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FT: Volatility extinguished by moves from central banks

Posted by jdavis on June 13, 2014

What the FT showed this week is a chart of the VIX stretching back to 2005.  The VIX is the mathematically-created financial instrument which 'prices' the level of concern or complacency in the US S&P 500 equity market.  The higher the VIX goes the more the concern.  The lower, the higher the complacency.

The point the FT made is that there is practically no concern out there.

Of course, that was exactly the case too in 2007.

What happened then?  Well, only that the stock market peaked and entered the biggest crash in history, starting from October 2007.

I recall 2007 very well.  Every media outlet was screaming 'Buy buy buy' and, effectively, 'you've never had it so good'.  Then...

So, that's what we hear a lot in the UK.  Here a few things of which you don't hear much:

1. As I show, in the house price discussion, UK household incomes have been lower than  inflation for years and I cannot see this changing, for years.  Indeed, just this week, average incomes were shown to have grown the least since that record began over a decade ago. 

2. Global growth is very fragile.  This week major financial institutions were falling over themselves to tell us how much more badly the US has done in Q1 2014 than they had previously thought.

Goldman Sachs said the largest economy in the World fell 2%.  Making it the weakest quarter (barring the 2008 crash) in a quarter of a century.  By the way, originally, Goldmans had forecasted +3% growth!

Barclays agreed with the-2% fall in the US.

Hardly positive.

This week the World Bank cut its forecast for global growth to 2.8%.  See here.  As have The International Monetary Fund (IMF) and The Organisation for Economic and Co-operative Development (OECD).

China, as most know, is slowing down.  It's the 2nd largest economy in the World.

The EU is in a generational economic Depression.

3. Investments-wise Government Bonds are rising faster than equity prices.  The following is a chart showing US Treasury prices in comparison with the S&P 500.

Normally, Government bond prices move opposite to share prices.  They aren't quite.  However, that US Treasuries are rising so strongly is in defiance of the complacency of the US stock market.  Investors in shares should be very careful when government bonds rise so strongly.

And that is our point.  There is HUGE complacency in the stock market and especially amongst professional investors, never mind Ma and Pa - who are also getting back in, after a big rise.  We remain extremely circumspect of Western stock markets at these prices.

 

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