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Credit & Volatlity Are Flashing Red, "But We Aren't In A Crisis, Are We?"
Via The 10th Man's Jared Dillian,
I recently watched the movie Interstellar in the theater. I liked it so much, I watched it again… and again. Three times in 10 days. Next, I’ll get the DVD and see it dozens of more times. It’s my new all-time favorite movie.
I’m something of an astrophysics geek. I think in another life I might have been one of these nerds working for the SETI project like Ellie Arroway in Contact. For my fifth-grade science project, I constructed a planetarium show. When my schoolmates were playing Contra on Nintendo, I was reading about quasars.
Interstellar fascinates me because I don’t understand how someone gets $150 million of financing to make a movie that no one who doesn’t understand Einstein’s theory of relativity can fully appreciate. Christopher Nolan is a stud. There is no other explanation.
I had to smile each time I left the theater, listening to the people walking out. “I didn’t understand any of that!” they would say. I think knowledge of the cosmos is pretty low in my corner of South Carolina.
I won’t spoil it for you, but let’s say there’s a lot of physics knowledge required for that movie. Incidentally, there’s a lot of physics knowledge required for trading too.
The derivatives guys understand this. Most conventional option pricing models are based on something called “geometric Brownian motion,” which was originally used to describe the movement of a particle suspended in a liquid or a gas.
Emanuel Derman, author of My Life as a Quant and contributor to the Black-Derman-Toy model that pioneered the pricing of bond options, started out as a darn good physicist. Then he was hired by Goldman Sachs. Lots of quants (quantitative analysts) are former physicists. Finance and physics really are that similar.
I have my own theories about financial physics.
- Stocks and bonds are matter. They are things. They are particles. They literally are physical objects—in the old days, certificates. Nowadays, they have a CUSIP. You can clip the coupons. In bearer form, they were worth money. Nowadays, nobody really gets to hold a bond in his hand, but it’s still tangible as far as I’m concerned. The foregoing also applies to currencies. And commodities… well, they are as tangible as you can get.
- Credit and volatility are not matter. They are forces very similar to gravity. Think about it: credit is the willingness or ability to repay. It’s a feeling, a sensation, a psychological construct. But it is not a thing. It has neither a certificate nor a CUSIP. But credit is directly related to volatility—otherwise the credit guys wouldn’t hedge with VIX call spreads all the time.
The one thing we know about gravity is that it is not constant in the universe. There can be large disturbances, like a black hole, where time can actually slow down - exactly like the gravitational time dilation described in Interstellar. When volatility increases (and credit widens), options decay more slowly. Volatility (“vol”) and time work in opposite directions.
Vvol Is Sky-High Right Now
We are currently experiencing - I’m grinning as I write this - disturbances in the force. Credit and volatility have never acted this way before, and I can quantify it exactly.
Never before has the VIX gone from 11 to 20 in just four days. A few weeks ago, I wrote about the outsize influence volatility ETFs were having on the vol complex, and that remains true. I think this can partially be explained by people panicking out of XIV, the VelocityShares Daily Inverse VIX Short-Term ETN.
But it’s actually bigger than that. Volatility is itself volatile. You can measure the volatility of volatility; traders call it “vvol.” And the only times vvol has been this high since the advent of VIX options were in 2007, 2008, and 2011—all times of serious crisis.
But we aren’t in a crisis now, are we?
Well, we might be, if you think vvol has any predictive power, as I do. Certainly nothing of the magnitude of ‘07, ‘08, or ‘11. But when you’re having 700-point intraday round trips in the Dow and vvol is at crisis levels, I think it’s time to start asking the hard questions.
“… Where No Man Has Gone Before”
The bigger picture is: Russia is experiencing a full-blown currency crisis, whether anyone is calling it that or not; emerging markets are in meltdown mode (as predicted by some of my colleagues here at Mauldin Economics); and the price of the single most important commodity in the world has just been cut in half in the span of a month or two.
These are not normal times. And the bull market in stocks is very, very advanced.
Even though I write for a living, I’m a former trader, so I still spend my days staring at the screens. I haven’t seen anything like this before. New territory here—and not in a good way.
But I’m a student of volatility and credit, and I paid attention in early 2009 when no put option was too expensive and no bond was safe. It feels as if something like that might be in our future.
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Bullish.
The Fed is my shepherd, I shall not sell..
and.. The Fed is my shepherd, I shall not buy vol.
My tin foil hat says that the PPT may not have any Christmas vacation this year. They be busy bees keeping panic from setting in. Shorts can be slaughtered but longs must be protected.
Screw'em
When this thing does finlly blow there won't be anybody left standing for the shorts to collect from. Selling will be outlawed like it was in 09.
I know what I'll do I'll make the taxpayer subsidize this because nobody's ever thought of that before
http://y2u.be/VI6tBwVjyOY
That red headed snorg tee chick has gained weight,
and her pants are half off. That should help sales.
My view also Doc.
Why I don't play anymore.It will not matter how nimble you are then.
Its a rigged game but by all means, lets keep playing...
We are not in crisis and Custer merely had an off-day at the Littlle Bighorn......
Using physics to trade options,
is like using a howitzer to hunt sparrows.
Yep but a Howitzer is a guaranteed win....
great analysis, but are the folksy pics with Grandma Yellen making the "Sugar Cookie!" Buy 2 month QQQ calls....they haven't lost money in 6 years.
Any particular strike price?
"everything will be as right as rain"
here's some physics for you: Au and Ag are elemental, ancient and permanent. they were here before central banking and will remain after central banking.
if people are too ignorant to understand their values, once central banking impoverishes the world, people will learn and seek out these relics like religious icons.
No treasury bond was too safe?
The second derivative of panic growth is positive -- meaning we are building up speed for a collapse...we are accelerating towards the brick wall.
I think of it more as circling the drain. At a distance the circle is wide enough that it appears we are moving tangent to the threat, if not away. As time passes our speed increases and we get ever closer to the hole pulling at us...but even still, we do not perceive that it is our destiny. Its only once we are firmly in the grasp of the vortex that we realize that regardless of direction, we are not in control, that we are trapped to whatever doom that awaits. Yes, the drain is in full view now but even then, many are not convinced that it IS our final destination. But panic IS setting in and as the bow of our now decrepit raft noses into the abyss, we have nothing left but to tear at each others torso desperately reaching for escape that does not exist. While all this is happening we suddenly realize....we knew it all along. Everything ends up going down the drain.
Great, now I need to turn on CNBC to forget what I learned.
It has been an exiting ride, but every time I believed we could not avoid hitting the brick wall, a Central bank bazooka vaporized it and the tracks seemed to be clear as far as the eyes could see.
Awww stop it with the sky is falling articles.
The DOW is up more than 10,000 points since your first one.
The facts are the facts. I fucked myself by buying into sanity.
Huh?
You mean the fact that the DOW is up more than 10,000 points since ZH published its first doom-and-gloom articles?
I gave you an upvote. That should tell you something. Sometimes you got to take it on the chin and admit you were wrong. I was wrong and insanity kicked my ass.
Most times doing the right thing has very little reward. That's why immorality still exists...it pays. Its called the wages of sin. We can only hope there is a God, because justice on this earth is rare indeed.
The whole point of the bible is to do the right thing nonetheless - even if there is no god.
Alan Abelson of Barrons has been a bear since 1100 on the Dow,
and he still has a job;)
I still have a job and an investment portfolio that requires scuba gear and anti-depressants.
Your comment amuses me. It's like me continually stealing from my neighbor and when my wife inquires as to the morality of the acts I say, "hey, enough with all of your mumbo jumbo- your pantry and bank accounts say that what I'm doing is right".
Rigged markets and intervention are stealing. And because they can "lift" or "punish" a particular asset, commodity or asset class tells you all you need to know about the morality of it all.
Since when has there been "morality" in
any market,
anywhere,
at any time in history?
There is plenty of morality out there, especially in smaller markets. Its when they get big, really big, that evil takes over. Its natural. If there were no moral players in the market, who would the immoral ones rob? Ultimately the theft is not money, its our lives, our personal being that is our asset. Those who engage in productive endeavors are the only ones creating wealth that can be stolen. These are your moral players and they are the ones that thieves leach from. Our significant problem is the shrinking number of moral, productive players and the increasing number of thieves.
I don't want to be ugly, but until those of you who believe that you can become wealthy through trading realize that you are not contributing to wealth creation, only consuming it, the real thieves will only gain in strength. Wealth is created through productivity. Those only seek wealth through redistributive channels, and that is what"investing"has become, are providing the kindling that will burn us to the ground. Just another victimless crime where you buy something atone price, add no value whatsoever, and then sell it to someone else at a higher price.And think about what it is your selling. Effectively it is someone else's labor. These "investments" are sustained by people working in jobs that ARE the companies you hold stock in. Without them, there is no value.
It's like the fat girl who secretly discovers her boyfriend is cheating (they got together years ago when she was a hottie).
If she confronts and dumps the boyfriend, then she will be alone, and it will be difficult to find a new boyfriend now that she is no longer a hottie.
So do I BTFD or not?
Al time high this week, "V" Bottom next week... Its all good DR.
Is that a rhetorical question, I think You know We know I know You know We think We know You know what to do...... or uh something !
Just in case though,, always always every hour, minute and second of day..
BTFD and ATH's..... !
The stock market will never again be a good indicator of the overall economy nor of things to come. I don't think there will be any moment in the near future where you can buy at a bargain price. The Fed will just keep moving in to keep it propped up. I see a currency/petri - dollar war erupting before the markets make a correction.
Yellen, speak more to make Dow a 20k.
the financial singularity approaches,
the velocity of falling bids approaches infinity,
time slows to a crawl,
and the market drops on no volume at all.
+1000
As Central Banks buy ever larger amount debt of their own and other countries(economy are so irrelevant)....we will have a FED a 100 years from now ...which will trade centillions of dollars worth of debt & equity with itself on quantum mechanics machines in yoctoseconds operated by Citadel Chairman Robot as all humans will have been wiped from the earth in 2020....hence 2020 hindsight! Eventually the heat will generate a singular, plunging the universe into a single black hole from which nothing can escape...not one yen, dollar, gold coin or euro!
Poets and oracles we have at The Hedge.
The comment que is unusually gimpy today. Probably all the new adds gumming things up.
If you see something way out of place, it probably isn't the poster's fault.
I recommend Ad-Blocker Plus.
Can't take a writer serious who enjoys TV as much as this guy.
How to create an illusion of calm.
Central Banksters workbook 101.
Collect printing press output to...
Sell the VIX
Sell gold
Buy the S&P
Buy Bonds
Welcome to the COMPLETELY NON-RESPONSIVE fake "gold price", which hasn't moved more than $2.00 each side of US$1197 for three days...
I think you mean the currency hasn't moved against gold value.
It will, but I don't think you will want to cash it in at that point.
"Only the good die young" There are no rich and honest people in the world
Those who have eyes, let them see. Those who have ears, let them hear.
As for the rest - sorry. You were warned.
The markets are controlled by windows, levers, desks and algo’s.
A new window can always be opened. Like a window of opportunity or a betting window. The Fed decides.
A lever can be added to any control panel at any time. A window can be opened to new levering for instance.
A desk can be set up at the window where the opportunity to lever is most advantageous.
The software upon which the levers operate can be changed on-the-fly to accommodate or take advantage of any fluctuations which can be seen through the window from the desk sitting just outside the sill.
As such, whims, rumors and phrasing are shouted out the window and become the currency of Wall Street.
Words, not deeds are what run the financial sector. So Peeping Toms and eavesdroppers make sure the word gets out to the levitators who tweak the algo’s accordingly.
It isn’t math: its myth.
2008 on steroids coming.
Yellen is channeling Chamberlain...."Peace in our Time!"
Waking up to TLT helps the little hangover.
It doesn't really matter who speaks, as it equally applies to all central banksters.
Bullard -- Yellen -- Draghi
They make coded promises to prop the markets up.
VE (verbal easing) is the new QE.
They will do exactly the opposite when they determine the time has come to crash it. They'll make coded bearish remarks that will put markets in a panicked frenzy.
World stock markets are no longer real. They are just zombies, walking dead. It's time to start a "new" market based on actual fundamentals.
Einstein’s theory of relativity is false and the movie sucked. Einstein's flawed theories are holding us up to reach for anti-gravity. Gravity sucked too. I want to see anti-gravity!
"LOUD NOISES!"
Stories like this give me a massive tension headache that only two or three shots of rot gut will fix.
We are in a crisis, oil screams it, credit screams it, Russia screams it. The crisis is happening right now.
Most of the indicators we used in the past that would reveal this are now completely manipulated by the Fed, and the MSM are on board painting a happy all is well picture.
Remember, these sociopaths truly believe that "perception management" changes reality. What we see today is effectively TPTB having a psychotic break.
"Statistics are not numbers but theories."
There is no substitute for numbers...hence liquidity.
Russia is getting destroyed because they have almost zero liquidity.
Great Britian...1/1000th the size of Russia has a billion times more liquidity.
Calm down, in Central Planning such indicators are completely meaningless.
Seems the timing to 'pull the rug' is almost ripe and what a tasty fruit it will be..... 'by their fruits you will know them' and that biblical warning isn't the real important one, but rather when the future is discussed.... as in the time of Noah.... all of this puppet show merely a veil of deception to keep control of the herd until the slaughterhouse is ready.... soon.
Imho,
I believe all hell to break lose when that one person in our population loses total confidence in the fed, like that one cigarette that ignites lung cancer. More and more Americans are learning about the wretched fed and its actions.
I live in one of the most liberal places in the U.S.
I've noticed something that has been quite amazing. On an average day I would spot 30-50 Obama bumper stickers driving around. It has been 4 days and I haven't seen ONE!!!
The time is running lean, and that one cigarette is in one of the packs I'm going to buy....