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Minyan Mailbag: Volatility



Editor's Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interacrtive dialogue among the Minyanship. We share this next discussion with that very intent.

Prof. Succo,

Thought I would ask a couple of questions today and see what you think. These questions all relate to the question of why volatility is soooo low.

How in the heck can Implied Volatility (IV) be so low in the face of such structural issues that could move every asset in a big way?

What is the value of the dollar (unit of account) going forward? Does the fed/government trash it or does it act responsibly? And how is Ben Bernanke even a candidate to run the Fed considering his comments about using the printing press (aka moral hazard)?

The questions about the dollar and the global imbalances would seem to be a BULLISH sign (IN A HUGE WAY) for volatility going forward, but the EXACT opposite is happening. Is being long volatility right now the ULTIMATE contrarian investment? IMO, I think it is.

And finally, gold continues to be the top performing CURRENCY in a large way since the French vote. Gold broke above Euro 360 today. That is an interesting chart and tells me FEAR is going up in the world not down. But equity volatility keeps going lower for some reason. WHY?


Minyan Mark

Those are lots of questions Mark; I am only qualified to answer two.

The cause of the crush in volatility in the long run is liquidity. As central banks have lowered real rates to nothing, the system is awash in liquidity (and debt). Investors search every nook and cranny and increase risk to get any return at all. This crushes everything from corporate credit spreads to stock fluctuations (I have given the example of day traders trading larger and larger positions for smaller and smaller moves in a desperate effort to make money).

And then you get the "new" strategies of selling volatility as a source of income. This is all human nature as Scott so expertly describes.

But don't be fooled. As you allude to all that has happened is that risk has increased while the perception of it has decreased. I agree that a great contrarian trade is to buy volatility here, as painful as that is as I am buying it.

As for gold, gold actually does well in deflation once deflation is recognized. This is because central banks print fiat currency willy nilly in order to fight it. Scott is short term bearish on gold, but eventually sees it going to new heights all the while believing we are entering a deflationary spiral.


Prof. Succo

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