At today's ^vix level (20), the market is in the normal area for worry. When the ^vix drops below 15, we are in the fat, dumb and happy area. I don't buy that the ^vix/treasury ratio accurately predicts fear. It is a) manipulated by the fed and b) not predictive of real fear. When real fear sets in, the yield increases. People start demanding more from their money when they are worried. It become the Twain quote: "The return OF your money is more important than the return ON your money." That said, I actually use the ^vix for buying and selling. When the ^vix exceeds 40, I buy. When it drops below 20, I sell half of my buy. When it drops below 15, I sell the second half. So far it has worked well. I did pull the trigger eqarly today when the ^vix hit 20.05. A 15% return in 5 months was a good return.
Superb commentary by Scott Grannis.I wonder if lower-than-historical PEs might be the new normal, given shareholder realization that long, long periods of sideways slosh are possible. And creative destruction, and the inherent weakness of shareholders (see Vigilante/Redleaf). That said, corporate profits are headed north. The private sector produces more with less every year, in opposition to federal agencies, that produce lels with more every year.
The resistance high was set Oct. 27and today closed just about there. A breakupwards may get lots of people climbing on board the moving train. People invest mostly based on what they think other people will do. Right now I think there are a lot of would be buyers. On the margin, the next buyers need to at least see stomping and snorting. Later buyers need to see the herd stampeding.
Speaking of walls of worry, I just saw the news bit in WSJ that German bonds are selling at a negative yield. Not merely a real (inflation-adjusted) negative yield, mind you, but an honest to God nominal negative yield. That's some kind of fear!
Re German yields: with the exception of the 1-yr note, German government bonds of all maturities have a positive yield, ranging from 0.3% for 3-mo. bills to 2.5% for 30-yr bunds. The 1-yr has a very slight negative yield of 0.008%. As is the case with Treasuries, these very low yields are a sign that investors are extremely risk-averse.
I am fearful. I trade, I don’t invest. It appears to me that the U.S. economy cannot operate, let alone thrive, without increased debt and stimulus, AND, that we have reached the end of debt of stimulus. I am fearful we are left with Benjamin’s solution, inflation. But my first comptroller job was during the late 70s early 80s stagflation so I don’t accept inflation will work.
Squire-I am proposing moderate inflation and robust growth---not bad stagflation! But thanks for noticing that I post. The option is Japan. If we do a Japan, short equities, short real estate, and invest in bonds.
Re Japan - any views on the truth of the lost decades (google The Myth of Japan’s Failure - Fingleton). Could be that demographic changes and pricking of monumentla asset bubbles (that mean that previous highs may never be reached) disguise the fact that Japan has done relativley ok.USA better demographics may mean that fear is misplaced except for those who bought in close to asset high points.
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