"Volatility Is Lowest Since the Great Depression" | TigerDroppings.com

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Doc Fenton
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Member since Feb 2007
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"Volatility Is Lowest Since the Great Depression"



Bloomberg BusinessWeek: LINK.

YouTube clip of Bloomberg's Market Desk's Dominic Chu: LINK.

SeekingAlpha: " Inverse VIX ETFs Rise 170% As Volatility Hits 5-Year Low"

VXX now down all the way to 21.02...










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gatorsimz
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cafe risque
Member since Feb 2009
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re: "Volatility Is Lowest Since the Great Depression"


calm before the storm
























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Doc Fenton
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Member since Feb 2007
51086 posts

re: "Volatility Is Lowest Since the Great Depression"


Here's my take on why the market has such low expectations for volatility...

#1. We know that volatility tends to carry a lot of momentum with it, and also, is in general negatively correlated with equity prices, so that equities tend to go up more gently than they go down.

#2. We know that central banks are very heavily involved in markets in recent years, and are watching equity prices closely.

Thus, it seems as though investors are generally just being chased into equities by central bankers, and that there is little probability of the equities going in either direction very far without the Fed moving to counteract that move.

In other words, the Fed has effectively put the stock market on training wheels. If stocks drop too low, then the Fed will simply find a way to take more emergency stimulative measures to chase money back into equities. If stocks rise too high, then the Fed will have greater leeway to start dialing back its current stimulative measures, and this should cause the equity markets to fall back down a notch.



Okay, now here's why I think that the market has been lulled into a false complacency:

#1. Historically speaking, this is just too low, and I think that is an argument unto itself.

#2. Much like the late 1960s, there seems to be a lack of appreciation for how much instability is lurking in international markets. We are seeing people start to complain about foreign exchange policy for various currencies, and central bankers in developed countries like China and Mexico are starting to worry about shocks from somewhat hot money flooding into their economies from relative currency devaluation from the more developed economies. In sum, the super low inflation we've experienced cannot last, (A) because rises in asset prices will eventually put upward pressure on consumer prices, and (B) because capital flows going to less developed economies are somewhat ephemeral, and will eventually boomerang back into more developed economies.

If this occurs in similar fashion to 1997 & 1998, then the dollar might become super strong again relative to other currencies, but this in turn might create an overheating problem that will require the inevitable painful rise in domestic interest rates. At that point, the volatility we've been missing should hopefully FINALLY return.



Now, as with so much else since the financial crisis of 2008, there are a lot of macroeconomic corrections and other things that must happen, but that are being put off indefinitely by extraordinary policy remedies. There seems no limit to how far this transitory period can go on, and every time so far when I thought that things have to get back to normal soon, the abnormal time period has just continued to keep going.

So don't hold your breath waiting for it to end--and for the remainder of this year, it might even keep going lower--but at the same time, know that it must end eventually.






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Doc Fenton
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Member since Feb 2007
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re: "Volatility Is Lowest Since the Great Depression"


Yep, that's basically what I'm thinking.





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BennyAndTheInkJets
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Member since Nov 2010
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re: "Volatility Is Lowest Since the Great Depression"


I can argue some of the semantics but mostly all you have is pretty spot on.

If you really want to see how the Fed has taken volatility out of the market, if you have access to Bloomberg go to the NSV screen. This is the Normalized Swaption Volatility screen that you can use as a proxy for rate volatility. It's basically been in a primary trend nose dive since the beginning of QE. The stock market on training wheels comment is pretty spot on as well, the Fed has a lot of leeway right now with how they can affect markets by unwinding the current programs but the effectiveness of additional measures will continue to decline.

A big question a lot of investors have is can rates go back up to "historical" levels under the current volatility of rates? Calculating the VIX is really, really damn complicated but rate volatility is more simple, relatively. Basically how much are investors willing to pay for vol in rate instruments (usually using some version of Black-Scholes). Until Fed minutes start getting more and more hawkish I think we will still have gradual movement one way or the other. You're not going to get some 1994 shock with the Fed as big of a current player in the market.






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Doc Fenton
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Member since Feb 2007
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re: "Volatility Is Lowest Since the Great Depression"


It seems like every time I look at this stuff, I recognize more different steps that need to happen to get back to normal, and then realize how much longer it's going to take than I previously thought.

I so want all this to be over with, but man, it seems like it's going to last forever.






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BennyAndTheInkJets
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re: "Volatility Is Lowest Since the Great Depression"


We're never going to be back in the old normal. It is, and frick me for pimping my shop, a new normal. And we will be here for a very, very long time.


This post was edited on 2/19 at 6:24 pm


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Doc Fenton
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re: "Volatility Is Lowest Since the Great Depression"








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Poodlebrain
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re: "Volatility Is Lowest Since the Great Depression"


Where can investors buy new equities? The number of new shares available is just insufficient to absorb all of the cash available for investment just from institutional investors. Why would institutional investors, specifically mutual funds with limited investment options, sell shares they own now if they can't replace them with alternative investments that will yield higher returns? Selling to lock in gains may get you locked out except at a higher price.

I think that is one of the reasons volatility is so low. Mutual funds owned by retirement plans hold an increasing percentage of the equities market, and they are pretty much stuck holding what they already have.






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donRANDOMnumbers
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re: "Volatility Is Lowest Since the Great Depression"


Tell that to the guy who was in RAX





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acgeaux129
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re: "Volatility Is Lowest Since the Great Depression"


quote:

We're never going to be back in the old normal. It is, and frick me for pimping my shop, a new normal. And we will be here for a very, very long time.



I'm curious as to whether or not you are serious about the entire statement here since Doc e-laughed. If so, are you referring to monetary policy? Do you think interest rates are going to stay very low for the foreseeable future?

BTW, I really enjoy reading your insights. You definitely seem like a guy that would piss Wiki off. Is there a way for you to sort of say that you work in central banking without actually outing yourself? Or by shop, you meant HF?

So many questions zomg.






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Jwodie
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New Orleans
Member since Sep 2009
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re: "Volatility Is Lowest Since the Great Depression"


But does it all mean, Basil? (Doc)

Given the current volatility and general state of the economy, where should smart money be going investment-wise?






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BennyAndTheInkJets
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Member since Nov 2010
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re: "Volatility Is Lowest Since the Great Depression"


quote:

Where can investors buy new equities? The number of new shares available is just insufficient to absorb all of the cash available for investment just from institutional investors. Why would institutional investors, specifically mutual funds with limited investment options, sell shares they own now if they can't replace them with alternative investments that will yield higher returns? Selling to lock in gains may get you locked out except at a higher price. I think that is one of the reasons volatility is so low. Mutual funds owned by retirement plans hold an increasing percentage of the equities market, and they are pretty much stuck holding what they already have.

I agree with your points but can also take then a couple steps further. Not only is there a supply/demand mismatch with equities but across all asset classes. Mortgages and treasuries are owned by the Fed and decreasing in market issuance compared to levels we've previously seen. Plus you have bank capital that is flowing out after the TLGP expiration at the end of the year.

With the mutual fund/pension point I think this is the crux of a bigger issue going forward. Defined benefit plans, while slowing down, will still be here for a very long time. Defined contribution plans are going to grow at pretty healthy levels for a long time. Cash on balance sheets is finding its way out into the marketplace to find yield. Everyone is lookin for returns and you can't find them anywhere. We need some sort of miracle on the growth end to avoid having to either inflate or cut benefits. Eventually the first pony up will be the state pension plans, and it's going to be hilarious watching Washington try and figure out how to deal with these pension issues because god knows they don't exactly have the best track record with anything investment related in the modern era. Actually I take that back, it won't be hilarious. It'll be just as painful as it is watching right now.



This post was edited on 2/20 at 8:16 am


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LSURussian
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re: "Volatility Is Lowest Since the Great Depression"


quote:

We're never going to be back in the old normal.


"The four most dangerous words in investing are 'this time it's different.'" - Warren Buffett






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GumboPot
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re: "Volatility Is Lowest Since the Great Depression"


I appreciate this thread.





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BennyAndTheInkJets
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NYC / Orange County
Member since Nov 2010
4047 posts

re: "Volatility Is Lowest Since the Great Depression"


quote:

"The four most dangerous words in investing are 'this time it's different.'" - Warren Buffett

Vincent Reinhart versus Warren Buffet steel cage match, who you got?

Buffet probably has a little size but I've met Reinhart and he is a wily bastard, wouldn't underestimate him.






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BennyAndTheInkJets
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Member since Nov 2010
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re: "Volatility Is Lowest Since the Great Depression"


quote:

I'm curious as to whether or not you are serious about the entire statement here since Doc e-laughed. If so, are you referring to monetary policy? Do you think interest rates are going to stay very low for the foreseeable future?

A couple things, the biggest overriding factor being lower growth in developed nations. Everything else kind of flows from there; much more involved monetary policy, lower investment returns, and higher correlation among asset classes (risk on vs. risk off). The rate question is an interesting one, do I believe we'll be in a range lower than historically? Absolutely. Very low (i.e. 1.5% 10-year) I don't see simply because investors do not want to bite that duration for no income. The involved monetary policy will keep rates low but also the huge supply/demand mismatch Poodle and I reference earlier.

Long story short here's the deal with the US. The average worker does not have the skill set to support their current wages. Due in part the structural problems with education and also due to this entitled mindset that the average American has. I give politicians a lot of shite but the fact of the matter is we almost always get the politicians we deserve. We want quick fixes as a society without paying for it and that is what politics usually gives us while never addressing the actual problems. Lower growth is a product of this.






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acgeaux129
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Member since Sep 2007
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re: "Volatility Is Lowest Since the Great Depression"


So are you essentially saying that sluggish global growth is going to force us to keep up with the subsequent currency devaluation bandwagon? IE, not only is the fed worried about pushing investors into equities and spurring the housing market, they are also concerned with preserving domestic manufacturing, etc.





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LSUcam
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Destin FL
Member since Dec 2011
381 posts

re: "Volatility Is Lowest Since the Great Depression"


quote:

"The four most dangerous words in investing are 'this time it's different.'" - Warren Buffett


THIS



This post was edited on 2/20 at 1:18 pm


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Poodlebrain
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re: "Volatility Is Lowest Since the Great Depression"


My personal opinion is that the global economy is in a period of equalization. The populations of more countries are reaching education levels that were once exclusive to advanced nations, and it has made their populations competitive in the global labor markets. The United States does not have any sort of edge when it comes to specialization of labor for most jobs. Thus our businesses have no advantages when location is not at a premium. Trying to counter this with political solutions is a futile gesture destined to fail. The key to staying at the economic forefront is innovation. And we have no monopoly on innovation. In fact, China is likely to be the leader in innovation due to the huge numbers of scientists and engineers it is training. One only has to look at the graduate students in the physics, chemistry and engineering departments at U.S. universities to see the disparities in the numbers of Chinese v. American grad students.





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