The Vix index is now down to 15, which is relatively low. It was as low as 11.2 in March 2007, before we knew that the housing market was unraveling. During "good times," the Vix likes to be a in a 10-15 range. So based on the today's Vix level, we can assume that the market has largely gotten over the fear that the Eurozone sovereign debt crisis would plunge the world into another Recession. As fear has subsided, equity prices have risen, and we're slowly approaching pre-recession levels for the S&P 500—another 14% and we'll be at new all-time highs for this broad measure of equity prices.
The market has climbed a huge "fear" wall of worry, but it is not very confident at all about the future of the U.S. economy. We can see that in the still very-depressed level of Treasury yields.
The two charts above make it absolutely clear just how depressed Treasury yields are today. Not only are 10-yr Treasury yields almost as low as they have ever been, they are as low as they were in the depths of the Great Depression. And if that's not enough to convince you, I note that U.S. yields have almost converged to Japanese yields, which have been trading at extremely low levels for more than a decade, thanks to modest growth and zero to negative inflation. According to these charts, it's not unreasonable to think that the bond market believes that the outlook for the US economy is one of Japanese-style growth stagnation coupled with extremely low inflation.
So the message from the prices of stocks and bonds is that although the market sees little chance of another major recession, the outlook for the economy remains dismal. I believe that 10-yr yields would have to rise to at least 3 or 4% before one could argue that the market was optimistic about the future. For now, pessimism continues to rule the day.
UPDATE:
This chart summarizes the advances in both the Vix index (which has declined significantly) and the 10-yr Treasury yield (which to date has risen only modestly). Risk has dropped a lot, but confidence in the future remains very weak, and that is why the Vix/10-yr ratio remains quite elevated from an historical perspective. There is very little about this market that smacks of optimism. The main message is that fear and pessimism have declined, but that we are still a long way from seeing the market as being overly optimistic.
The Vix index is now down to 15, which is relatively low. It was as low as 11.2 in March 2007, before we knew that the housing market was unraveling. During "good times," the Vix likes to be a in a 10-15 range. So based on the today's Vix level, we can assume that the market has largely gotten over the fear that the Eurozone sovereign debt crisis would plunge the world into another Recession.
ReplyDeleteAh, the fallacy of looking at surface stability that masks the underneath volatility.
Scott - please consider The Black Swan of Cairo by Taleb.
The ^vix dropped below 15 today. When the ^vix rose above 40, I bought a large block of stock funds. I sold half when the ^vix reached 20, and the second half at todas close. I'l buy again when panic returns.
ReplyDeleteIf anything, the last chart is a scary signal of debacles to come. Especially considering the last 4 years of global markets were dominated by central bank intervention on a planetary scale.
ReplyDeleteThe Greenspan/Bernanke puts are going to send this place up in smoke once and for all.
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ReplyDeleteScott,
ReplyDeleteHere is where i think you and I diverge on the Fed and money supply. Not that it matters as such but I find the below paragraphs enlightening. Maybe Benji will eventually see the light too.
Ironically, Volcker was seen as an 'inflation fighter' when in reality it was the same Fed who created the inflation via money printing in the first place!
"But now consider the following case: the rate of growth in money is in line with the rate of growth in goods. Consequently, the prices of goods on average don't change. Do we have inflation here or don't we? For most economists, if an increase in the money supply is exactly matched by the increase in the production of goods, then this is fine, because no increase in general prices has taken place and therefore no inflation has emerged. We suggest that this way of thinking is false: inflation has taken place, i.e., the money supply has increased. This increase cannot be undone by the corresponding increase in the production of goods and services...
Contrary to the popular definition, inflation is not about general rises in prices but about increases in money "out of thin air." Inflation is an act of embezzlement. On a gold standard, inflation is about the increase in receipts unbacked by gold money. On a paper standard, inflation is about an increase in the supply of paper money. The general increase in prices, as a rule, develops on account of the increase in money. The harm that most people attribute to rises in prices is in fact due to increases in the money supply out of thin air. Therefore, policies that are aimed at fighting inflation without identifying what it is all about only make things much worse. When inflation is seen as a general increase in prices, then anything that contributes to price increases is called inflationary. It is no longer the central bank and fractional-reserve banking that are the sources of inflation, but rather various other causes. In this framework, not only does the central bank have nothing to do with inflation; on the contrary, the bank is regarded as an inflation fighter."
Still no comments today are positive about the rising stock markets; just as little money is being invested in stock mutual funds. The pessimism lives on.
ReplyDeletePersonally, I ALWAYS prefer to be with the minority which at this point means being positive about the future of the economy and equities.
At 1395 the S&P trades at 1.32 times sales....last years high was 1.35...
ReplyDeletesay sales per share ends the year at 1100.1100 x 1.35 = 1485.
P.S. 1.35 is a modest target historically