"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Tuesday, July 17, 2012

Investors' Attitude: "What? Me Worry? Why?"

Given all that is transpiring across our global economic and financial system, the degree of utter complacency in the US equity markets is astonishing. Looking at the Complacency Index, my name for the Volatility Index or the VIX, one would think that there is hardly a care in the world.

All of this has a somewhat surreal feeling to me. It is almost as if the entire investing community is in a state of denial. It seems to believe that the "all powerful demi-gods" aka, the Central Bankers and monetary officials, are able to suspend the impact of excessive leveraging and exorbitant indebtedness.

"Yeah, things are not very good right now, but no worries. If things were to go from bad to worse, the officials will throw open the bar and we can all think from the freshly spiked punch bowl. Go back to sleep and wake me if there is really a crisis".

I don't know whether to laugh at such an attitude or weep that we have degenerated into this.


  1. You were reading my mind--posted a comment on your prior post about the cognitive dissonance between the volatility index and tanking economy.

  2. The market is right, VIX included. You will be finding out why in the near future, possibly starting tomorrow.

    1. I'd like to hear a bit more about why VIX should be down to, well same level it was in summer 2008, going into the last recession...

      Market is right in the crudest way, I agree. Not fair by any stretch:
      Goldcorp lowers 2012 guidance by 10% and falls 10%, Intel lowers 2012 guidance by 5% and gains 1%.

    2. "The market is right, VIX included. You will be finding out why in the near future, possibly starting tomorrow."

      EXHIBIT #1

    3. ah, ok, the economy is heating up.

      fairly anemic though...

      i'll note:
      1. actually only 2% over consensus estimate vs. downward revised estimate (when in doubt, make it impossible to miss target).

      2. data is becoming uncomfortably smooth. partially i'd guess because we're really just skittering along the bottom and second, i'd guess that the data needs constant massaging.

      3. shadow inventory creepily high--i'd guess so banks can keep them at full value on their books.

      if you're correct, this should be great for commodities and target inflation that Bernanke has no doubt is on target

    4. There was no downward revision. From my link:

      "Housing starts rose 6.9 percent to a 760,000 annual pace after a revised 711,000 rate in May that was faster than initially estimated"

      The data in your link only goes up to February. The report out today was for June. The past few months have all been revised upward as well.

    5. You're right. Nevertheless, the numbers are pitifully small...From the same chart, look at the table below. The last time housing starts were under 800,000 was JANUARY 1991--dead of winter, 798,000. You don't get numbers as low as we are now going back to all the way to WWII.

      Again one wonders what housing starts would be like if some of the housing demand were soaked up by the shadow housing inventory...

      By the way, housing permits were down

      What other data justifies the low VIX? Not rhetorical...

    6. Permits were down only because of single-family permits, which are volatile month-to-month.

      Yes, the numbers are still small in historical context. But the key is, they're headed back up, and have been for several months now. The market knows that when housing construction heads up, there is little risk of an imminent recession. Thus, the market "complacency" as Dan phrased it.

      As for the shadow inventory, there are good arguments why that won't be that big a deal. It would only (re-)crash the housing market if it all came onto the market all at once, or in a short period of time. Not going to happen. More probably, it'll trickle in, which will minimize the disruption to the market. There is also sufficient evidence that a lot of the shadow inventory still left over is worth little more than its tear-down value, having been unoccupied for years it's not even marketable anymore, and thus is of little threat to the market. Lee Adler explains here (in his usual obnoxious language, but nevertheless ...):

      "Feeding foreclosure inventory into the market slowly is in the lenders’ best interest, and it is bullish for the market. Even if they could foreclose and sell more quickly, the lenders know that dumping massive numbers of properties on the market in a short period of time would be self defeating. It would depress the market and impair their portfolios more than holding REO off the market will. In many cases it is not even financially feasible to foreclose and sell the collateral because it is worth less than the cost of foreclosing and selling. They call this inventory which has not come to market “shadow inventory,” as if it’s a zombie that will come back to eat the market. It’s really “ghost inventory.” It’s dead and it’s not coming back. Most of this ghost inventory is not marketable either because of its physical condition, or because it is in locations where demand was never sufficient to meet the oversupply created during the bubble. It was obsolete from the minute it was conceived."

      I've been reading about these "shadow inventory" scares for, like, 3 years now, and have seen little effect so far.

    7. "Permits were down only because of single-family permits, which are volatile month-to-month."

      Oops, I meant multi-family permits.

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    9. I take your point about shadow inventory...both in the sense that these homes are unlivable (what a waste of natural resources and what is says about our culture...) and destroying supply.

      The scary thing about that (shadow inventory / homes degrading) is what it says about the assets that are sitting on the balance sheets of the banks that hold these mortgages. Again, it will be the tax payer that ends up footing the bill for the junk on the books.

      Moreover, the derelict assets are abetting the ruin of municipalities in the areas that hold the junk. San Berdoo / Inland Empire, Vallejo, Stockton... Again, it will be the taxpayer of the state or nation that pays.

      So, when you look at it, this policy of holding back these homes is utterly cynical & emblematic of everything that is wrong with the Federal government and the banking system.

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  4. Take a look at German Bunds:

    Exactly what you describe. As if Germany was independent and would not have the Euro and exploding liabilities, if one of the bigger Euro-countrys would go "bancrupt".

    The only explanation i have, that investors are paying the FRG to lend it money for two years, is an ongoing silent bank-run/capital flight from PIGS.

    Everything seems quiet and almost normal, but if we take a look at certain financial and monetary numbers, the system seems no longer to work correctly. Interests no longer reflect the risk, money velocity is not increasing to normal levels, every part of the market, from currencies, to treasuries, to LIBOR, to oil and gold is being constantly intervened, or to call it more honestly: manipulated.

    I'm really wondering, in which direction the current silence will vanish: torwards a crash or will the run from treasuries begin very, very soon, because nobody is expecting it now?

  5. I've been buying gold for a few years, and this has led me to sites where Technical Analysis is often discussed, but it seems to me that TA is very mystical and hard to beleive in, like reading tea-leaves or something.

    Can anyone explain why it works? Give evidence that it does? Do people really make money from it?


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