Friday, January 22, 2010
This chart shows the implied volatility of equity and T-bond options. Implied vol can be thought of as a proxy for the level of fear, uncertainty and doubt that inhabits the market. Implied vol has fallen sharply over the past year as the market's many and deep-seated fears were resolved: the economy hasn't fallen down a black hole; this isn't another Depression; there is no deflation; Obama is not going convert the country to socialism; we aren't going to have a global trade war; political balance (gridlock is a good thing) is returning; there are many signs of recovery.
There are still lingering concerns, of course. How fast will the recovery be? Are we being set up for another slump? How will the Fed reverse its quantitative easing? Will inflation go up a little, a lot, or not at all? Will trillion dollar deficits go on forever? Will businesses find the courage and the capital to create new jobs?
Despite these concerns, I think there has been enough progress on many fronts that the future looks appealing, if not bright. Our financial markets have largely healed, and our political system is working to provide checks and balances. The economy has undergone a tremendous adjustment process, with the result that we now have a relatively solid base upon which to build a recovery. The housing market has also undergone radical adjustment, with an unprecedented decline in prices and residential construction, but this also is a necessary step and a base upon which to mount a recovery. The global economy is recovering as well.
I think it still pays to be an optimist.
Posted by Scott Grannis at 11:52 AM