The Gold Standard | Rational markets

The VIX index – the index of implied volatility derived from ‘at-the-money’ options on the S&P 500 Stock Index – is now 15.64%. At the beginning of the year, it was 23.4%. That is, the level of volatility that option buyers on S&P 500 Index are willing to pay for. In other words, they do not think that volatility in the S&P 500 index would be higher than this, that it would be paying to protect themselves against it or to bet on. That is why it is called a gauge of fear or complacency. It is low. It was only slightly lower than this in 2007. For this blogger, investors’ attitude towards risk is intriguing.

Only one explanation appears plausible to me: since policymakers have made sure that interest rates pay no compensation for risk, investors have concluded that there is no risk.

The top ten stock markets this year are, as of yesterday (12th March) Egypt, Venezuela, Colombia, Greece, India, Peru, Vietnam, Dubai, Turkey Russia (not necessarily in that order). Looking at this rankings today (March 13th) shows Hungary instead of Peru. Point remains unchanged, however.

You can draw your own conclusions as to whether this is a rational, considered investment stance. There are no right or wrong answers. Only profitable or loss-making answers and that too known only with hindsight at the end of relevant horizons. These horizons vary for investors. In my book, investors’ preferences that have given rise to this performance ranking this year are myopic.

In my article in MINT published today, on the US payroll report, I have stressed the role that mild weather has played in the last three months in the US:

The average contiguous US temperature for December was 35.0 degrees Fahrenheit (F), or 1.7 degrees F above the 1901-2000 long-term average.

The average contiguous US temperature in January was 36.3 degrees F, 5.5 degrees F above the 1901-2000 long-term average—the fourth warmest January on record, and the warmest since 2006.

The average temperature in February 2012 was 38.2 degrees F. This was 3.6 degrees F warmer than the 1901-2000 (20th century) average, the 17th warmest February in 118 years. (Source: National Climate Data Center of the US department of commerce.)

Henry Blodget wants ECRI to issue a three-word report: ‘We were wrong’. The more people get audacious about dismissing calls for a recession, the more encouraged the pessimists on the US economy should be. The US economy is adding a good number of jobs in temporary jobs placement services and in ambulatory services under Healthcare. Real Personal Income and Spending growth rates are declining. So are orders and shipments for non-defense capital goods excluding aircraft. The behaviour of retail investors in the 1990s and post-2008 is so  startlingly different that it is almost as though they and market commentators inhabit different worlds.

Complacency is well and truly back. Or, we live in a truly Orwellian world of capital market in America. Or, as always, it is a bit of both.

As a specie, one knew that we do not learn from mistakes but the consistent and unfailingly repetitive demonstration of this trait is, nonetheless, impressive.


DISCLAIMER: This is an archived post from the Indian National Interest blogroll. Views expressed are those of the blogger's and do not represent The Takshashila Institution’s view.