Comparing the level of the Vix Index of implied equity volatility to the level of the 10-yr Treasury yield is a handy way of gauging how extreme market sentiment is. The Vix index is a good proxy for fear (because the implied volatility of options determines how expensive it is to purchase options in order to limit one’s downside risk), and the 10-yr Treasury yield is a good proxy for the market’s long-term outlook for growth and inflation. When you combine a high level of the VIX with a low level of the 10-yr, you have a market that is not only very fearful but also very pessimistic about the future. [IMO, however, we may well have time on our side. Here’s what I mean by that.] Words: 730
So says Scott Grannis (http://scottgrannis.blogspot.com) in edited excerpts from his original article*.
Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!) and www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) has further edited ([ ]), abridged (…) and reformatted (some sub-titles and bold/italics emphases) the article below for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.
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Grannis goes on to say, in part:
The VIX to 10-year Bond Yield Ratio
The first chart below shows the ratio over the past two decades.
Bottom line, we are living in times of great fear and pessimism.
PIIGS Default Risk Could Already Be Baked Into the Markets
Fear, knowledge and time can short-circuit prophesied disasters and…[as such] the PIIGS crisis might therefore end with a whimper instead of a bang…The more time that passes, the greater the likelihood that of even a multiple PIIGS default will prove to be much less awful than the market currently fears. After all, the world has had almost a year and a half to adjust to the risk that the PIIGS countries were in trouble and might default. That’s a lot of time, and any sentient investor or risk manager with serious exposure to a PIIGS default most likely has taken steps to reduce his exposure. When risk is hedged it is diversified, so PIIGS default risk has likely been spread out over much of the world; and of course the ECB and Germany have in the meantime been willing to shoulder a good deal of that risk.
To judge by the Vix/10-yr ratio, markets and investors have only been so consumed by fear, uncertainty, doubt, and pessimism once before—the period starting with the collapse of Lehman in 2008 and ending with the beginning of the current recovery in mid-2008.
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Back then, [however,] we did have monster defaults and we saw the decimation of banks and their balance sheets, and we did have a global economic collapse and a financial panic that brought us very close to the feared abyss called “the end of the world as we know it.”
Today we have been waiting 18 months for this to happen again. [As I have said before]…debt defaults don’t destroy demand, banks can be recapitalized, government spending cuts [can] actually make the outlook rosier, and most of the damage from too much debt has already happened. “The failure of a bank is simply the last chapter in a book about money being flushed down the toilet. It’s not the end of the world.”
It’s not that the suspense of a PIIGS default is killing us. The longer the suspense lasts, the less likely it is to kill us.
50 economists forecast their estimates for real GDP over the next 6 quarters in a recent Wall Street Journal survey [and their projections, on average, show a modest increase through to the end of 2012 as the table below shows. In addition, they were asked] to forecast… the probability of a recession in the U.S. in the next 12 months] and the results were quite surprising – quite. Let me show you.] Words: 600
The widespread stagnation in wages, rather than the level of unemployment, may offer a better explanation for the failure of economic growth to accelerate two years after the end of the recession. Workers’ ability to negotiate higher earnings won’t return until the job market strengthens, and flagging confidence has raised the risk that consumers may retrench. [Let us explain.] Words: 1018
A good way to think about our country’s economy is to think of the U.S. like a boxer. We were knocked flat on our back in 2008 and have since struggled to one knee but have never got back to our feet. [As such,] those conversations that imply we might be on the verge of falling down again are rather pointless…With this much slack in the economy, it’s unlikely that any economic downturn from here will be substantial. Does that mean I think the U.S. economy can’t contract from here? No, but I would be very surprised if we were to experience another blow similar to the 2008 recession where real GDP fell 5%. [Let me explain.] Words: 538