Market Analysis


The $VIX has been a patient with an irregular heartbeat ever since central banks injected markets with artificial stimulus. After years of abuse his body finally gave out and his heartbeat was reduced to sporadic palpitations as central banks cranked up the stimulus to lethal levels in 2017. In short: Mr. $VIX was in his deathbed come summer 2017.

Then Ms. Ratchet killed him off:

On July 12 Janet Yellen executed the $VIX. Correspondingly markets raced to new highs.


While many held out hope for a biblical resurrection over the days that followed onlookers were sadly disappointed only waiting for $VIX’s remaining family member, the $VXO, to die in agony and crash yesterday:

It is not often that one gets to witness a complete breakdown in a multi decade long market structure. But here it is. Full blown crash. The end of risk as we know it.

If that was Janet Yellen’s intent on July 12 then congratulations are in order. Well done.

If it wasn’t her intent then what the hell does she think she is doing???

One may consult some of her compatriots in recent weeks:

Key comments:

The general rise in valuation pressures may be partly explained by a generally brighter economic outlook, but there are signs that risk appetite increased as well. For example, estimates of equity and bond risk premiums are at the lower end of their historical distributions, and, relative to some non-price-based measures of uncertainty, the implied volatility index VIX is particularly subdued. So far, the evidently high risk appetite has not lead to increased leverage across the financial system, but close monitoring is warranted.

We have a better capitalized and more liquid banking system, less run-prone money markets, and more robust resolution mechanisms for large financial institutions. However, it would be foolish to think we have eliminated all risks. For example, we still have limited insight into parts of the shadow banking system, and–as already mentioned–uncertainty remains about the final configuration of short-term funding markets in the wake of money funds reform.

The U.S. financial system is inherently dynamic, with a range of institutions competing to offer a changing mix of financial products. New financial technologies promise great benefits but will no doubt carry novel risks. As a result, we monitor these vulnerabilities, and we are vigilant with respect to economic and financial developments across markets and institutions within the United States and around the world. And we know that complacency must be avoided.”

On the same day the Fed’s William’s said this:

“The stock market seems to be running pretty much on fumes,” San Francisco Federal Reserve Bank President John Williams said in an interview carried on Sydney’s ABC News affiliate and available on the internet on Tuesday. “It’s something that clearly is a risk to the U.S. economy, some correction there — it’s something we have to be prepared for to respond to if it does happen.”
with measures of market volatility near historic lows, I am somewhat concerned about the complacency in the market,” he said.

What do you say now Fed members?

Complacent enough?

So again the rhetoric does not match the carpet if you will.

Yet yesterday we saw a slight change in the recent program:

Whether it means anything remains to be seen. Fact is Janet Yellen oversaw the final execution of the $VIX and it appears to be up to her to now perform the miracle of the resurrection.

Hence it’s perhaps no coincidence that yesterday Donald Trump flip flopped on Yellen or at least is playing a game of musical chairs. He who cited low rates as a conspiracy theory to keep markets high with intent to have him lose the election now loves low rates:

“She is in the running, absolutely,” he told The Wall Street Journal. “I like her. I like her demeanor. I think she’s done a good job. I’d like to see rates stay low. She’s historically been a low-interest-rate person.”

Right. There are your marching orders. Keep rates low or I’ll replace you because I need rates low to keep markets up. And now his agenda is to keep rates low and whoever gives it to him he’ll put in office.

So there you have it. Rates will stay low and I’ve said this for weeks. They are done, they can’t raise them and now we have political marching orders confirming it.

So why and how would the Fed incite markets to invite volatility back? Because they know they are sitting on a massive bubble and a gentle correction is better than an eventual crash. But I have to admit the prospects seem low. I’ve never seen Janet Yellen show a backbone. When push comes to shove she is always dovish. After all she is the one that sparked the volatility crash on July 12.

Still if you take the Fed at its rhetoric anything can happen. Says Pedro Da Costa today:

“Federal Reserve officials repeat it so often it’s fair to call it a mantra: “Every meeting is live.”

That is, the Fed says it could take policy actions at any of its eight yearly meetings, not just the four that include press conferences which allow Fed Chair Janet Yellen to explain any moves in greater depth.”

But he too acknowledges the carpet analogy:

“So far, the Fed has not proven its point — it has only taken policy actions in recent years during meetings that include press conferences. This has caused market participants to largely discount non-press conference meetings, like this week’s gathering, as nothing-burgers. Currently, the market is pricing in zero percent chance the Fed hikes rates at Wednesday’s meeting, according to Bloomberg’s World Interest Rate Probability data.”

So there you have it. The $VIX’s executioners seem to be the only people that could prompt a resurrection.

We will know more later today. And if miracles still happen then it’s possibly we are witnessing a cyclical low in the $VIX now and his resurrection is at hand:

Who knows. It’s a magical market after all. Perhaps miracles can still happen, but don’t wait for a crash. It already happened.

Categories: Market Analysis

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