Monday, October 10, 2011

Volatility update


Fear—emanating primarily from Europe—continues to be the big driver in most markets around the world. Today that fear eased a bit as talk out of the Eurozone pointed to more serious steps being taken to deal with the sovereign debt crisis. The Vix declined, and equity prices rose in lockstep.



Here's a closeup look at the Vix Index over the past six months, and since early 2008. The good news is that we haven't scaled new heights of fear since the latest round of the crisis erupted in early August. The bad news is that the Vix remains quite high, fear is still intense, and to date there has been no definitive resolution to the crisis.

Good friend Ashby Foote today noted that this crisis is not at all like a "Black Swan" event that catches the world totally by surprise. That reminded me once again of my post comparing Europe's sovereign debt crisis to Los Angeles' "Carmageddon". When looming losses stare the world in the face for 18 months, people take notice and act. The world has had plenty of time to brace for a Greek default, beginning early last year. When it finally happens, I would be surprised if markets deteriorate further; they might even rally, happy to have eliminated the uncertainty at last. Angelenos went into Carmageddon weekend convinced that they faced a nightmarish gridlock; instead, there was hardly any traffic to speak of.

2 comments:

Benjamin said...

Hard to see big rally if the Fed keep its "revealed preference" for inflation at well under 2 percent.

The ECB is also "fighting inflation" despite a woefully weak continental economy.

The worst wounds are often self-inflated.

W.E. Heasley said...

“Today that fear eased a bit as talk out of the Euro zone pointed to more serious steps being taken to deal with the sovereign debt crisis“.


The central problem with the notion that “…more serious steps being taken…” lies in the base model of the EU, Euro Zone, and associated institutions. The notion that the whole gummed up ball of wax can be fixed in a few special steps/changes is the personification of Milton Friedman‘s famous Barking Cat essay.

The model is broken. The mere idea that seventeen member states could be linked together basically by a common currency , seventeen member states, member states that historically have been at one another’s throat, seventeen member states with untold numbers of political parties that historically have been at one another’s throat, seventeen member states with diverse socio-economic aims…..this makes for a good model or the creation of a broken model from the get-go?

You see, this murky quagmire is going to take “more serious steps” by merely tweaking this item or that item. A few items within the model need changed based on “the way things ought to be” and all will be well. Yes, some barking cats is all that is needed.