This qualifies as a genuine panic

Here's an update to a chart I featured last June. Today's plunge in global markets qualifies as a genuine panic, according to this measure of how pessimistic the market is, and how much actual deterioration in the fundamentals there has been. The chart takes the Vix index of implied equity volatility and divides it by the yield on 10-yr Treasuries. The higher the Vix, the higher the degree of market uncertainty and fear; the lower the yield on Treasuries, the weaker the economy is perceived to be. So a higher ratio is bad, and a lower ratio is good. This is almost as bad as the first European sovereign debt scare which struck in April of last year. The Vix is currently over 28, and the 10-yr yield has dropped to 2.46%, which is only a few bps higher than the lows it hit last October when the market thought we were in a double-dip recession.

However, as this next chart shows, the Vix is still substantially below its previous peaks, so the driving factor behind the increase in the Vix/10-yr ratio is the very low level of 10-yr yields, which decline like this only when driven by fears of an imminent recession. This suggests that the market is very concerned about the onset of a global economic slump, triggered by PIIGS defaults which cause such great stress among European banks that contagion effects ripple throughout the world. Are we finally on the cusp of "the end of the world as we know it?" I doubt it. We've survived worse situations.

UPDATE: Here's the top chart with today's closing values (Vix = 32, 10-yr = 2.42%). It will be very interesting to see whether this panic can be arrested if tomorrow's jobs numbers are decent.

Good news: cheaper gasoline on the way

With almost everything collapsing today it's probably time to highlight some good news: the big drop in oil prices in recent days means we could see gasoline prices at the pump fall by about 15% in coming weeks.

The top chart compares the price of crude oil futures (white line) with gasoline futures (orange line). Gasoline futures appear to be lagging crude futures, which suggests that gasoline futures have further to fall, perhaps to $2.40/gal.

The second chart compares gasoline prices at the pump (white line, which comes courtesy of AAA) with gasoline futures prices (orange line). Based on past correlations, today's $86.6/barrel of crude oil should, if it holds, result in gasoline prices at the pump falling from $3.70/gal to $3.10.

European stocks plunge

This is a chart of the Italian stock market, and it's a good illustration of just how ugly things have gotten in Europe, and a big reason for why U.S. markets are swooning. Italian stocks are down 67% from their 2007 highs, and that is reminiscent of the plunge in Japan's Nikkei index, which is still down 75% from its 1989 high. By comparison, the S&P 500 is down only 22% from its '07 high, and the Dow is down only 12%.