Dreading “volatility” only on the way down.
“It’s too quiet out there,” BlackRock Global Chief Investment Strategist Richard Turnill wrote in his market commentary. “Low volatility and inflation expectations look unsustainable.”
Volatility isn’t low because things are great. It’s low because the Fed and other central banks have “played a role in suppressing” it with their QE programs, he said. And between 2012 and 2014, they “dulled market volatility to unprecedented low levels.” But that ended in 2015, as the Fed, after having ended QE, began to flip-flop about raising rates.
It must be said that surging “volatility” – as measured by the Volatility Index (VIX), which represents expectations of 30-day price volatility calculated from S&P 500 options – isn’t associated with jumping stock markets but with swooning markets.
Volatility shot sky-high during the Financial Crisis and in late 2008 broke through 80 for the first time ever. At that point, QE was announced, and the VIX descended. In early 2010, it was back in the teens, and solidly below 20, the average since 1990.
But in June 2010, as QE ended, the VIX skyrocketed past 40. With “fear” suddenly pulsing through the markets, Wall Street screamed for more QE, and the Fed listened, and QE-2 rumors started floating around. Soon QE-2 appeared on the horizon. The VIX settled down and for much of QE-2 remained in the mid-teens. Then QE-2 ended … and voila!
The VIX shot up to 50 and continued to bounce around at high levels until QE-3 rumors started circulating. By the time QE-3 started, the VIX was below 20. For most of QE-3, the VIX remained between 10 and 20. Complacency, somnolence, euphoric dreaminess come to mind.
Then QE-3 was tapered out of existence, and the VIX has since bounced around a lot. On August 12, 2015, it was at 12.8. But a few days later, all heck broke loose, and the VIX shot up to 40! It spent January and February this year between 20 and 30. But then the ECB kicked off additions to its QE and NIRP programs, and the Bank of Japan shot another arrow, and the VIX once again sank into somnolence, to 13.8 today, the lowest level since mid-August just before all heck had broken loose.
The markets “have become eerily quiet recently,” Turnill said. And that’s “unsustainable.” Because there are some risks:
This unusual calm follows declining market concerns about sliding oil prices, and the health of China’s economy and European banks. We do not expect this to last, and see a return to the higher-volatility regime that was the norm prior to QE.
The future path of monetary policy remains uncertain, and tail risks remain. A big Chinese yuan devaluation isn’t our base case, but it’s a downside risk. Geopolitics, particularly as Europe confronts terrorism and migration, could spark volatility.
Then there’s inflation. Fed Chair Janet Yellen said today that she expected inflation to rise “gradually” to the Fed’s 2% target. But that 2% is based on the Fed’s preferred measure of inflation, “trimmed mean PCE,” which is currently 1.84%.
The collapse in prices of energy and other commodities, such as corn, has pushed down inflation as measured by headline CPI to 1%, though it too is rising. But inflation as measured by core CPI already hit 2.34%, the highest since 2008.
If you rent in the Bay Area and other hot spots, or if you need healthcare or have kids in college, forget it. And if oil prices rise significantly – we doubt they will now, but they will someday – and if other things do what my favorite chocolates with 86% cocoa just did, though cocoa is trading at the lowest level since early 2015, then inflation is going to bite. And in this near-zero yield and low-wage-growth environment, higher consumer price inflation will eat nearly everyone’s lunch.
Yet, despite these visions, the public expects inflation to average 1.65% for the next 10 years, according to the Cleveland Fed. The bond markets peg the 10-year breakeven inflation rate at 1.56%, though that too has shot up from 1.18% in early February. And Pimco’s Mihir Worah declared on a company video in early March: “The market is pricing 1% inflation in the U.S. for next year; we think it’s likely to be closer to 2%.”
In short, the financial world isn’t even willing to contemplate inflation! But that could change. And that’s another risk.
While a “modest” increase in inflation expectations might “support riskier market segments,” such as emerging market stocks and commodities, according to BlackRock, “these assets could suffer in the longer term if the Fed were seen to be falling behind the curve, raising expectations of sharper rate hikes.”
By the sound of Yellen’s speech today, the Fed is bound and determined to fall behind the curve! So, in order to prepare for “higher volatility” and the market mayhem it can drag along, the report suggests:
- Buy gold, which “can be an effective hedge if volatility spikes due to rising U.S. inflation fears.”
- Buy Treasury Inflation-Protected Securities (TIPS) and “similar instruments.”
- And diversify away from the dollar and get some “foreign-currency exposure.”
In order to buy these goodies, investors need to unload something else. But what? The report is silent on the topic. A sell recommendation would go too far for the biggest money manager in the world. It certainly doesn’t want to create a stampede out of stocks, for example.
Bond-fund specialist Pimco is singing from the same page:
“If you look at inflation expectations as they are reflected in the bond market, we think they are too low,” Pimco’s global economic advisor Joachim Fels told Bloomberg TV. “We still think markets are pricing in too low a profile for inflation.”
As stock and bond markets adjust downward with big bouts of volatility, seat belts might be required for the ride. That’s their theme. But if you’re sitting on some gold, TIPS, and foreign currency exposure – such as yen, God forbid? – you might have a smoother ride.
In this debt-fueled economy, the “hangover from years of lenient credit may become painful,” according to ratings agency Standard & Poor’s. Read… “Spike in Defaults”: Standard & Poor’s Gets Gloomy, Blames Fed
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I must admit that with all these Wall Street big boys telling us to bail out of the stock market and buy gold I’m somewhat suspicious. I’m almost thinking that from a contrarian point of view I should be buying stocks with both hands and sell all of my gold. When have these guys ever given us good advice?
I think the point is diversification into an asset that hasn’t moved in lockstep with stocks, bonds, residential and commercial real estate, classic cars, art… which all soared together. So they might go down together, and there’s little diversification.
But gold sold off while these assets soared. A sign of real diversification.
I get the impression that BlackRock’s strategy is capital preservation with a hedge against inflation to ride out the coming storm, rather than trying to make a killing.
When people ask me about where to park their money I suggest some gold because everyone hates it.
I bought gold in 2008 and have held it ever since. I bought physical not only because I want access to it and because I don’t trust ETFs but because I can’t panic and hit a button and sell it.
I bought PMs because eventually there’s going to be a lot of pain. I don’t know when, but until the narrative changes I am holding it in a private vault.
Just because you ski under the snow pack every day without problems doesn’t mean you won’t get buried by the avalanche one day. Like avalanches, financial systems are nonlinear. A small perturbation such as a squirrel dropping a nut on the snow can change your skiing experience dramatically and instantaneously.
Wolf – in 2009 gold tanked in lockstep with the stock market. Not sure why it won’t tank again.
Yes, no one is sure these days when it comes to true diversification, and if it is even possible at all after years of central bank asset price inflation. Everyone is grasping at straws.
If you think volatility is going up buy volatility. Duh uh! Forget TIPS and gold.
I think you’re confusing gambling/trading with what asset managers consider “investing.”
They know that the next time all hell breaks lose the people will be coming for them this time. They are trying to buffer some of that. This is why we hear it this time around.
Having been burned over and over by listening to the PM community…I am firmly in the short gold camp.
So many people are yelling to buy gold…I think my shorts will pay off by the end of April.
Gotta love the Direxion 3X ETFs for bull and bears!
I’m thinking it’s almost time to short oil again….I’ve made out like a bandit doing the contra thing there.
I will take your shorts – I am 40-ish, educated, extinguishing all debts, and will never borrow again. I got a little gold, but I put it right next to piles of BJs in my safe deposit box – F the banks – I get 0% for cash in my safe deposit (NIRP technically if you add it up that way – without deflation – but hey, I am behind the curve, right?).
Anyone that “knows” how this pans out is full of shit.
The only real investment right now – that has upside – is intellectual capital – which doesn’t flow from Universities. Why? They don’t tax it (yet). Or a genuine value producing investment, not a skimming investment, that folks want to pay for because, well, it has value and folks want to pay for it. No one cares about business value anymore – everything is about lawyering, lobbying, TPP’ing, etc – there are no real business leaders left – just … robber barons or the equivalent.
I talked to my old man recently about this and he retold one of his favorite stories on this subject (i.e. advice from someone – follow the bouncing ball) which goes like this (y’all love these – at least as best I can tell from the comments -I’ll shut up if you regulars complain).
There was an Oklahoma boy, got drafted for Vietnam at a young age, who always wanted to be a geologist (a common theme in the oil patch of TX and OK – where those sorts of folks did well and inspired “youngins”). He did two tours and came home (alive and well – not a given) and went to Texas A&M on his GI bill (despite being from OK he correctly ascertained this was the best college for his goals). His first year, as a VN vet with combat experience …
ASIDE: Let me clue y’all in about Texas A&M. Half the officers of WWII went to Texas A&M. Kind of hard core. So, keep that in mind.
… as a civilian, he was walking across campus and a ROTC Lieutenant got right up on his ass and started chewing (greens were restricted or some such). This OK boy started to explain to this LT that he didn’t give a shit and … this old boy suggested he get the hell out of his face … but that didn’t go over well. So our beloved VN vet beat the bloody shit out of this ROTC LT.
Our VN vet got hauled before the dean and was told to find another college/university to attend. He went to UT and did quite well for himself in the long run.
Coming full circle, this guy had a famous saying in the oil patch (he was very successful) which goes like this; “Every time I have to choose between a college degree and 40 years experience, I take the 40 years experience”.
My point is that all you got is bravdo – you provided nothing to the community in terms of why you invest, what you invest in, or what concepts they should pay attention to value markets/positions. You aren’t even sharing experience – in the long sense.
My story is true, but as I have learned reading anonymous public forums, yours is probably BS.
All I know is getting 100% out of debt is the best return available for anyone right now – because shit is going to hit the fan – argue that.
Regards,
Cooter
I will tell you Cooter what I watch very very carefully: I watch non-meat edible commodities….as long as they generally are trending down or level, I am not truly concerned…because China will not want/need a re-pricing of their Gold to keep things calm at home. The minute oats, rice, edible oils, and so forth start shooting up, China will have no reason to look the other way about Gold:Commodities
iirc, the last time these non meats started rising birthed the arab spring.
Pork! Look at what Pippa has been saying about the price of pork in China. Heed.
Good story Cooter! The ability to think on your feet, NO debt, and be your own central bank (ie. stuff your cash and PM’s into your gun safe at home :) Bring it on!
I look at Soy Meal price as an indicator for Ag Commodities. As of Friday, 25 March, the cash grain prices at the Breckenridge MN elevator: $4.54 per bushel for 14% protein spring wheat, $3.18 for corn and $8.20 for soybeans. Breckenridge is on the ND border at the beginning of the Red River which flows north.
Farmers will not turn a profit at these numbers.
As I have posted, quite a few growers spray RoundUp on their wheat crop before harvest, but the elevators only check for protein and moisture on wheat. Many of the elevator managers also inquire about what variety of grain is being brought in and sold, as different varieties have different end use qualities. For the most part, elevators blend wheat for protein uniformity.
“As I have posted, quite a few growers spray RoundUp on their wheat crop before harvest”
Meaning what, exactly? I’m not too happy to hear we have a chemical in our diet that is perhaps unnecessary but don’t understand the implications of posting this.
Chicken,
Grower spray RoundUp into their wheat and barley for a few reasons, and they do it because either they don’t care what happens after they take crop to elevator and/or they don’t think, or know, what they’re doing is quite simply putting poison into non GMO crops.
When wheat is ready to harvest ‘old-school’, you wait until the straw is fairly dry and the moisture content is under 17% in the grain. This is just the naturally occurring maturation of the plants. Then you combine the plants by cutting the straw under the heads of grain, and threshing the combination of straw and heads. Weather plays into this equation. You can’t combine after rain since the straw will be hard to cut and the grain will be too wet (and swollen) to thresh. If the crop gets too long of a delay before harvest, there are problems of quality and shattering too.
RoundUp is cheap and applying it lets the grower set the timetable. If your crop is almost ready, but not quite, and there’s a few days of dry weather coming you can spray it. This basically kills the plant, but the chemical gets into the grain. Now after a few days, the straw is dry and cuts well, the seed is dry and threshes well. Plus, the harvest is faster and easier on the combine.
Beer in Germany now contains glyphosate in it! Wine in Napa Valley has it, and the vines life expectancy has been drastically shortened.
‘Anyone that “knows” how this pans out is full of shit.’
This will all end in tears.
Also, assuming farmers can’t turn a profit at today’s price then why do they increase their cost by spraying RoundUp?
Not very insightful. Everything always ends in tears. Tears of pain for muppets, and tears of joy for the 1%. What’s new?
Even in hell, there will always be a 1%.
Chicken,
The cost of RoundUp is negligible. Farmers are very savvy business people, and they calculate the tiny cost of spaying versus a potentially larger cost of a delayed harvest. Plus, they have to schedule the harvest of other crops in their fields. Putting Monsanto’s chemicals into your food gives them a return on their bottom line or they wouldn’t do it.
City folk may not be aware of the size and scope of farming operations in dollars. Let’s say you live near Fargo and own/farm 2,000 acres (640 per square mile). Land value at $5,000 per acre equals $10 million! Combines, which you have a couple at least, cost $600,000 per. Now, add in tractors, sprayers, planters, storage bins and buildings.
Two thousand acres up in the northern plains is no big deal.
“All I know is getting 100% out of debt is the best return available for anyone right now – because shit is going to hit the fan – argue that.”
Ditto that. As the old saying goes, guns and butter are your friend.
Volatility and instability go hand in hand. And produce panic. Fear is where gold rises. Treasuries as well. Or most tangible assets. Start to watch the level of NPLs on debt.
I think all three of those “investment” suggestions are poor. First I think US Government bonds are one of the worst places to put your money now. TIPS don’t impress me in the least. Buy good blue chip corporate bonds or securities as an alternative. And even though I am lukewarm on gold, and expect it to fall below $1000 per ounce, it is probably not terribly overpriced. By the way, gold is not correlated with inflation. It is a hedge against governments. Watch it go up with the US stock markets. Foreign currencies? The US dollar will remain on the top of the dog pile for a few more years at least. There might be a case for the Singapore dollar or possibly other smaller Asian currencies. It’s just that when the world’s wealthy think of currencies it is the greenback. Watch it go to 1.20 again.
I agree with you.
You can do what you want, BUT DON’T RAISE MY CHOCOLATE PRICES !!
Any overproduction these days is economically dangerous when primary producers suffer due to low selling prices while end consumers don’t any savings at all because almost all of it is siphoned by the parasitic middle-men. Then when cracks start to appear at both sides piles up even more debt to keep the show going.
Everybody here that says they are paying off debt because they expect another financial crisis is nuts. If you are expecting the economy to fall off a cliff you need to have as much cash as possible. Nobody is going to be buying your gold or your house when the economy tanks, at least not for anywhere near what you paid for it. You should have as much cash as you can store, and not in a bank either. Everybody here seems to think their gold and cash is safe in a safe deposit box, it is not. They can and will take that too.
wolf. negative interest rates. what type of accounts does this affect? will someones 401k or in Canada rrsp be touched or is it the people who have cash in their accounts? is account specific?
I heard that some economists put for the idea of giving everyone money in their accounts. is this the helicopter cash that I have read about. I guess with all the QE’s that were over the years this really speaks highly for the distribution or redistribution of wealth. cause all that money never made it to the hands of the people who spend most of it. it just got burned on art cars houses. kinda proves a point, when you give the top 1% money you know what they didn’t do with it.
Dan Romig,
I see now, thanks for the explanations and I wasn’t aware of the strategy. In this case I don’t blame farmers for spraying RoundUp despite I wish they wouldn’t.
Similar kind of subject with Parmesan cheese having cellulose added (quite a bit in some cases) and Cool-Whip is made from hydrogenated vegetable oil.
Some might consider our food chain poisonous, more than a few would call it unpalatable. And, it’s getting more expensive as well !
If you were loaded up on debt, who says you have to pay it off? Seems to me, bankruptcy pays well, no? Some people claim they take on debt to buy physical gold, I suppose they don’t intend on paying off that debt in the event of a crash despite they will possess the physical gold which isn’t likely to fetch what they paid for it?
Just an off the wall comment about assets: your most precious asset is your life which is supported by your health. Millions of people who are wealthy but also smoke heavily are actually in a negative position. I don’t mean this as some profound philosophy, I mean it literally.
The extra medical costs associated with a unhealthy life style can bankrupt a millionaire.
Walking a mile a day is a way of making money by avoiding expense.
The dollar figure from being healthy enough to enjoy money is probably impossible to calculate, because as health approaches zero, the cost increases to infinity.
Sorry, a PS: -‘the medical costs can bankrupt a millionaire’
And he still won’t be healthy. Health can’t be purchased but it can be destroyed.
The point is that money only serves a purpose when it is spent on something the owner will enjoy. At this moment millions of people are risking their mental and physical health to accumulate money which may become worthless as far as they are concerned.