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Market Tranquility Is Sowing The Seeds Of Its Own Demise

Tyler Durden's picture




 

The mainstream media is latching on to the idea that all is not well in the world of 'markets'. The FT's Gillian Tett notes that, as we have vociferously explained, almost every measure of volatility has tumbled to unusual low levels, "this is bizarre," she notes, "financial history suggests that at this point in an economic cycle, volatility normally jumps." But investors are acting as if they were living in a calm and predictable universe, "[Investors in] the options markets are not pricing in any big macro risks. This is very unusual." In reality, as Hyman Minsky notes, market tranquility tends to sow the seeds of its own demise and the longer the period of calm, the worse the eventual whiplash. Tett concludes, that pattern played out back in 2007... and there are good reasons to suspect it will recur.

 

No matter what asset clas you espy, volatility levels are at or near record low levels (record high levels of complacency)...

 

In case you needed one more warning - the period from initial crash in vol to melt-up in vol was around 15 months in 2007, the current period since April 2013's crash in vol and the sustained low vol period is 13 months...

 

But as The FT's Gillian Tett notes,

This is bizarre. Financial history suggests that at this point in an economic cycle, volatility normally jumps; when interest rate and growth expectations rise, asset prices typically swing (not least because traders start betting on the next cyclical downturn). And aside from economics, there are plenty of geopolitical issues right now that should make investors jumpy.

But investors are acting as if they were living in a calm and predictable universe...

“There is no demand for protection [against turbulence],” observes Mandy Xu, an equity derivatives strategist at Credit Suisse. "[Investors in] the options markets are not pricing in any big macro risks. This is very unusual.”

Why?

If you want to be optimistic, one possible explanation is that the economic outlook has turned benign.

 

But there is a second, less benign possible reason for low volatility: markets have been so distorted by heavy government interference since 2008 that investors are frozen. One issue that may account for the pattern, for example, is that tougher regulations have prompted banks to stop trading some assets. Another is that ultra-low interest rates have made investors reluctant to deploy their cash in public, liquid markets.

 

And there could be a more subtle issue at work too: investors are so unsure what to make of this level of government interference that they are unwilling to take any big bets. Far from being a sign of sunny confidence in the future, ultra-low volatility may show that investors have lost faith that markets work.

 

In reality, nobody knows which of these explanations holds true; I suspect that government meddling and low interest rates are the key factors here...

And that is a problem... as Tett concludes...

while ultra-low volatility might sound like good news in some respects (say, if you are a company trying to plan for the future), there is a stumbling block: as the economist Hyman Minksy observed, when conditions are calm, investors become complacent, assume too much leverage and create asset-price bubbles that eventually burst. Market tranquility tends to sow the seeds of its own demise and the longer the period of calm, the worse the eventual whiplash.

 

That pattern played out back in 2007. There are good reasons to suspect it will recur, if this pattern continues, particularly given the scale of bubbles now emerging in some asset classes. Unless you believe that western central banks will be able to bend the markets to their will indefinitely. And that would be a dangerous bet indeed.

In the meantime, BTFWTF!!

 

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Fri, 05/30/2014 - 12:03 | 4809718 maskone909
maskone909's picture

anyone have the latest spread on CDS of american and jap bonds?

Fri, 05/30/2014 - 12:09 | 4809741 NotApplicable
NotApplicable's picture

Investors? What are they?

I think the label is "front-runners."

Fri, 05/30/2014 - 12:15 | 4809774 WhyDoesItHurtWh...
WhyDoesItHurtWhen iPee's picture

I wonder if Mandy Xu is related to Kandy Goo ?

Fri, 05/30/2014 - 12:15 | 4809780 flacon
flacon's picture

What ever happened to... "Debt Ceiling"? Why is this a non-issue now?

Fri, 05/30/2014 - 12:21 | 4809802 CrashisOptimistic
CrashisOptimistic's picture

There is a Sequester budget and ceiling in place that extends past the election . . . til March. 

There will be no new fiscal stimulus this year.

Sat, 05/31/2014 - 00:51 | 4812010 Whootie_who
Whootie_who's picture

Obama got the American Express Centurion (Black Card.. no that is really what it is called) ... no more pesky espending limits

Fri, 05/30/2014 - 12:10 | 4809747 disabledvet
disabledvet's picture

Narrowing?

Fri, 05/30/2014 - 12:16 | 4809786 maskone909
maskone909's picture

via bloomberg

 

he search for CGECC1U5:IND produced no matches Try the symbol search.

Many symbols available on the Bloomberg Professional Service are not available on Bloomberg.com. To learn more about the Bloomberg Professional Service, contact us

 

i guess i need to get a terminal :(

Fri, 05/30/2014 - 12:09 | 4809735 Dr. Engali
Dr. Engali's picture

Is this guy fucking retarded? Helllooooo McFly...... It's the fed. If the market is a policy tool and the money printer of the world says buy stawks...you buy fucking stawks. If they say.... "hmmm there may be a bubble in small caps"  then you roll out of fucking small caps before you get crushed. It's that fucking simple. 

Fri, 05/30/2014 - 12:11 | 4809748 NotApplicable
NotApplicable's picture

That would be a gal named Gillian, btw. As for your question, how else does one survive writing for the FT?

Fri, 05/30/2014 - 12:20 | 4809758 Dr. Engali
Dr. Engali's picture

Yeah I saw that. In today's world it's hard to tell sometimes.

Fri, 05/30/2014 - 12:23 | 4809816 WhyDoesItHurtWh...
WhyDoesItHurtWhen iPee's picture

This is just the build up for "No one could have seen this coming, no one".

Fri, 05/30/2014 - 12:34 | 4809862 NotApplicable
NotApplicable's picture

I looked at her purty picher.

Fri, 05/30/2014 - 12:22 | 4809810 Ghordius
Ghordius's picture

she wrote an excellent book in 2009: Fool's Gold: How Unrestrained Greed Corrupted a Dream, Shattered Global Markets and Unleashed a Catastrophe

Fri, 05/30/2014 - 12:37 | 4809872 NotApplicable
NotApplicable's picture

The only pertinent question... who's her villian?

Fri, 05/30/2014 - 12:21 | 4809803 disabledvet
disabledvet's picture

It's the Government not the Fed in my view.

What the Fed did they did of necessity...with some experimentation granted.

But the Federal Government "took it the wrong way" (spending spree of truly epic proportions) and have simply crushed any hope for recovery before we even had a chance to say "thanks destroying us!"

Believe it or not there is a way out...but it might be VERY bloody.

Interestingly the Administration has initiated said "solution." (Ukraine.) To make it work they'll have to go after Putin personally and see themselves as Russia's new rulers (on an interim basis of course.)

Hmmmm. That ought to be interesting. "You'll need to secure the borders first." That would be of BOTH Ukraine and Russia.

Hmmm. Thoughts? Questions? Comments?

Fri, 05/30/2014 - 12:40 | 4809883 earnyermoney
earnyermoney's picture

Last bullet point in an article on voltairenet.org was interesting considering the pipeline wars under way.

http://www.voltairenet.org/article184014.html

Fri, 05/30/2014 - 12:09 | 4809738 firstdivision
firstdivision's picture

It's different this time.

Fri, 05/30/2014 - 12:13 | 4809765 Headbanger
Headbanger's picture

That's what she said...

Fri, 05/30/2014 - 12:26 | 4809828 CrashisOptimistic
CrashisOptimistic's picture

Here's something different this time:

http://headlines.ransquawk.com/headlines/imf-s-board-signs-off-on-fifth-...

imf-s-board-signs-off-on-fifth-review-of-greece-bailout-and-allows-disbursement-of-usd-4-64bln-30-05-2014

Or not.

Fri, 05/30/2014 - 12:11 | 4809749 JJdog
JJdog's picture

The Vix is rigged, so why are everyoe looking at the vix to determine the market future? Real traders no longer use protections, options relating to the Vix index anymore. 

 

Fri, 05/30/2014 - 12:22 | 4809805 NoPantsSpongeBob
NoPantsSpongeBob's picture

Implied Vol is not a predictor of future volatility contrary to the claims.

Fri, 05/30/2014 - 12:11 | 4809752 Miffed Microbio...
Miffed Microbiologist's picture

This is a game meant for whales. This minnow is staying out of it and watching from a distance.

Miffed;-)

Fri, 05/30/2014 - 12:23 | 4809812 CrashisOptimistic
CrashisOptimistic's picture

Buy farmland and watch real things come out of the ground to be eaten.

Fri, 05/30/2014 - 12:57 | 4809944 Dr. Engali
Dr. Engali's picture

Like zombies? Zombies climb out of the ground.

Fri, 05/30/2014 - 12:14 | 4809768 q99x2
q99x2's picture

Well ya dumb shits, Q99x2 has been telling since 2011 that at the end of 2011 the FED connected their computer system directly to the stock exchange system. IT IS THEIR SOFTWARE SYSTEM THAT MAKES THE INDEXES.

Fri, 05/30/2014 - 12:18 | 4809771 buzzsaw99
buzzsaw99's picture

what, the author thinks volatility just organically appears one day out of the blue? take a look at the fed funds rate bozo.

what i didn't know until this day is that it was barzini all along. [/don corleone]

Fri, 05/30/2014 - 12:16 | 4809785 SheepDog-One
SheepDog-One's picture

Tranquility about markets? Frankly it worries the shit out of me.

Fri, 05/30/2014 - 12:22 | 4809804 Winston Churchill
Winston Churchill's picture

Just the 'eye' passing overhead.

The back side of the hurricane is usually much worse.

Fri, 05/30/2014 - 12:20 | 4809795 LawsofPhysics
LawsofPhysics's picture

Where is this "market" you speak of?

 

"Full faith and credit" motherfuckers.

Fri, 05/30/2014 - 12:22 | 4809808 oklaboy
oklaboy's picture

is everybody irratable today????

Fri, 05/30/2014 - 12:23 | 4809817 CrashisOptimistic
CrashisOptimistic's picture

The gold people are.

Fri, 05/30/2014 - 12:27 | 4809830 Two Theives and...
Two Theives and a Liar's picture

Physics has it right +1. Who needs an "eCONomy" anymore? We have the FED and the "P" button. I never get mad when they smash PM prices...I get happyyyyyyy and stack up more!

Fri, 05/30/2014 - 12:45 | 4809897 HamRove
HamRove's picture

What demise?

CNBC said everything is fine.... http://www.cnbc.com/id/101718253

Bond bounces....eeeryting is gonna alright.

Your government loves you
Your Corporations care for you
Your Repubs and Dems are looking out for your best insterest.

.......downvote this before I buy a noose to hang myself with. 

naw....that's just what "THEY" want. 

Fri, 05/30/2014 - 12:54 | 4809934 DannyTX
DannyTX's picture

The markets are more rigged and controlled by the government that ever in history. 

Fri, 05/30/2014 - 13:07 | 4809943 Quinvarius
Quinvarius's picture

I don't think they give that much of a shit about the stock market now that the banks have been stuffed with cash.  They wanted lift off in the economy as plan A.  Meh.  They didn't get it.  But they still have all money and really don't even need the stock market or the economy to get more of it.  Historically, these dicks go out of their way to crash the markets when they are ready.  The fact that it always ends up way worse than they had planned has never stopped them from repeating the cycle.  Plan B is "suck it, America".  Down is faster and easier than up.  These guys have no loyalty to any country.  It is all about the next big plan.  The US stock markets are like a ripe piece of fruit waiting to be picked. 

Fri, 05/30/2014 - 14:52 | 4810438 matrixman68
matrixman68's picture

I think we're at the point that they can start playing the JAWS music.

Fri, 05/30/2014 - 15:02 | 4810464 MuleRider
MuleRider's picture

Man these markets are crazy....I'd love to BTFD, but I need it to FD before I can B. 

Fri, 05/30/2014 - 15:21 | 4810535 w1LE.e
w1LE.e's picture

We are now accepting callers for these beautiful, beautiful pendant keychains

Sat, 05/31/2014 - 09:35 | 4812364 AdvancingTime
AdvancingTime's picture

I think ugliness lies ahead. I love the way problems are always being kicked out a year or two and never going to happen tomorrow. It is as if we can't handle what is coming at us and need more time.

For a long time I have been trying to develop a scenario for a market "super crash" and a reasonable map that would arrive at such a situation. People tend to figure they will make the right moves before it is to late, but what if it hits like the flash crash on steroids? We know that can't happen because circuit breakers have been put in place to arrest panic style moves, but imagine a market that falls, trade is halted, and the market simply does not reopen for days, or even weeks. Below is an article looking at how it could happen sooner rather than later.

http://brucewilds.blogspot.com/2013/01/flash-crash-on-steroids.html

 

Do NOT follow this link or you will be banned from the site!