In the midst of turmoil among asset classes, investors tend to make irrational decisions, such as panicking and liquidating at inopportune times. Nobel Prize-winning Psychologist Daniel Kahneman helps explain ill-conceived reactions to the market with his concept of loss aversion. That’s the fear and feelings of loss surpass the joy one may receive from a similarly sized potential gain. In order to frame this discussion of volatility, we dug up old surveys of institutional and individual investors that recorded their responses to the 1987 market crash
According to the latest, just released survey concerns about both geopolitics and Greece have been largely forgotten, as have Chinese debt defaults, and instead these have been replaced with far more overarching fears about a China recession (made all the more acute after China's devaluation) and an Emerging Market debt crisis. In fact, according to BofA, "2 out of 3 investors think either China recession or EM debt crisis = biggest "tail risks."
"...rising asset prices provide investors confirming evidence that their strategy is good and everything is fine. This induction problem lulls investors into a sense of confidence, and sets the stage for the shock when events turn down. That nonlinearity causes sudden change only adds to the confusion."
The ongoing decline in the VIX starting last week (and still going) is the largest supernormal volatility collapse in VIX history. Over the past 2 years, we have been experiencing a quantifiable ‘outlier’ or ‘black swan’ decline in the VIX every 6 months as evaluated against history. We can only point to government intervention as the core reason. We firmly believe that this moral hazard produces a hidden leverage and “shadow market gamma” that at some point will result in a sustained volatility outlier event in the opposite direction.
Hyperinflation in the U.S. is coming sometime in the next 20 years or so, and this isn't a cry from a Chicken Little, but a conclusion that the analysis strongly suggests. It is possible hyperinflation could happen during the next few years, but that seems unlikely since it would require a series of major crises and political blunders – events unprecedented in the history of the United States. If this led to a corruption of Constitutional rights in the midst of an exaltation of the Executive Branch that resulted in loss of the rule of law, hyperinflation might result. It is much more probable that hyperinflation will be preceded by a long slow decline that will include a protracted period of high inflation, and that the crash of the dollar and hyperinflation will be the final tumble off a looming, steep cliff.
"...the 'Ice Age' of low rates and low growth for a long time – as predicted by many analysts and economists – won’t happen. Instead, a crisis will cause a crash on Wall Street. The banks will go broke. The credit system will seize up. People will line up at ATMs to get cash and the cash will quickly run out. This will provoke the authorities to go full central bank retard. They will flood the system with “money” of all sorts. The ice will melt into a tidal wave of hyperinflation."
The airline has been working with its banks and the relevant authorities and understands that the funds – less than $5 million – have now been frozen. Although the sum stolen was relatively small in corporate terms and appears to have been tracked and frozen quite quickly, the incident - yet again - highlights the threat posed by cybercrime to today’s banking and financial systems.
The trio of macro-prudential policy, the onset and evolution of shadow banking, and the nebulous concept of financial stability may have become a toxic cocktail which can be instrumental in moving forward the Federal Reserve’s timeline for lift-off zero bound rates. The intuition here is stooped in concepts of volatility and how market structure evolution may contribute or detract from asset volatility. Volatility is the square root of time. Financial repression times time equals volatility. Financial repression and/or macro-prudential policy times time equals the inverse of financial stability. Financial stability inverted equals volatility squared.
The reality is, like dominoes, that once one of these issues becomes a problem, the rest become a problem as well. Central Banks have had the ability to deal with one-off events up to this point by directing monetary policy tools to bail out Greece, boost stock prices to boost confidence or suppress interest rates to support growth. However, it is the contagion of issues that renders such tools ineffective in staving off the tide of the next financial crisis. One thing is for sure, this time is "different than the last" in terms of the catalyst that sparks the next great mean reverting event, but the outcome will be the same as it always has been.
Doing what it does best, a month after the fact and long after the black swans have left the stable so to say, Mario Draghi's ECB has finally asked Eurozone banks "to detail their exposure to Austria and provisions they plan to make after the country halted debt repayments by a "bad bank" winding down defunct lender Hypo Alpe Adria," financial sources told Reuters.
In light of the social and economic devolution of the world, it should hardly come as a surprise that as SocGen attempts to quantify the biggest Black Swans risks (and hopes) of 2015 (yes, a foolish endeavor since nobody can actually envision what a black swan may be, by its very definition an event that was predicted by no one), it notes that "political and financial risks now outnumber real economy risks."
With historically low long-term interest rates, the opportunity cost of holding gold and silver are close to zero or even negative, in other words you would “lose” money if you buy bonds (the benchmark) instead of gold and silver. When people realize that their money is not “safe” with the banks they will start withdrawing cash from their accounts and buy physical gold and silver instead. Depending on circumstances this could possibly bring down the (fractional) banking system. Why keep money in an account that gives you a negative return? Swiss banks are already witnessing stronger than normal interest for physical gold.
Like spirits, debt and risk make for a great party but a terrible hangover...
This country has gone from being one of the most regulated countries in the OECD to one of the least regulated and as a result the economy has boomed. Many of the wealthiest people in the world have been quietly establishing escape hatches here.
“In effect, there is nothing inherently wrong with fiat money, provided we get perfect authority and god-like intelligence for kings.” Aristotle (?2,400 years ago)
“Remember what we’re looking at. Gold is a currency. It is still, by all evidence, a premier currency. No fiat currency, including the dollar, can match it.” Alan Greenspan (2014)