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Minyan Mailbag: The Death of Volatility?

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The average eye might not notice this, but intra-day swings are much larger even though closing prints disguise this fact.

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Mr. Practical,

Like Sergeant Schultz, I obviously know nothing as it feels as though volatility should be up... although doesn't look that way. Probably the non-free market at work. FXI over 43% above the 200 day average... a 'little' unusual for an index.

-Ron


Minyan Ron,

A year ago market pundits declared a new world. Volatility had been defeated. Central bankers had found the Holy Grail and could "adjust" markets out of any problematic conditions. Stocks were proclaimed an annuity where risk was gone and companies returned ever-growing earnings to shareholders.

We now know how ridiculous that claim was, just like all other claims of financial alchemy. All that was really going on was continuous meddling in the economic process by central bankers, encouraging extreme risk taking by participants. Everyone was holding hands and the music would never stop.

And it hasn't stopped yet, but the tune is certainly souring. Volatility has picked up dramatically, even though stock indices (you can't say the same for individual stocks) are at all-time highs while the dollar is at all-time lows. The average eye might not notice this, but intra-day swings are much larger even though closing prints disguise this fact.

Risk has certainly increased and even the pundits must admit that. When risk increases yet the market does not fully acknowledge that I call it compression: forces working in the currency and debt markets to keep things looking sanguine.

I think compression is actually higher now than ever, even though intra-day volatility has picked up. Stocks are the most visible sign of economic activity, even though underneath policy makers continue to choose to make the middle class bleed with a lower dollar.

At some point this compression will become too much for policy makers to hold things together and we may see volatility like never before.

-Mr. Practical
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