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These Are Confusing and Scary Times for Investors

These Are Confusing and Scary Times for Investors

(Dollar Photo Club)

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Wednesday, 10 August 2016 11:26 AM Current | Bio | Archive


These are, without doubt, very confusing and troubling times for the common investor.


The world is awash with uncertainties and the CBOE Volatility Index (VIX), which indicates expectations of 30-days volatility in a wide range of S&P 500 options, is trading around its lowest levels since the summer of 2014. That time was, especially for currencies, one of the quietest moments on record.


This means that investors are overly complacent and feel, at least for the time being, comfortable enough not to worry that much about the current high price levels in the bond and equity markets. They certainly don’t fear pressure looming for the dollar.
 

So far, the U.S. elections, which are less than 3 months away, don’t seem to cause worries for investors for the time being. The latest polls indicate that Democratic candidate Hillary Clinton is comfortably ahead of Republican candidate Donald Trump.


Meanwhile, the U.K.’s EU membership referendum decision on June 23 of leaving the European Union, known as Brexit, hasn’t caused the lasting turmoil markets widely expected.
 

Markets seem to have forgotten what Fed Chair Janet Yellen said explicitly about Brexit in her June 15 FOMC press conference: “Well, Brexit, the upcoming U.K. decision on whether or not to leave the European Union, is something we discussed, and I think it’s fair to say that it was one of the factors that factored into today's decisions ... It is a decision that could have consequences for economic and financial conditions in global financial markets. If it does so, it could have consequences in turn for the U.S. economic outlook that would be a factor in deciding on the appropriate path of policy.”


It could become interesting what Yellen will tell us at the upcoming Kansas City Fed 2016 Economic Symposium that will be held on August 25-27 under the motto “Designing Resilient Monetary Policy Frameworks for the Future.”


I also think that investors should remember that although Brexit initially sparked big drops in the broad based markets, the markets quickly rebounded, which is in itself really extraordinary.


Nevertheless, and this is important for investors, this underlines the fact that markets are out of sync with reality. This awkwardness is caused by the continuous and desperate search for yield that, without any doubt, one day will come to an end. That fate will probably be more abrupt than many investors could ever imagine.

In this context it could be helpful for investors to take a look at the futures contracts of the CBOE Volatility Index that shows VIX futures prices are in "contango," indicating an upward price slope. That slope means that markets are willing to pay a premium today against future expected spot price levels.


Yes, this is somewhat complicated but it means that there is a great probability that volatility will go up in the near future. Believe me, these kind of moves can be extremely quick and when that occurs markets will “tank.” It’s as simple as that.


Maybe many could do well not to forget what Peter Marshall said: “Teach us, O Lord, the disciplines of patience, for to wait is often harder than to work.”


You may ask: "What could be a catalyst for this to happen?"
 

I think it probably will be the strengthening of the dollar as a consequence of the Fed finally starting raising rates, albeit moderately. When that happens, we should better not exclude a sudden broad-based reversal in the markets.


Don’t ask me when that will happen, because I don’t know. What I do know is that it will happen somewhere on the near future. 

 

The U.S. Economic Surprise index is on the rise again, while the U.S. 5y-5y Inflation Expectations are at 1.95 percent. The Atlanta Fed Wage Growth Tracker came in for the month of June at 3.6 percent, and it is still rising.

The Fed will come under more and more (sound) pressure for starting raising rates at a slow pace, but enough to lift the dollar, which most of the G-7 countries will be happy about it.
 

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments. To read more of his articles, GO HERE NOW.

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So far, the U.S. elections, which are less than 3 months away, don’t seem to cause worries for investors for the time being.
investors, confusing, stocks, markets
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2016-26-10
Wednesday, 10 August 2016 11:26 AM
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