{"id":16849,"date":"2013-02-22T13:19:33","date_gmt":"2013-02-22T21:19:33","guid":{"rendered":"http:\/\/drduru.com\/onetwentytwo\/?p=16849"},"modified":"2013-02-22T13:19:33","modified_gmt":"2013-02-22T21:19:33","slug":"global-markets-synchronize-into-a-state-of-calm-that-does-not-equate-to-safety","status":"publish","type":"post","link":"https:\/\/drduru.com\/onetwentytwo\/2013\/02\/22\/global-markets-synchronize-into-a-state-of-calm-that-does-not-equate-to-safety\/","title":{"rendered":"Global Markets Synchronize Into A State of Calm That Does NOT Equate to Safety"},"content":{"rendered":"

(This is an excerpt from an article I originally published on Seeking Alpha on February 19, 2012. Click here to read the entire piece<\/a>.)<\/strong><\/p>\n

{snip}<\/p>\n

Nassim Taleb has been on a tour promoting his new book “Antifragile: Things That Gain from Disorder<\/a>\"\".” He provides related links and interviews on his Antifragile web site<\/a> where he emphasizes the point that governments and regulators should not strive to drive out volatility from the financial markets in an effort to make markets appear “safe.” Taleb considers volatility a tool for failing quickly, learning fast, and building robustness. I listened\/watched his talks for a second time this weekend in honor of the volatility index, the VIX, which has amazingly dropped to seven year lows.<\/p>\n


\n
\"The<\/a>
The VIX has dropped to an incredible 7-year low: "wake me when something happens"<\/figcaption><\/figure>
\n<\/center><\/p>\n

Volatility has not only declined precipitously in U.S. markets. This dynamic is global. The latest Statement on Monetary Policy from the Reserve Bank of Australia<\/a> (RBA) earlier this month contains some very instructive graphs on the worldwide, nearly synchronized, decline in volatility.<\/p>\n


\n
\"Volatility<\/a>
Volatility has moved in near unison to track to multi-year lows across multiple financial markets<\/figcaption><\/figure>
\n
\n
\"Expected<\/a>
Expected volatility in global stock markets and currencies has also moved in near unison to levels last seen before the financial panic<\/figcaption><\/figure>
\n<\/center><\/p>\n

{snip}<\/p>\n


\n
\"Average<\/a>
Average daily trading activity in stocks has declined every year since the financial panic peaked<\/figcaption><\/figure>
\n<\/center><\/p>\n

The RBA points to actions by the European Central Bank (ECB) and the Federal Reserve as primary contributors to driving down stock market volatility (and trading) in 2012:<\/p>\n

{snip}<\/p>\n

Even more notable is that the RBA points to currency interventions as an explanation for the recent decline in volatility in foreign exchange markets.<\/p>\n

{snip}<\/p>\n

The interesting and contrary irony here is that we could consider the stock market, especially now, to be LESS safe, specifically because volatility is so eerily calm. {snip}<\/p>\n


\n
\"You<\/a>
You can't tell that a 31-day overbought period just ended!<\/figcaption><\/figure>
\n<\/center><\/p>\n

Currently, the “Black Friday trade<\/a>” remains firmly grounded in bullish mode, but I am definitely not one to interpret the relative calm as a sign that the water is just now getting safe for swimming. Dips are buyable because some amount of downside risk drops from the table. The same holds true now for me. Market technicians have a truism that I hold dear in times like these: periods of extremely low volatility precede periods of high volatility. We may not know what will stoke the flames only that the flames WILL eventually get stoked somehow, someway.<\/p>\n

Be careful out there!<\/p>\n

Full disclosure: long VXX shares and puts<\/p>\n

(This is an excerpt from an article I originally published on Seeking Alpha on February 19, 2012. Click here to read the entire piece<\/a>.)<\/strong><\/p>\n