Complacent volatility, with no preset course.
These days, few of the dials that control the global economy are on a preset course. Here are a few that are out of control.
Phase one trade deal? A ‘no deal’.
China VP Liu was back in the White House on October 11 with media suggesting a trade deal breakthrough. Since then the so-called deal has become a ‘phase one’ deal, and according to Donald Trump it could happen as long as it is good for America, otherwise tariffs on Chinese goods will increase substantially.
Deal or no deal? No deal.
Even if a little ground is conceded, I can’t imagine it being substantial given the ideological stakes that were hammered into the rice paper last year.
US monetary policy not on a preset course.
Jerome Powell’s testimony for tonight (US time) has been published.
In it, he says (much like Ben Bernanke and Janet Yellen had often said) that he wants plenty of wriggle room on monetary policy:
“We see the current stance of monetary policy as likely to remain appropriate as long as incoming information about the economy remains broadly consistent with our outlook of moderate economic growth, a strong labor market, and inflation near our symmetric 2 percent objective.
We will be monitoring the effects of our policy actions, along with other information bearing on the outlook, as we assess the appropriate path of the target range for the federal funds rate. Of course, if developments emerge that cause a material reassessment of our outlook, we would respond accordingly. Policy is not on a preset course.”
Or maybe that’s code for, well, not really sure what comes next?
Brexit.
The UK’s exit from the EU was ordained on 26 June 2016 by way of referendum, and it is probably the most non-preset course of events of recent times.
Originally slated for 29 March 2019, Article 50 was first extended to incorporate a leave date of 30 June 2019. With the leave of Brussels, it was then extended to 31 October 2019 and has now been extended again until up to 31 January 2020.
In the meantime, and in an attempt to cure parliamentary paralysis, Boris Johnson has called an election for 12 December where he will be hoping to win a majority and exit his country from the EU by 31 January.
Still, there is no preset course here and there may be a few more chapters to play out (and scalps taken) if there is no majority for Boris on the 12th.
More dials off their spindles.
US 2020 elections and presidential impeachment hearings.
The exit of Mario Draghi, the greatest monetary dove of them all and the entrance of Christine Lagarde to the role of ECB President, with very little direction on monetary policy.
The exit of European council and commission presidents, Donald Tusk and Jean-Claude Juncker (oh, shame).
Slowing growth in Europe, Japan and China.
And, the list goes on.
So why has the VIX dialed down?
The VIX measures expected volatility in the equities market by looking at options over S&P500 index companies.
The average daily VIX closing level since January 2004 is 18.25.
In October 2008 at the time of the US sub-prime meltdown, it hit ~80.
In fact, it has been as high as 80.86 (that’s a lot of fear) and as low as 9.14 (that’s a lot of complacency).
So the fact that it’s currently sitting at around 12.88, 30% off the long term average, in light of all of the above and also in light of a stampeding equities market - is a bit of a worry.
Why? Because in the absence of other places to grow money (caused by QE Infinity) investors and traders have little choice not to be in equities, and that level of support is maintaining prices and the overall bull market for now.
But, the glaring disconnect between pre-QE valuation theory/economics and current market-based valuations under QE Infinity expectations suggests we need to keep an eye out for a snap back. Or, perhaps it’s time to buy the VIX.
Mike.
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