it guaranteed Tyler?Or is it just a throw away comment to sum up the current irrational exuberance?

Ungaro's picture

Have you seen a downtick in recent memory?

wyosteven's picture

* Edited for Content *

economicmorphine's picture

I'm with those who say this show is better watched from the sidelines.  I have no desire to play this game any more, but it sure is fun to watch.





Joe-the-Farmer's picture

Aren't all assets highly correlated? Isn't that part of the lesson learned from 2007-2009? In theory, you could have one asset class that survives and thrives. An implosion in the bond market, a geopolitical event (Iran/Isreal), etc. would seem to favor commodities - not neccessarily on a fundamental basis but as a benificiary of nowhere-to-run-nowhere-to-hide investing. To me, the VIX at 16 is a sign that the the Equities horse is almost out of gas as the bizzaro world "pace setter."

Also, does anyone else buy the theory that the TPTB will have to implode equities to support Treasury market (flight to safety)?

Anecdotal Economist's picture

"There is nothing that can ever again default or lose money..."

Perhaps with the exception of us little guys. We're defaulting in pre-BAPCPA 2005 quantities, and about two-thirds of the $130 billion reduction in Revolving Consumer Credit since Dec. 2008 is from TBTF/TARP-Recipient write-offs of bad credit card debt.

The irony of the current levels of extended unemployment is far more people are qualifying for Chapter 7 debt discharge, instead of the Chapter 13 debt-slavery envisioned by BAPCPA.

Caviar Emptor's picture

Much of the rise in options spec is due to the nascent M&A frenzy. Takeovers are popping up like weeds but notice the financial press is keeping it nice and quiet. In normal times they'd use a bull horn to announce each deal.

This is an side-effect of what I've pointed out before: one key goal of Fed engineered stock market reflation was to permit huge secondary public issuance at a time when bond issuance was severely constrained. My guess is the initial hope was that this would allow many US corporates to stay afloat and avoid asking for bailouts while awaiting "the V-boom" in the ecnomy (still waitin on that one). Combine this with the enormous surge in junk bond issuance (another reflation sector)  and you've got a setup for an M&A Hootenany as all the "pile of cash on the balance sheets" are deployed that came from big secondaries and junk issuance. 

But here comes the law of unintended consequences. This is absolutely horrific for the economy (but great for Wall Street as they profit 3 ways from underwriting secondary offerings AND IBanking fees on the M&A side, plus all the insider info they can trade on). First of all the root of all this financing is zero-interest taxpayer money via the Fed through myriad programs. And this is all very inflationary by nature. But worst of all what we're witnessing is a huge surge in anti-competitive business practices in the US economy. Think about it. Startups and small nimble competitors? Dead in the water because they had no access to secondaries, junk bond offerings, TALF, emergency liquidity and other indirect bailouts. If you missed out on the $16 Trillion that was spent since 2008 you have almost no chance of succeeding in competition with those that fed at the trough. Big consolidations also spells higher job losses and less negotiating power for employees. We may end up right back in the Gilded Age with giant cartels doing price fixing and only doing business if they get rebates. I predict that this will occur particularly in view of a Congress, judiciary and Executive branch that are extremely permissive to business right now and have no stomach for any confrontation with the Fat Boyz.

cougar_w's picture

[We may end up right back in the Gilded Age]


Anyone who is serious about anticipating the future economy needs to take a long, sober look at the past. The middle- and merchant-classes are doomed outright, IMO. I don't see any safe haven in the face of this other than the fortress of massive personal wealth.

Headbanger's picture

I wonder what the trigger point is on the VIX to switch the HAL 9000 algos into reverse?

Caviar Emptor's picture

Gotta love the Alcoa earnings analysis: 

-They'll benefit from 8% increase in Aluminum prices this quarter (inflation)

-But they've announced new plant closings (deflation).

Translated: no organic growth, just inflation (thank you, Ben!)

trav7777's picture

Can't people see what is happening???

These are SCARCITY metrics.  They prove what I've been saying; we are entering an aggregate contractionary phase.  The Era of Growth is over.

This type of "mixed message" where people cannot figure out whether it's inflation or deflation *should* occur.  We are not in the Era of Growth anymore.

Prices go up to reflect the abundance of paper currency representing debts that the future cannot pay. 

This is what is happening:  all around us, despite the credit deflation of default, the value of the debts themselves continue to wane.  When default is rampant, who should expect other debts to become more worthful?

As our currency is itself a debt instrument, its value too is being discounted.  All while people get laid off and businesses close.  All these things do is prove the diminished worthfulness of our debt!

The deflationists had it contraction will not lead to lower aggregate prices because the prices are denominated in OTHER DEBT which ITSELF too, is being discounted!

The confusion comes from various people's inability to admit or recognize that we crossed a significant epoch at world C&C Peak in 2005 that mandates the reevaluation of every single piece of economic "theory" that only made sense during the Era of Growth.  The fundamental axioms of the system have changed; it is as if we are trying to navigate using a compass when the Poles have swapped.

Only a fool would assign the dollar more worthfulness in the face of what we're seeing.

cougar_w's picture

Deflation in all the things you don't need.

Inflation in all the things you do need.

Jobless "recovery" is the death of the middle- and merchant-classes.

If they don't turn this around and start supporting the Real Economy -- rather than this crap "crony capitalist" system -- this crisis will go from farcical to fatal. That said, I doubt anyone of means will either notice or care.


ExistentialSkeptic's picture

Okay, riddle me this:

Say I'm in my mid-forties, married, with 2 teenage kids.  I know nothing about finance and my husband knows even less.  We have spent our whole adult lives listening to the advice and opinions of people twenty-five to forty years older than ourselves, and on the whole haven't hit the wall although we've been directed to behave more or less like the middle of the herd as that's the advice we get.

And now all of a sudden I'm freaked out and I can't stand the thought of what's going to happen.  I start buying metals.  When we're 5% invested, it's okay because it's just the crazy wife doing her batsh*t thing.  When we're 10% in, that's okay because we can quote some money manager or other that recommends it as a "safety" play.  By the time we're 25% in, the people who make money telling us what to do start making a fuss, and try not to be available to answer the phone, afraid that we want them to sell something else.

So I ask.... now that every metric seems to be screaming "Sell!  Sell SELL!!!" -- how do I call up the guy that knows better than me and say I know better than he does, and I want out?

A Man without Qualities's picture

infinite fiat collides with the inescapable reality of finite resources...

Mercury's picture

I personally like to look at the VXO which is a much simpler calculation of the at-the-money puts and calls on the OEX (S&P 100).  Plus, it has more history.  A chart of the VXO 1987-today is worth looking at (I have one handy but I can't figure out how to paste it into the comment box or attach it).  It too is near historic lows and although it has been in this neighborhood before it tends not to stay there.  Since there is no good way to "buy" the VIX or VXO yet you can buy the underlying index options, it stands to reason that (especially put) protection is pretty cheap right now.