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Volatility is all about Liquidity
The S&P 500 tried to pull back yesterday, but as usual the late day trading pushed the loss to just 65 bps. This has become the normal market. In 2012, volatility puttered at 12.77%. In 2013 it fizzled down to 11.07%. YTD we have crept up to 11.73%. These metrics tell you to expect daily gains and losses to be +/- .75%. Very Exciting.
What does this market remind me of? I would say the nearest example is 2004-2006 when volatility cycled between 10-11%. What do these two periods in time have in common? Extremely easy monetary policy provided by the Fed.
The most powerful chart to show you the impact of Fed provided liquidity plots realized volatility against the steepness of the yield curve as measured by the spread between the 10y and 2y treasury rates. As the fed keeps the front part of the curve low through the Fed Funds rate, the steepness is held high. A steep yield curve induces investors to borrow at cheap shorter rates and buy riskier assets to earn a spread. Party on while the Fed provides the punch bowl.
The red line above is the steepness inverted, so higher numbers represent the curve flattening or the Fed taking punch away from the party. Low numbers say party on. The blue is the trailing 90 day realized volatility of the S&P 500. When the Fed says to party, the volatility stays abnormally low.
Key point to make in this chart is that the red line is two years behind the blue line so the red line starts at 1/31/1977 while the blue line starts in '79. This implies that the tightening of monetary conditions or reduction in market liquidity takes about 2 years time in order for volatility to pick up. If the curve can remain steep for another two years, then how large will the volatility dislocation become when the Fed does ease off the gas pedal? Most punch bowls are provided for 2 years or less. Right now we are in the 6th year of zero interest rate policy with a strong indication that they will maintain it well into 2015. Maybe this time the volatility will come even before the Fed eases off the pedal?
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When most of the 401K's get EXTRACTED and the foam portfolios have been sucked dry, like a chewed rib bone at a prehistorical barbeque, the ersatz market will grind to a halt. Gulag america will open its labor camps and invite you in to die, especially you complainers.
Where is this "tightening" you speak of? The fed's balance sheet is still growing at 55 billion per month. In addition, Belgium has already shown that they will provide additional liquidity...
LMFAO!
Yeah LoP - somebody needs to give them a lesson in the Laws of Physic...by gosh. And use the same instrument to do their upper GI with, too.
Lets ignore the fact "the market" is now the Fed's Tool... and pretend it still works like a Market, you know, with price discovery and all.
for every cockroach gets caught with his pants down, there are ten thousand more unseen doing god's work
smiles like sunshine to me!
This 'market' -----let's dispense with the word 'market' since what this really is is a highly ordered liquidation by one entity to get cash to pay off the 133,000,000 people in this country who either can't, won't, don't have to work, and the various promises made to pensioners, and other fixed income human beans, as well as the obligations the FEDERALes took on and are taking on.
When an insurance company like, say, John Hancock contracted with a customer, institutional or retail, to pay out a sum of money 30 yrs hence, they buy a buncha other paper assets like stocks, bonds and who knows what all.
When that sum of money becomes due in the form of a monthly annuity payout to a retiree, JH must liquidate some of its holdings to pay the cash each month. When the quadrillions of those FRNs begin to become excessive over new premiums, they, JH, have to sell some of their IBM stock ( and so do a lot of others who own IBM to pay off their obligations).
Now imagine for a moment what happens when there is no bid.
Armageddon.
So, the 'secret' arrangement with these TBTFFuckers who need to liquidate, there has to be a bid of last resort and it cannot be too much lower than the current stock price otherwise the shares go into freefall, thus depriving next reitirees of the cash they need each month.
The FED is the steel beams under this flurry of activity either directly or----here is where the secret really pays off----by tacit agreement with the entities that must make payments, like John Hancock, to assure an orderly liquidation by not allowing any major decline in the IBM shares.
e.g. Comte d'Herblay needs his monthy pension check along with a million others that have reached mandatory retirement age. His John Hancock annuity must needs to liquidate some IBM shares to pay him. Either the FED or Lord Blankfein, doing god's work, buys those IBM shares at mere pennies or a few bucks lower than the highest open market bid. Viola! John gets the money he needs to pay off Comte and no panic to sell IBM shares ensues. If Lord Blankfein is the seller, and none of the other primary banks or insurance companies (you didn't think the lastest Bailout of Insurance companies in the ObamsterCare program was a capricious insertion in the bill by those lawyers, did you) will bid (highly unlikely since they have already agreed with the FED to do so to avoid any prosecutions for the shit they pulled in the Mortgage fraud, CDO, CDS and other derivatives markets in the last 20 years) the FED does so directly.
I fully expect that one could sell long calls on IBM out into the next 100 years if there were such LEAPS (as well as shorting the shares but don't expect to see a 10% drop, bon ami) and come out very fine indeed. Nor should you expect make double sixes on your IBM shares in the same time frame.
BOT (bit off topic) That picture of Ken Fisher is about 40 yrs old. He's now grey haired, has many more wrinkles and puffs, and thinner lips.
As good an explanation as any. Explains why there has been no correction of any import since this destruction of the US Stock Market began.
...and 'splains why TZA and other triple derivatives are down 95% from their highs in 2008. Losing the bears a whole ton of FRNs. I'd bet that the banks didn't buy TZA but TNA, instead. gaining 95% of their free money from the FED with no risk.
Given the options, wouldn't you or I do the same? Probly. Not defending or agreeing to it, but damn, that sure would take the pressure off, especially since the very bozo's that are floating those vehicles are the ones bailing you out. Perfect.
"Tightness" can no longer be presented by only yield curve analysis. Traditional monetary policy is related to "steepness". Now we have thieving through QE, typically reserved for wartime periods.
In addition, USD liquidity is now a world reserve currency with liquidity impacted through monetary operations in Japan, Europe, BRICs and even China.
You almost said it.
Modern economics does not have a monetary policy.
Modern economics has a counterfeiting policy.
Counterfeit enables thieves to not have to produce anything because they steal from those who do.
Counterfeiting is the lifeblood of the world's tyranny and the primary cause of all of the economic "problems."
Stopping the counterfeiting, stops the thieves; stopping the thieves, enables economic solutions.
Oh, don't you see that may sound silly but it would fix it for sure.
I wish I would have written that. It verifies that the market is Counterfeit. Just like Zimbabwe Dollars, it too will colapse.
Thanks, rocker.
I have defined the difference between Money and Counterfeit here:
http://ocsure.blogspot.com/
I hope you find it of interest. It is a view that you won't hear discussed but i think it is irrefutable.
Interesting. But I think we've seen fairly convincing evidence that the FED is actually smacking the shit out of vol in order to drive the stock market higher. So that may indicate a different chain of cause and effect here.
This is reasonable analysis if one assumes there is some semblance of a market.
But it is of no import anymore.
Any person with a thinking brain will get out of the Ponzi with all due dispatch.
A thinking moderate risk taker might also 'play her as she lays".
The problem with playing her lies in the FED, and who controls the free money. I don't have access to the 40 Dark Pools of which Goldman and JPMorgan are included.
All of this against 13 exchanges. With their Bloomberg terminals and some of their own mixtures from HFTs they know every dollar applied that is not their own.
Top it off with Goldman's special software, (as they themselves said), in the wrong hands one can manipulate stocks or markets.
Yes, Goldman is the right hands. LOL on that. I would rather wait with lots of Cash until somebody screws something up, and they will.
They daily melt up and frantic pull down is timed to their gain, not yours or mine. One can NO Longer invest in America until.