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Thoughts on the Mysterious Low Volatility of the Capital Markets
One of the most stunning facts about the investment climate is the unusually low volatility throughout the capital markets. The reason that is increasingly worrisome, not just because trading profits of the major banks suffer or that hedge funds find it difficult to make money.
The reason is that low volatility is seen as a harbinger of doom. As the NY Fed's Dudley put it recently, "Volatility is markets right now is very low. I am nervous that people are taking too much comfort in this low volatility period, and a consequence of that, taking bigger risks."
It may seem ironic that Dudley expressed concern about volatility as according to some, the Federal Reserve (and other parts of the government) are responsible for it. Gillian Tett of the Financial Times expressed the views of many when she wrote that "markets have been so distorted by heavy government interference since 2008 that investors are frozen."
Dudley is worried investors taking too big of risks and Tett is worried that investors are not fully participating. It is not clear how the lack of desire to invest leads to record high stock prices. Alternatively, if the Fed is interfering too much, why would the US bond market rally as it reduced its interference through tapering its purchases. Moreover, the policies (interference) have been in place for some time and volatility only recently has fallen.
Nevertheless, the low volatility is cited as evidence that the capital markets are not pricing in macro-risk. Investors, so goes the argument, have become complacent. This conclusion may be a function of confusing net positions with gross positions. Consider that in late May, the gross short speculative position in US Treasuries was 529k contracts, the highest since 2007. At the same time, the gross long speculative position rose to 432k contracts, which is the highest in over a year and only surpassed a handful of times since 2008.
The euro, whose resilience in the face of Fed tapering has been unexpected, saw relatively large gross positions. In the middle of May, for example, both the gross long and gross short positions were above 52-week moving averages though the net position was relatively small. Large gross long and short positions, as in the Treasuries and euro do not speak to the traders being "frozen" as Tett suggest or taking bigger risks as a whole as Dudley fears.
Much of the discussions about volatility seem to pretend it is neutral to market direction. It is not. Volatility has fallen as stocks have risen. Volatility has fallen in the bond market as bonds have rallied. Euro-dollar volatility has fallen as the euro has risen. In fact, over the past month as the euro has been pushed down, away from the $1.40 level, volatility has risen. A call for higher volatility is a call for a stocks and bonds to sell off and for the dollar to appreciate.
This line of reasoning brings us to what seems to the crux of the matter. What is driving the markets? One line of reasoning that strikes a responsive chord for many, which Tett articulated, is that the government policies are the main culprit. In some ways, this is a resurrection of the old argument since the early days of the policy response to the crisis. There have been countless doomsday scenarios proposed by those who of opposed a strong government, including central bank, response. It would lead to hyper-inflation; they cried. It did not. It would lead to the US defaulting on its debt. It did not. No one would buy US Treasuries if not for the Fed and yet the private sector has shown a large appetite, with US bank holdings increasing by a dramatic 25% in the January-March period.
There is a reductionistic argument here. Low volatility proceeded the global financial crisis. There is low volatility now. Therefore, another crisis is lurking around the corner. Q.E.D. Yet, low volatility did not cause the global financial crisis. The lax regulatory framework and enforcement, excessive leverage and what was traditionally understood as off-balance sheet exposure, now called "shadow banking" played in important role in more narratives of the crisis. To varying extents, policy makers have tried to address some of these issues through boosting capital requirements and other regulatory issues. Some who do not like these measures call it "financial repression", but it is really meant to address the excess laxity of the previous period.
In conclusion, we see the recent discussions of the low volatility of the capital markets as confusing several issues. First, the complaints seem to be contradictory. Is it leading to greater risk taking or is it freezing investors? Second, the focus tends to be on net positions, which conceals the insight offered by examining gross positions. Third, the decline in volatility does not line up well with the government interference arguments. Fourth, volatility is not neutral relative to market direction. Fifth, the doomsayers may be crying wolf yet again. Low volatility did not cause the global financial crisis, and while efforts to deter another one may contribute to a decline in volatility, the excesses that are associated with the financial crisis, such as extreme leveraging and opaque off-balance sheet exposures do not appear present now.
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Digital Fascism.
National socialism.
Totalitarian executive.
Uneducated and fearful armed masses.
No constitution.
The USA.
Bill Shockley
No one wants tp play with us.
The answer to the questiom posed in this article is found in a recognition of the current system and it's mechanics.
Econmically we have digital fascism where fascism is defined as an alliance between the military, the government and the corporations including the banks.
Politically we have an increasingly totalitarian goernment, that is to say anti-democratic.
The historical enevitability is failure as both wealth and power concentrates in fewer and fewer hands until the system topples under its own weight.
Lenin and Mao said give it a push, trotsky said let it be, it will happen on its own.
the chinese and the Indians are socialists and their intellectuals well understand the current situation, many of the intellectuals are youg and well educated.
In the end the world will abandon the USA and in fact is so doing this now.
Given our apparent inability to change we are fucked and low volitility could be because increasingly no one wants t play with us because if the Fed quits digitalizing money the system will colapse.
The end will come either through currency colapse or through war as in someone pops a cap in Washington's ass.
Same as it ever was. The market means nothng compared to a currency colapse.
Sorry I can't spell.
Bill
"It would lead to hyper-inflation; they cried. It did not. It would lead to the US defaulting on its debt. It did not." YET!
And you say that as if there are no consequences to be had for bailing out malfeasant banks and corrupt failed corporations and insurers - while rescinding bondholder/homeowner/taxpayer rights.
How horribly wrong you are.
He makes a ridiculous argument. The low volatility (and volume) is caused by direct criminiogenic intervention by the Fed's own trading desk, the infamous 6J. The deep state has also captured and controls the money manager business in much the same manner they have captured the mainstream dinosaur media (Operation Mockingbird). See "There is More to the Story of Ultra Junk Finance. http://winteractionables.com/?p=11085
Mystery? No one is involved! The markets are baked! Fuck'n 'A!
There is no risk. That's why there is no volatility in the "fear gauge". That's why there is no market. By now all believe that the Fed will back it all.
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How about that 60 million volume on the DOW?!
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V-V
Yes wow.
What has typically happened after the stock market performs well in May?
History says stocks could rally 4% this summer
Analysts at Ned Davis Research tackled this question in a note out Monday. Their findings might encourage stock bulls, who already should be feeling pretty good after the S&P 500 SPX -0.04% gained 2.1% last month.
Check our this link => bit.ly/1fMcakJ
The market isn't pricing in any risk actually.
"Priced to perfection." Having said that following the hyperinflation with "Barbarossa" is far from an original idea.
He said:
Well, the *reason* for the low volatility is Because The Fed Said So, but he never really even discussed that! But I was wondering *why* they were doing so and I guess this is the answer: even the Fed has noticed that ALL THEIR QE was going into tbonds and major dividend-paying equities. This has been their lame-o attempt to push it into other categories, it's on the order of sticking stacks of hundred dollar bills up your ass and lighting them on fire. Oops I just gave away their plans for keeping people warm this winter.
I'm not sure why this guy is so committed to constructing "doomsdayer" strawmen. "There have been countless doomsday scenarios." True, but most argue not that the world will end but that such intervention leads to market distortions. I think we've seen a few. "It would lead to hyperinflation they cried; it did not." Ever heard of asset price inflation? How are asset prices immune from anyone's definition of inflation? Distinguish between historical and implied vols. Come on man.
dude ignores a lot of data...but he does examine gross holdings...
How can he ignore the effect of buy-backs, zero interest, Belgium and China/Russia?
A lot going on speaks for a rigged market. More than would seem to suggest volatility is low due to some kind of stability.
Just because we have not yet had hyperinflation does not mean the US won't. Weimar Germany was buying forign currency by printing marks years before the hyper hit.
Get with it. Use your head. We are heading dead on into hyperinflation. Nobody said anything about timing. I'm not now.
The Weimar printed on a gold standard after depleting their gold reserves during WW1 to pay foreign post war debt when they should have renegotiated the terms of the debt instead.
It's one thing to print on a fiat system, another altogether to print on a fixed gold system when you don't have the gold to back it.
This is partly why Friedman switched to a fiat from gold standard in the early 60's, after researching 100 years of recessions and debt crises.
I'm not arguing for or against the notion of future (hyper)inflation, but saying I won't bet the farm on it if Weimar is the bellwhether.
There's also the Fed rule change in 2008, allowing interest on excess reserves, that gives the Fed the ability to stem excess flow of reserves ...so far, it seems to be working, so far.
Exactly.
I did study the Weimar print-a-thon....alllllll the way back in H.S. Economics <tip of the hat to you, Mr. Osborne>. Of course, that's when Economics was taught correctly. Today, not so much....at fucking all.
Indeed, the German's printed for nearly 5 years before hyper kicked in, and when it did, the Germans went off the Hitler rails....
And they were not the reserve currency of the world. That should give us about 3-4 more years than the Germans got milking that cow, unless something ENTIRELY unforeseen pops up on the radar. And more likely than not, it will. As the Captain, I am usually pretty comfortable going where no man has gone before, but THIS situation with the Fed gives new meaning to "uncharted territory."
Speaking of volatility, what happened here?
http://finance.yahoo.com/echarts?s=IAG+Interactive#symbol=IAG;range=1d
Somebody either found a really big vein or they made a really good deal with the Chinese.
So it's confusing, contradictory and my be causing over or under investment but it is somewhat, not fully neutral.
I'm not fully neutral on this article I may be somewhat but not overly either positive or negative buy kinda middle-ish but with muted somewhat concerned cautious fearishness tempered by malaise.
Why don't we have a "middle" arrow? I'm not complaining, but maybe I would be while praising the better parts but not so much.
Ennui, anhedonia, and yeah, malaise.
It's kind of like mayonnaise but not good on a sandwich at all.
Then be aggressively neutral.
But not passively agressive.
or, overtly passive....