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NY Fed Admits Higher Rates Mean Higher Volatility
In another well-funded research study, the New York Fed has, via its Liberty Street Economics blog, unveiled its explanation for why volatility is low (obviously missing the Kevin Henry-Citadel dark-pool VIX-slamming machinations that are so evident on an almost daily basis). Their findings are a little awkward for The Fed... the current volatility environment appears substantially different from what happened prior to the financial crisis. However, the Fed's conclusion, as Helen Thomas notes, is worrisome - low interest rates tend to mute volatility (something we already knew) - but if that is the case (from their findings) then implicitly: If low volatility is caused by low rates which in turn cause low volatility, what happens when rates go up?
As Liberty Street Economics blog notes,
Volatility, a measure of how much financial markets are fluctuating, has been near its record low in many asset classes. Over the last few decades, there have been only two other periods of similarly low volatility: in May 2013, and prior to the financial crisis in 2007. Is there anything we can learn from the recent period of low volatility versus what occurred slightly more than one year ago and seven years ago? Probably; the current volatility environment appears quite similar to the one in May 2013, but it’s substantially different from what happened prior to the financial crisis.
Broadly, our results confirm what has been reported in the press—namely that reduced uncertainty regarding the policy outlook, proxied by the dispersion of the three-month Treasury-bill forecast, as well as low levels of financial stress, are contributing to the recent low levels of volatility. Also, low interest rates tend to mute volatility, with the ten-year Treasury yield low by historical standards. These three variables were similarly low last May, contributing to the interpretation that current underlying fundamentals resemble those from a year ago. When thinking about what was happening back in 2007, there are some substantial differences. Uncertainty regarding short-term policy was higher, with survey forecast dispersion for the three-month Treasury bill being substantially greater than it was today or last year. Financial stress, as represented by the TED spread (the difference between the interest rates on interbank loans and Treasury bills), and the ten-year Treasury note yield were also higher. In contrast, households seemed much more certain in their outlook, based on the dispersion of forecasts from household surveys. This measure was substantially lower prior to the financial crisis, but is currently near average, as it was last May.
During times of relative market calm, like today, it could be that low financial market volatility is pushing these fundamental drivers lower, rather than the other way around. This note does not specifically address whether volatility is affecting or is being affected by these drivers.
* * *
So, as Blonde Money blog adds,
Since the financial crisis, there has been a heightened awareness of how markets interact, and how a signal from one market can suggest that positions in another should be covered.
hen markets watch one another, this can cause volatility to propagate.
...
[The research above] says: Volatility is low because Treasury yields are low and not moving around very much. It’s very different to Lehman, when household confidence was in disarray, credit spreads were high and random news was flying around.
You may discount this as telling you what you already know. The authors themselves conclude:
"During times of relative market calm, like today, it could be that low financial market volatility is pushing these fundamental drivers lower, rather than the other way around."
But the ongoing conclusion from that is dynamite. If low volatility is caused by low rates which in turn cause low volatility, what happens when rates go up? Even worse, what are these alleged indicators of volatility telling us? Precisely nothing.
You can no longer place your portfolio in risky assets, sit back, and wait for an exogenous factor to tell you when to hedge. There are no exogenous factors. Volatility is eating itself, and when the market realises, we will be in for one hell of a panic.
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But then the Fed probably knows that...
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Higher Rates Mean Higher Volatility
aka....utter doom!
EVEN CNBS SAYING GTFO NOW!
http://www.cnbc.com/id/102077422?trknav=homestack:topnews:1
No shit Sherlock. The real question is how low will the markets go, and how high will volatility spike, before the Fed unleashes QE 5?
<You live by the CONfidence sword, you die by the CONfidence sword.>
Has the FEMA Attitude Adjuster been found on Mars? And we are worried about volatility on this rock.
http://www.youtube.com/watch?feature=player_embedded&v=q1X0IjL9Mhk
(sarc w/ L)
CD said "shit"?
Full faith and credit bitchez...
No volatility please !! Don't sell the ponzi !
At the core of many investment models is something called a "risk free rate of return", generally the place holder for that is "US Treasury rates". It's always been assumed to be a positive number. But why should it be? If you're taking no risk, why should you receive any return?
The Fed has readjusted the Risk Free Rate of Return to effectively zero. And along with it, the time value of your money is now also zero.
You might want to prepare for it to go negative.
And since all currency is debt and the value of that debt is surging ("in dollar terms" so to speak) why buy any debt at all?
This correction in miners and oil producers should drive prices lower for gold and oil...not higher.
I would remain long NASA as well...
"If you're taking no risk, why should you receive any return?" -- Yes, if this is true than the converse is also true; if YOU take a risk, do it with YOUR OWN MONEY and don't expect a BAILOUT when you FUCK UP.
Can we get our bailout monies back motherfucker?
SHADOW BANKING system is going through similarly what occurred during Weimar Hyperinflation.
Nobody wanted the printed currency and was holding on to real stuff
Same now in Shadow Banking. Nobody wants Digital Dollars. All holding oil, copper, grain, soybeans, USTs etc
This is pure and simple DIGITAL HYPERINFLATION unwinding now, same as during Weimar with actual printed paper
Hmmm. I just invented a term:
DIGITAL HYPERINFLATION.
"Same now in Shadow Banking. Nobody wants Digital Dollars. All holding oil, copper, grain, soybeans, USTs etc"
How are UST's not digital dollars?
No. You can't buy anything with USTs.
USTs are NOT digital dollars. You need to sell them to buy something
If a bank or even shadow bank collapses, the USD simply vanishes.
Not so with USTs. Giant difference
It is about 'location'
"How are UST's not digital dollars?" ---
How? Shit that's easy, remember CD, all paper promises are created equal, it's just that some paper promises are more equal than others. Personally, my employees and I are holding a lot more lead and brass lately.
Which is exactly what happened during Weimar Hyperinflation.
Only that now, money is being injected into shadow banking, not to the street.
Hence, shadow banking is pulling a Weimar right now.
Large institutions storing around the world aluminum, copper, oil etc. I'd say even grains, coffee, soybeans (as you told me) etc
We have DIGITAL WEIMAR going on right now
I will admit that we are buying and storing diesel right now as we finish the last harvests (fruits and nuts), but I still don't see the crisis. Winters coming, happens every year. Fuck the shadow banks. They should have been killed a long time ago anyway.
Digital Weimar is going on world wide.
A better term to depict what is currently happening:
DIGITAL WEIMAR
Time to dust off the circuit breaker rule book ... what is it 5% on the S&P before halt?
its ok we just bring it down 4.999 everyday, they will never know, they are just computers
so they've basically given us Minsky's work on stability...thanks.
Its a Trap!
No worries....I'm holding stops going into the weekend.
TOO LATE FOR YOU REBEL SCUM!
In effect you're a "victor of your own success." As the dollar moves higher the need to hold onto any financial "exotica" becomes...well, kinda stupid.
In this sense volatility is to be expected as after blowing up themselves and the world in 2008 it's not like Wall Street doesn't see itself as less smarter.
Simply put "the dumber your money the better." Higher volatility is a result of massive amounts of cash "not being put to work" while "the smart money" does stupid shit.
Of course the biggest risk is in not taking one...
Yes, but do they also admit that a higher (historical average) rate is impossible?
I don't think publicly....and certainly not on purpose.
Rates would be high if it weren't for Reverse Repos.
http://blogs.wsj.com/economics/2014/10/09/feds-reverse-repo-tool-catches...
Fed already being publicly attacked about its legality
RRs basically make policy setting irrelevant
This is the Fed And Primary dealers plus about 20 more large institutions simply recycling the same USTs to fake volume and fake low rates.
No demand from the world at this rates
While higher rates may be impossible they are not un-possible. Welcome to The Twilight Zone.
What the hell is this gobbledeegook?
"Financial stress" is NOT represented by the TED spread, or any other metric you pick. It is measured by how a person, a family, navigates the day-to-day reality of the economy they are living in. Persons and families who have no FUCKING IDEA what a TED spread IS.
But go ahead...keep talking, you stupid arrogant fucks. Financial alchemists, trying to turn lead into gold, with an audience of slack-jawed yokels looking on in wonder at the magic in front of their eyes.
These people know nothing, and all the big words and high-sounding terminology doesn't change that a whit.
The financial high priests have spoken. Please grovel now.
Do you bow before you grovel....or do you do it after?
I curtsy and avoid all that confusion.
Did you read what Albert Edwards had to say yesterday?
What I have never really been able to understand is why vol only rises when the market declines.
http://www.zerohedge.com/news/2014-10-09/albert-edwards-asks-if-bond-vol-can-surge-result-rising-bond-prices
Higher velocity means that current fiat God disappears down the drain at an alarming pace.
A ponzi is a ponzi, its not Austrian or Keynesian. Its "hey presto" Madoffian sleight of hand when ONE GENERATION robs two or more generations of their Usufruct--aka, pursuit of happiness-- by kicking the can as far as the eye can see !
Converting "pursuit of happiness" of future generations into 5°C higher atmospheric and acidified oceanic misery land! --Apart from being debt slavery tattooed to the core-- that's the legacy of Helicopter Ben and Paulson/Squid shenanigans.
NO MO POMO until Oct 14
short the crap out of every bounce
Kevin Henry has apparently punched in
I thought higher rates (in this epoch) meant deflation, lower money velocity, lower growth, lower GDP, fewer jobs, and would unleash civil unrest.
Who cares if the S&P and DOW have a bumpy ride? That's what free markets are about and profits can be made by knowing how to play the higher volatility, no?
Willie Sutton: "Never trust a banker who wears socks."
Policeman: "But they all wear socks."
Willie Sutton: "Exactly."
Alex, I'll take Debt Jubilee for $400.