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Market Tranquility Is Sowing The Seeds Of Its Own Demise
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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anyone have the latest spread on CDS of american and jap bonds?
Investors? What are they?
I think the label is "front-runners."
I wonder if Mandy Xu is related to Kandy Goo ?
What ever happened to... "Debt Ceiling"? Why is this a non-issue now?
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.
Obama got the American Express Centurion (Black Card.. no that is really what it is called) ... no more pesky espending limits
Narrowing?
via bloomberg
he search for CGECC1U5:IND produced no matches Try the symbol search.
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i guess i need to get a terminal :(
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.
That would be a gal named Gillian, btw. As for your question, how else does one survive writing for the FT?
Yeah I saw that. In today's world it's hard to tell sometimes.
This is just the build up for "No one could have seen this coming, no one".
I looked at her purty picher.
she wrote an excellent book in 2009: Fool's Gold: How Unrestrained Greed Corrupted a Dream, Shattered Global Markets and Unleashed a Catastrophe
The only pertinent question... who's her villian?
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?
Last bullet point in an article on voltairenet.org was interesting considering the pipeline wars under way.
http://www.voltairenet.org/article184014.html
It's different this time.
That's what she said...
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.
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.
Implied Vol is not a predictor of future volatility contrary to the claims.
This is a game meant for whales. This minnow is staying out of it and watching from a distance.
Miffed;-)
Buy farmland and watch real things come out of the ground to be eaten.
Like zombies? Zombies climb out of the ground.
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.
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]
Tranquility about markets? Frankly it worries the shit out of me.
Just the 'eye' passing overhead.
The back side of the hurricane is usually much worse.
Where is this "market" you speak of?
"Full faith and credit" motherfuckers.
is everybody irratable today????
The gold people are.
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!
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.
The markets are more rigged and controlled by the government that ever in history.
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.
I think we're at the point that they can start playing the JAWS music.
Man these markets are crazy....I'd love to BTFD, but I need it to FD before I can B.
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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